India was able to add only 135,000 jobs in eight labour-intensive sectors surveyed by the Labour Bureau in 2015, while the number of people working or looking for jobs or the 'labour force', grew by over 10 million. The latest Economic Survey reports that annual employment growth in India was only 0.5 percent during the period 2004-12, while labour force growth was 2.9 percent. Alternative calculations peg employment growth at 1.2 percent and labour force growth at 2.8 percent annually. However, India’s gross domestic product (GDP) has been growing annually, on average, by over 7 percent for quite a few years now.
All of these numbers together point to a clear case of jobless growth. Furthermore, it is common knowledge that a large proportion of the employed, especially in agriculture, are actually underemployed. To fully employ the growing labour force gainfully and productively, India will probably have to create tens of millions of modern-sector jobs over the next few years.
When Productivity Gain Starts Hurting
If output is growing much faster than employment, it is obvious that the output per worker, or what we call labour productivity, is rising rapidly. This can happen either through technical progress in individual sectors or through growth-enhancing 'structural change', which means that the relatively productive sectors expand their share in national employment at the expense of other sectors. While recent research by Rana Hasan, Sneha Lamba and Abhijit Sen Gupta at the Asian Development Bank has shown that growth – through both these channels of productivity growth – has reduced poverty in India, one can easily argue that employment growth lagging behind the growth in working-age population can have adverse economic, political and social consequences. The negative consequences have already manifested themselves in the form of the recent Jat, Patel, and Maratha agitations, and have been highlighted by Christophe Jaffrelot in The Indian Express.
Many surveys in the West have found that unemployment often has a scarring effect on a person that is much deeper than even divorce. These kinds of emotions, together with the low opportunity cost of an unemployed person’s time, are expected to result in agitations and have a negative impact on the well-being of citizens. The resulting instability will not create the right environment for future economic and social progress.
Outsized Growth Within A Small Slice
Having recognised India’s jobless growth and the problems associated with it, it is important to understand the reasons for it. The main contributor to India’s stellar growth performance over the last decade and a half is the sector comprising financial, retail and business services including information technology-enabled services.
My research with Reshad Ahsan of the University of Melbourne shows that average labour productivity in this sector is 5-10 times that in the overall Indian economy, while its share in overall employment is only about 1.7 percent. Due to the small employment base from which it is growing, albeit very rapidly, this sector adds relatively very few jobs every year. However, its high productivity means that it adds a significant amount to the GDP. Unfortunately, only a tiny proportion of India’s labour force can meet the skill and education requirements of this sector.
Since bringing the majority of the population to that level of education might take a few decades, in the short and medium term, it is labour-intensive manufacturing that would need to grow to absorb India’s growing labour force at reasonably high productivity levels. This has not happened so far. As a result of which India’s manufacturing sector accounts for only around 15 percent of national employment.
The International Labour Organization says 87 percent of India’s manufacturing employment is in the informal sector, where productivity levels are quite low.
Thus both the quantity and quality of jobs in the manufacturing sector have been inadequate.
No Way Around The Export Model
In the presence of rapid technological progress (which includes automation but is not restricted to it), which means less labour is needed to produce a given amount of output, it is difficult for the manufacturing sector to rapidly expand its employment. The demand for the products of this sector does not expand fast because many of these products fall into the category of necessities, whose share in total expenditure falls with income growth.
The only solution to this problem is to find external markets to export to. Exporting removes the domestic demand constraint. However, to be able to export successfully, Indian products need to be able to compete successfully with products from other countries, especially China. Some strong trade facilitation measures by the government are required.
What are the constraints on the expansion of exports? They are the same as the factors that constrain the efficiency of the manufacturing sector.
While in China most of the manufacturing employment is concentrated in large enterprises with 1,000 workers or more, in India it is concentrated in those with lower than 20 workers, according to research by Rana Hasan and Karl Jandoc at the Asian Development Bank. As a result, efficiency in India is relatively low and costs are relatively high, resulting in a serious handicap in world markets.
Factors responsible for forcing firms to remain small and unregistered (i.e., in the informal sector) include reservation of small and medium enterprises in labour-intensive sectors, poor infrastructure, and rigid labour regulations that make it extremely difficult to fire workers in response to contraction in demand or incompetence. As a result, firms are reluctant to hire workers.
Heavy Skew Towards The Informal Sector
While the share of the informal sector in overall employment is generally high in all developing countries, even in the developing country category India seems to be an outlier. The actual share of the informal sector in non-agricultural employment in India is 83.6 percent, but the predicted share using its per capita GDP as the predictor – based on the estimated worldwide relationship between the two variables – is 60 percent. In other words, the formal sector needs to be more than double its current employment size at India’s current stage of development.
Countries, such as Brazil, Costa Rica, and Uruguay, that have the same incidence of poverty as India’s (around 28 percent of the population below the national poverty line), though with higher per capita incomes, have only 40 percent of their non-agricultural employment in the informal sector. Uganda, also with the same incidence of poverty but a lower per capita income than India’s, has this share at around 70 percent. For those interested in India-China comparisons, this number for China is only 32.6 percent.
Push States To Reform Labour Laws
In my research with Rana Hasan of the ADB and Asha Sundaram of the University of Auckland, we have found that Indian manufacturing industries use more capital-intensive techniques and produce more capital-intensive products than countries at the same stage in their development or even compared to China, whose per capita income is currently roughly double India’s. The high capital intensity is also a response to India’s labour regulations that make labour (adjusted for its productivity) more expensive, forcing firms to substitute away from it into capital. Thus India is unable to exploit its labour-abundance based comparative advantage to export labour-intensive products. As a consequence, manufacturing employment remains relatively small.
There are several steps the government would need to take to bring the country out of this jobless growth trap. One of them is the reform of labour regulations. Rajasthan has set an example for other states to follow through a recent state-level amendment.
- It raises the threshold firm employment size for seeking permission for laying off workers from 100 to 300 workers under the Industrial Disputes Act.
- It has also raised employment thresholds for the enforcement of some of the restrictive provisions of the Factories Act.
- The minimum membership for the registration of a labor union has been raised from 15 to 30 percent of the firm’s employment, addressing the problem of the multiplicity of unions.
Encouraging states to make their own amendments (as labour issues fall in the concurrent list of the Constitution), an approach that was taken recently by the Centre, is a step in the right direction. In addition, the Centre has rightly set up a web portal for the self-filing of compliance reports pertaining to many central labour acts, with a built-in algorithm to trigger inspections if needed, which is a welcome move that will reduce harassment by inspectors and the resulting corruption.
However, what has been done so far is just a small fraction of what needs to be done. And the recent demonetisation initiative, that has been destroying jobs in many industrial clusters throughout the country like the cellphone manufacturing hub in Noida, according to a recent Washington Post report, certainly does not help in this regard.
Devashish Mitra is professor of economics and Cramer Professor of Global Affairs at the Maxwell School of Citizenship and Public Affairs at Syracuse University, New York.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.