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Tuesday, April 07, 2020

Explained: Is the push towards organised manufacturing the answer to India’s jobs crisis?

Data suggests that the formal manufacturing sector is becoming more capital intensive, and as such, unlikely to provide the expected boost for jobs.

Written by Udit Misra , Edited by Explained Desk | New Delhi | Updated: February 1, 2020 10:40:24 am
For a while now, it has been suggested that India’s unemployment woes can only be solved by boosting the manufacturing sector.

In any Budget, there are essentially two main questions that need to be answered. One, what is the outlook on boosting economic growth. Two, what is the status of the fiscal health of the government — that is, what is the level of fiscal deficit etc.

This year, however, there is another big question: What can the government do to boost employment in the country.

In the past year, there have been several reports, both official and by independent academics, that have painted a bleak picture on the jobs front. For instance, a 2017-18 National Sample Survey Office’s (NSSO) survey pegged unemployment at a 45-year high. Other researchers like Mehrotra & Parida as well as Himanshu have shown how the absolute number of “employed” people witnessed a decline between 2012 and 2018.

For a while now, it has been suggested that India’s unemployment woes can only be solved by boosting the manufacturing sector.

Why manufacturing?

It has been argued that between the three broad sectors of the economy — agriculture, industry and services — it is the industry sector, and within industry, the manufacturing sector that has the highest potential to absorb the surplus labour in the economy.

Agriculture, which engages almost half the Indian workforce, does not grow fast enough and is, as such, not remunerative enough to provide gainful employment to the millions who join India’s workforce each year. It is for this reason why more and more people have left agriculture and tried to join other sectors of the economy since 2004.

Services is a fast-growing sector and pays well but it places far greater demands on job seekers in terms of skills and education. Often, the rural millions looking for a job find themselves inadequate in terms of delivering in the services sector — not without skills education at least.

That leaves the industry, which includes sub-sectors like manufacturing and non-manufacturing (that is, construction and mining etc.). Research shows that the employment elasticity — the ability to create new jobs with every additional increase in a sector’s growth — of the manufacturing sector is the highest.

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What did the past governments do?

For a while now, both UPA and NDA governments have tried to focus on boosting the growth in the manufacturing sector. For instance, in 2011, Congress-led UPA came out with a new National Manufacturing Policy that aimed at raising the share of the manufacturing sector to 25% of the GDP by 2022. The BJP-led NDA too unveiled the Make in India initiative that focussed using manufacturing as the main platform to create jobs.

Each Union Budget tends to focus on measures that will promote manufacturing — both big- and small-scale — and create jobs.

However, despite such a focussed stand right through the past decade, manufacturing’s share is still under 17% of the GDP and the jobs situation in the country has only got worse.

What does the data show?

An analysis of the Indian manufacturing sector done by India Ratings shows that manufacturing units in the organised sector are becoming more capital intensive — that is the capital-to-labour ratio is increasing. In other words, instead of increasing the number of workers in a unit, owners are choosing to increase the amount of capital.

As Table 1 shows, the trend is of a secular increase over the years. What is worse is that this trend holds true across the board including those sectors such as textiles and leather products that are considered “labour-intensive” and most capable of creating jobs and soaking up surplus labour (see Tables 2 and 3).

The oddest bit in this trend is that owners of these manufacturing units appear to be increasingly substituting labour with capital even when the return on capital is falling. Data shows that in the organised manufacturing sector profit per unit of capital invested has fallen sharply between 2007-08 and 2017-18. 

The flip side of this picture is the decline in India’s labour productivity growth rate — see Table 4   

Not surprisingly, this trend of falling labour productivity growth in organised manufacturing has also gone along with a decline in wage growth — Table 5

Yet again, this trend of decline in wage growth is largely secular across the board and includes sectors like textiles and leather that could create the maximum jobs.

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What is the upshot?

The data shows that in organised manufacturing — that is, manufacturing done in the formal sector where workers are covered under labour laws etc. — labour productivity growth and wages growth are declining and businesses are increasingly preferring to substitute labour with capital.

This raises several questions for policymakers:

1> Why are manufacturing owners increasingly preferring to substitute labour with capital? It is important to note that they continue to do so even when the return on capital is falling.

2> If this is the trend, how reasonable is it to assume that boosting manufacturing growth will create more jobs for the Indian youth?

3> The government has been increasingly pushing for “organised” or formal sector manufacturing but if this trend is anything to go by, is such a push justified?

4> What is the extent to which the lack of significant labour reform is holding back manufacturing from achieving its potential to create jobs?

When Finance Minister Nirmala Sitharaman stands up to present the Budget on February 1, these are some of the issues she could be expected to address when discussing the growing question mark on unemployment in India.

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