When the growth of national income slows down, that of employment follows. This is so basic a principle as to approximate a truism. But the current condition of India’s economy requires it to be stated.
The decline in India’s real gross domestic product (GDP) growth has been dramatic over nine consecutive quarters. It has shrunk by 3.1 percentage points, from 7.5% in April-June 2011 to 4.4% in April-June 2013. The decline of growth has been particularly sharp in manufacturing, dropping by 8.6 points, from 7.4% in April-June 2011 to minus 1.2% in April-June 2013. Construction has also taken a significant hit, down from the heady double digits of four years ago to 7% in April-June 2012, and then to 2.8% a year later. Similarly deflated are trade, hotels, transport, and communications—falling from 9.6% in April-June 2011 to 6.1% a year later, and to 3.9% in April-June 2013.
The employment picture is equally disturbing. According to the Planning Commission, between fiscal years 2004-05 and 2009-10, employment growth slowed, increasing by merely 2.7 million people. The largest absolute decline in the five years leading up to 2009-10 was in agriculture—by 15.7 million people, or 6% of the number employed in 2004-05. The second-worst crunch was in manufacturing—down by 7.2 million people, or almost 13% of those employed in 2004-05.
The decline alone is worrisome enough. More disconcerting is the sharp fall in the percentage change in employment for each percentage change in value added, a metric known as employment elasticity. In the aggregate, employment elasticity slumped from 0.44 in 1999-2000 to 2004-05 to 0.01 during the period 2004-05 to 2009-10. Simply stated, a 1% increase in value added led to 0.44% growth in employment during the first period and virtually none in the second.
The decline in elasticity has been truly alarming in some sectors. Manufacturing’s elasticity has fallen from 0.76 in the first period to minus 0.31 in the second. Agriculture’s is down from 0.84 to minus 0.42. And, probably most disturbing given its share of GDP, the services sector has slumped from 0.45 to minus 0.01.
Across the country, incremental employment demand is slowing quite significantly. If the average GDP growth rate continues to hover at 4.5% to 5% per year, the current employment situation will not improve, and India will never generate a demand for labour that is even vaguely in line with its future supply.
Size of tomorrow’s problem
To appreciate the challenge that India faces in generating adequate employment over the next three decades, it is useful to examine two scenarios for the worker population ratio (WPR), which is the ratio of workers to the population of men and women.
In the first scenario, the WPR remains fixed at the rate estimated by the National Sample Survey in 2011-12 through 2040. In the second scenario, after 2015, the male WPR rises by 2.5% every five years, while the female WPR increases by 5% (due to the much lower current female WPR). Multiplying the WPR by the relevant population statistics gives a reasonable estimate of the number of men and women who might be in the job market up to 2040.
The situation looks grim even if the WPR remains fixed. An additional 30 million jobs will need to be created between 2010 and 2015—which will not happen given the depressed economy and that only 2.7 million extra jobs were added between 2004-05 and 2009-10. As it stands today, India has neither the growth nor the required institutional flexibility to create 6 million extra jobs per year up to 2015 and over 5 million per year from 2015 to 2025.
Things get worse under the second scenario, which incorporates the more realistic assumption that, armed with a better education, the percentage of men and women joining the labour force will be higher. Under this setting, India will need to find 44 million additional jobs between 2015 and 2020 at an annual rate of a little less than 9 million.
These numbers are not exact, but they underscore the urgent need to create much wider employment in the coming years.
There are those who believe that India can never hope to achieve significantly higher employment without the freedom to fire. However, India has reasonable labour market flexibility.
The vast unorganized sector, which accounts for more than 90% of India’s approximately 470 million workers, has no entry or exit barriers. Moreover, the legal constraints that allegedly prevent extra hiring in the organized sector—such as sections 25(N) and 25(O) of the Industrial Disputes Act, 1947, or provisions of the Contract Labour (Regulation and Abolition) Act, 1970—are often overstated.
No doubt creating legal flexibility can help. But the barriers to employment growth lie in an environment that is increasingly cramping the country’s growth potential.
