As the Indian economy reels from the devastating economic and health effects of two consecutive waves of the Covid-19 pandemic, the latest estimates of the fourth quarter of financial year 2020-21 (January-March) brought some relief, at least for policymakers. The construction sector showed a 15 per cent increase in gross value added (GVA) in the last quarter as compared to the same quarter in the last financial year. GVA is essentially a measure of the “net” value of output — deducting the cost of any input that went into its production from its total value. So, a 15 per cent growth in construction GVA indicates the value of the output of the sector (after deducting the costs that went into its production) grew by that amount.
This increase is nearly double the growth experienced by the sector in the previous year (7.7 per cent). The buoyant growth of this sector has been hailed by policymakers not just as a sign of better times to come, but also of the capacity of the economy to, on its own, address the distress that households have faced in the past year. In response to a question of whether the government was considering cash transfers to households, the Chief Economic Advisor pointed to the high growth rates in construction possibly to indicate that growth would address the needs of the beleaguered workforce. Recently, he also laid emphasis on this high growth in the construction sector to highlight the government’s plans for economic recovery. The Union budget 2021 has also allocated a considerable sum towards infrastructure and construction in the hopes of the sector playing a catalysing role.
But an increase in GVA does not always translate into growth in employment. While GVA and/or GDP are considered as indicators of economic health, it has been argued in detail how it may not be prudent to rely on these alone as measures of economic welfare. In particular, mere growth in a sector may not necessarily translate into benefits for its workers. We look at what this much-heralded growth in the construction sector means for its workers, using data from the nationally represented Consumer Pyramids Households Survey (CPHS) released by the Centre for Monitoring Indian Economy (CMIE-CPHS).
In the last quarter of 2019-2020, when construction GVA grew at nearly 8 per cent, employment in the same sector grew by 3 per cent based on our estimates from CMIE-CPHS. In the last quarter of 2020-21, even as construction GVA grew at twice the rate, employment grew only by 2 per cent. The fact that employment grew in this sector even during a crisis year is largely because of the fact that the construction sector emerged as a fallback employment option for many displaced workers. For example, about 20 per cent of workers employed in the manufacturing sector had moved into construction by the end of the year. So, the employment growth in this sector even at this time is not surprising. However, the massive GVA increase in this sector has not been accompanied by a commensurate increase in its employment capacity. During “normal” times, the sector typically employs around 60-65 million workers — only about 10-15 per cent of India’s total workforce. Even if this sector were to expand in line with its GVA growth, it will not be able to provide employment beyond a certain level and in a manner that adequately addresses the huge welfare loss workers have suffered.
Moreover, employment alone is not enough. Earnings for an average daily wage worker in the sector have actually declined this year. In January 2020, according to CMIE, the monthly earnings for a construction worker were around Rs 8,900. A year later, this has declined to Rs 8,600. Again, the overall economic growth in GVA in the sector has not been passed on to the workers.
To get a sense of how workers employed by the sector benefited from this growth in GVA, we look at the “labour share”. The labour share is a rough estimate of the share of value added that accrues to the workers, in effect through wages and salaries. In the last quarter of 2019-20, of the roughly Rs 2.75 lakh crore GVA, labour share was 21 per cent based on official estimates of GVA and CMIE-CPHS estimates of employment. A year later, despite the same sector having grown by twice the rate, labour share actually fell to 18 per cent. This fall in labour share is indicative of a corresponding rise in the profits made in the sector.
The growth that this sector has experienced has not “trickled down” to the workers employed in it. In fact, we find a negative relationship between GVA and labour share of the sector — an increase in GVA accompanied by a decrease in labour share, pointing to a further worsening of the relative position of workers even as they go back to work after braving the economically harsh months of the pandemic and lockdowns last year. Any relief effort, therefore, that relies solely on economic growth as a means to uplift workers will be sorely inadequate as we see from the experience of workers in construction.
While boosting growth of high-employment sectors is one strategy to adopt, this has its limitations. The capacity of a sector is limited in terms of the number of workers that it can absorb, and the extent to which growth can benefit workers. The need of the hour is to go beyond relying on sectoral growth as a means of delivering relief to workers. Direct transfers of cash and food are also needed, as is livelihood support through employment guarantee programmes.
This column first appeared in the print edition on July 27, 2021 under the title ‘The limits of sectoral growth’. The writers teach at Azim Premji University