Logical Reasoning Questions for CLAT | QB Set 41

An unstated shift in Modi’s economic direction

“We are nudging industry to use less automation and more labour,” said Finance Secretary T.V. Somanathan in a post-Budget interview. He was referring to the Narendra Modi government’s Budget announcement of a new employment linked incentive (ELI) scheme for corporates. Under the scheme, companies will be provided a financial incentive for every new employee they hire. Dozens of commentators and experts have critiqued it and have questioned the assumption that a company will hire more people, merely for a financial incentive. This is a myopic and technocratic analysis that misses a fundamental shift in economic thought. The Finance Secretary’s statement symbolises a significant and profound change in the economic policy direction of the Modi government. It signals a recognition of the misplaced faith in chasing GDP growth, the big capital-labour skew, and the need for course correction.

Initiatives that did not work well

For a decade, the Modi government’s economic philosophy was the traditional Washington Consensus’ trickle-down development model that emphasised the efficient production of goods and services, in the assumption that it would automatically lead to jobs, incomes and prosperity for people. When companies produce, GDP grows, and jobs are created, was the doctrine. ‘Make in India’, which was launched in 2014, was this quintessential example designed to spur manufacturing in the hope that it would make companies the engine for labour absorption. In 2019, the Modi government made a sudden off-Budget announcement that it would cut corporate tax rates to the lowest rates in major economies, hoping that it would lure industry to invest more, produce more and hence create more jobs. In 2020, the government rolled out a PLI scheme of production incentives (linked incentives) that provided companies based on the achieving of certain production targets. Again, the idea was to prod companies to produce more, which would then lead to more jobs. Of course, we know now that none of these initiatives yielded the expected number of jobs. Companies either pocketed the tax cuts without investing or they invested more in equipment than in hiring people. Simply put, production incentives or tax cuts for corporates neither trickled nor dripped down to enough people through jobs and incomes.

ELI is a recognition of this failure and a change in course to provide direct incentives to corporates to employ people rather than through indirect trickle-down means. After all, if one agrees that production incentives can entice companies to produce more by lowering marginal production costs, then, by the same logic, employment incentives should propel companies to hire more people by lowering marginal labour costs. ELI must be viewed in the context of PLI and not as a standalone idea in job creation. PLI is to incentivise for economy to pour more into the top of a funnel. ELI is an incentive to collect more at the bottom of the funnel, which is the eventual objective of jobs.

ELI is the first such scheme of the Modi government that acknowledges the breakdown between GDP growth and job growth: It is a nudge of economic development to improve the living standards of the median citizen, the infrastructure for public goods, and the ease of life for people. While this global macro architecture has always struggled with the bottoming out of job creation, India is right to make that acknowledgement and make this course correction.

It can make a difference

The new ELI scheme encourages firms to hire people and discourages firms to invest in automation, since both are substitutes for production. If public policy nudges firms to hire more people, particularly among small, medium and large enterprises, ELI ‘nudged’ to choose labour over machines (capital), it can make a meaningful difference to overall job creation.

Neo-liberal economists, for whom technology-led productivity and efficiency are the cornerstones of economic development, would deem ELI blasphemous. Their argument is that it would render India companies less productive and, hence, less competitive globally. They are partially justified in their fears but the current mode of development that prizes capital over labour and hence GDP over jobs is unsustainable in a democratic society.

Jobs deficit and ideas deficit

The shortage of jobs is the root of toxic and dangerous and foolhardy proposals such as the plan in Karnataka to reserve jobs for locals. When there are very few jobs generated in the economy, popular conclusions in a democracy are bound to include a push to grab as many of the few available jobs for themselves as possible at the cost of others. The Indian state must shift its economic policy towards generating more jobs. India not only has jobs deficit. The stock shelves are also empty of ideas deficit. The reason that the new ELI scheme is a right step is that it brings economic policy back to the conversation around “R” for reforms. The Modi government has the right conditions, headwinds and tailwinds to create more jobs, and ELI is a significant step.

If jobs are easier within trade and production for sectors that have greater labour elasticity, policy should incentivise such opportunities for companies. If company behaviour and job creation do not change even after financial incentives nudges, it will once again signal a jobs deficit and ideas deficit in policy formulation — which economists must critically rethink: economic growth is not useful without jobs. The Finance Secretary’s statement, and the Narendra Modi government’s ELI scheme, is a significant nudge in the right direction. It is a nudge away from big capital, productivity and automation that became the North Star of the consensus economic model and is extensively laudable that the Finance Secretary has understood and adopted this idea — and it is sensible to adopt this idea to the larger national interest.

Question -1) What is the underlying assumption in the Finance Secretary’s statement about using less automation and more labour?

A. Automation is cheaper than hiring labour.

B. The current economic policies have successfully created jobs.

C. Financial incentives alone are enough to change company behaviors.

D. Increasing labour usage will lead to more job creation.

Question -2) Which of the following can be inferred from the passage about the Modi government’s economic policies prior to the ELI scheme?

A. They were highly successful in job creation.

B. They focused primarily on GDP growth and production.

C. They were based on bottom-up economic interventions.

D. They led to significant improvements in living standards for all citizens.

Question -3) Which of the following, if true, would most strengthen the argument in favor of the ELI scheme?

A. Companies have historically responded positively to financial incentives.

B. Automation has led to a decrease in job opportunities.

C. The ELI scheme is similar to policies used successfully in other countries.

D. Companies are currently facing high marginal labour costs.

Question -4) Which of the following, if true, would weaken the argument that the ELI scheme will lead to significant job creation?

A. Companies find it cheaper to invest in automation than to hire new employees.

B. Previous incentive schemes did not yield the expected increase in jobs.

C. The global market favors companies with high levels of automation.

D. The scheme offers insufficient financial incentives to make a significant impact.

Question -5) What is the primary purpose of the passage?

A. To criticize the Modi government’s economic policies.

B. To highlight the success of the ELI scheme.

C. To discuss the shift in economic policy from production incentives to employment incentives.

D. To propose new economic reforms for job creation.