For example, the National Highways Development Programme is slated to construct 47,476km of highways. As of July 2013, only 42% had been built, 25% was under implementation, and the remaining 33% had not even been awarded for construction. The pace is dismal: about 8km per day, compared with the target of 20km per day. Why so? Because successful bidders are overleveraged and do not secure adequate funding on time, coupled with a so-called pro-people stance in many state governments that creates expensive barriers to acquiring the land needed for widening highways. The construction sector has a great deal of de facto flexibility in the use of workers; still, growth and the demand for labour has slowed.
Another example is the telecom industry. On 2 February 2012, the Supreme Court of India cancelled 122 mobile telecom licences allegedly on account of rigging to generate below-market prices. Since then, it has been virtually impossible for the Telecom Regulatory Authority of India and the department of telecommunications to allot additional permits and spectrum. An employment-intensive sector, the slowdown has reduced its growth and its potential for creating additional jobs.
There’s a long list of sectors with high employment elasticity that have slowed on account of lower growth as well as judiciary and regulatory overreach. For instance, bans imposed by the Supreme Court have a played a major role in sharply reducing iron ore output and, with it, a possible loss of some 200,000 direct jobs. Examples continue. But it is useful to consider three other labour-related issues.
First, the skills that will be needed over the next two decades are in short supply. Governments will likely be tempted to bridge the gaps by setting up more state-financed vocational training institutes, but recent history shows that most of these have not taken off. Instead, India should rely on private training institutions—which have been successful in some sectors—and on-the-job learning.
The second issue relates to a geographical mismatch between labour supply and demand. It exists in large measure, but it is not a problem, as labour is far more mobile than commonly believed. In the last quarter of the 19th century, the rural poor of several districts of Bihar and eastern Uttar Pradesh (then the United Provinces) went as indentured labourers to Durban, Mauritius and Trinidad. The same districts supplied workers for the cotton textile mills in Bombay and Ahmedabad and the jute mills of Calcutta. Today, every large city and each major factory town is populated by workers from other parts of the country.
The third issue is the impact of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), which provides at least one hundred days of guaranteed employment in a financial year to every household whose adult members volunteer for unskilled manual work. Despite leakages, MGNREGA has raised rural incomes across India and tended to increase daily wages in rural India and among unskilled migrant labour in urban India. Employers view MGNREGA wages as impeding a flexible and sufficiently cheap labour market, but it is not as significant a problem as made out to be.
This brings to the fore a set of recommendations for the new government.
- Focus on bringing back 7.5% GDP growth. This is a must if India is to entertain the slightest hope of creating jobs for at least an additional 30 million people, and possibly 44 million.
- Devise reforms that can substantially grow the more employment-intensive sectors: agriculture; manufacturing; mining and quarrying; construction; transport, storage, and communications; education; health; and real estate. The kind of restrictions that have hampered growth, such as those in telecommunications, need to be reviewed and removed.
- Help industries—whether manufacturing, utilities, or infrastructure—get access to land to build factories, power plants and highways. Although proponents of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act argue it rectifies serious imbalances, it will significantly increase the cost—in price and procedural delays—of securing land for non-agricultural use. We need to re-look at the law and make amendments that, at the very least, reduce procedural delays.
I am intentionally not making a case to abolish labour legislation such as the laws mentioned earlier. History has shown that these are politically impossible to repeal; therefore, no government will raise such issues. And, as suggested earlier, these do not matter anymore. For one, 90% of employment is in the unorganized sector, which is beyond the reach of such laws. Besides, there is sufficient flexibility in organized manufacturing to keep demand for labour relatively elastic. If the next administration adopts the above recommendations and unerringly targets growth, there can be hope that a more sensible and flexible labour market could accompany much needed additional employment.
Omkar Goswami, an economist, is the chairman of CERG Advisory, which specializes in economic research and corporate consulting.
This is adapted from a chapter in the upcoming book Getting India Back on Track edited by Bibek Debroy, Ashley J. Tellis and Reece Trevor. It will be published in June by the Carnegie Endowment for International Peace and Random House India.