In his budget speech, the finance minister rightly highlighted the need to create several million new jobs in the manufacturing sector — the “Achilles heel” of the Indian economy — over the coming years. India adds one million people to its working-age population every month. That’s right, every month. Not everyone looks for a job, though. Labour force participation is around 58 per cent — this means, of every 10 lakh persons between the age of 15 and 59, only 5.8 lakh will actually seek a job every month. The others would mostly be studying or working at home. Even with such low labour force participation, our calculations show that the number of job seekers would have risen by a whopping 51 million during the seven fiscal years leading up to 2018-19. In the global context, India will have to create 16.6 per cent of the additional jobs that are needed each year across the world. It’s a staggering number and challenge.
Creating adequate employment opportunities for new entrants in the job market, especially in the non-agricultural sector, will be a stiff task for policymakers as growth slows down. Successful employment generation is, of course, vital for equitable growth. If India is unable to generate the required number of new jobs, its much-vaunted demographic dividend will morph into its bugbear.
A recent CRISIL study estimates that the non-agricultural sector (industry and services), which now accounts for 86 per cent of the GDP, will add only 38 million jobs between 2011-12 and 2018-19 — a quarter less than the 52 million jobs that were added during the preceding seven-year period. With not enough opportunities outside the agricultural sector to absorb the 51 million new job seekers, an additional 13 million people will be forced to either depend on low-productivity farms for work or remain unemployed. That’s the opposite of what happened between 2004-05 and 2011-12 — during this period, 37 million people migrated out of agricultural employment.
As the economy develops, surplus labour needs to shift out of agriculture into more productive sectors, which will raise the per-person farm income and benefit the economy. The inability to do so will increase disguised unemployment and limit productivity improvement.
India’s growth prospects as well as its ability to translate growth into employment have been curbed in recent years. The economy grew at 4.5 per cent during the last fiscal year, and is unlikely to do much better in the current one. What is clear is that India will have to live with diminished growth expectations for the coming years. We expect the economy to expand at a lower average growth rate of 6 per cent during the seven fiscals up to 2018-19 compared with 8.5 per cent between 2004-05 and 2011-12. The 250 basis point decline will be due to the sluggishness in industry and services, assuming that agriculture grows at its trend rate of around 3 per cent. Slower non-agriculture growth, in turn, will mean fewer jobs being created.
Aggravating the slowdown is the sharp decline in the employment elasticity of the GDP, which is defined as the percentage increase in employment for every percentage point increase in the GDP. The number deteriorated sharply to 0.38 per cent between 2004-05 and 2011-12, from 0.52 per cent in the five preceding years, for the non-agricultural sector.
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Two factors were responsible for this “jobless” nature of growth. First, the growth in the GDP has been driven by the services sector, which is less labour-intensive than industry. And even within the services sector, growth is driven increasingly by less labour-intensive services, such as finance, real estate and business services, including information technology and information technology enabled services.
For example, in 2011-12, these services, which account for 19 per cent of the GDP, employed only 3 per cent of the workforce. These sectors grew at over 11 per cent per year. In contrast, the more labour-dependent service sub-sectors, such as health, education and recreation services, which require 6.5 times as many people to produce output worth Rs 1 million, grew at below 7 per cent annually during the seven fiscals leading to 2012.
Second, the ability of labour-intensive sectors such as manufacturing to absorb workers has declined considerably. The employment elasticity of manufacturing fell sharply to an average 0.17 in the seven fiscals leading to 2012 from 0.68 in the five years up to 2004-05. Inflexible labour laws and increasing automation have resulted in the large-scale substitution of labour by capital. Automation is part of technological progress and is inevitable. And restrictive labour laws are speeding up the process of automation, which is an unhealthy development for an economy endowed with a large and fast-expanding workforce.
It is imperative for the government not only to push growth up but also to arrest the pace of decline in employment elasticity. For this, it will have to raise the labour dependency of the manufacturing sector by simplifying labour laws and encouraging the growth of labour-intensive industries such as textiles, gems and jewellery, handicrafts and food processing.
There is an emerging export opportunity in some of these low-cost/ labour-intensive sectors, such as textiles, as wages in China rise and businesses there start exiting these segments. Bangladesh is a good example of an economy that took advantage of its low-cost structure and developed its textile sector. This not only created jobs but also improved social indicators. Today, Bangladesh beats India on most social indicators despite having a lower per capita income.
Within services, politicians should also focus on developing the health and education sectors. This will not only create jobs as they are labour-intensive services, but also raise India’s growth potential by making the workforce healthy, skilled and educated.
And finally, we need to focus on physical infrastructure and the construction sector. This sector not only has high employment elasticity but can also absorb low-skilled labour from the agricultural sector.
Construction has the highest employment elasticity among non-agricultural sectors — a percentage point growth in the construction sector raises employment by more than 1 per cent. No wonder the number of people employed in the construction sector went up by 25 million, in contrast with only six million in manufacturing, in the seven fiscals leading to 2012, even though both sectors grew at a similar rate of around 9 per cent per year. More than 65 per cent of the labour force used in construction is unskilled or semi-skilled — a key characteristic of people coming out of agriculture. A fast-growing construction sector can therefore create significant employment opportunities for low-skilled surplus labour in agriculture.
Cutting to the chase, policymakers have their task cut out. Inaction will be perilous as it will transform India’s potential demographic dividend into a demographic liability.
The writer is chief economist, CRISIL. Co-written by Vidya Mahambare, principal economist and Neha Saraf, junior economist, CRISIL