Jobless growth: What lies beneath and how to address it
The Indian economy needs to create 150 million jobs from 2010 to 2020 to compensate for the jobless growth since 2005
The construction sector created 18 million jobs between 2005 and 2010, services contributed 3.5 million jobs, while the manufacturing sector actually lost 5 million jobs
It is time to face facts. The estimated number of entrants into the workforce in the period 2005-10 was an average of 12 million per annum. This was a period when the economy grew at an average 8.7% and at above 9% in three of the five years. But despite this growth, the economy managed to create just 5.5 million jobs annually in the industry 1 and services sectors in the same period. This is after accounting for new job creation through welfare schemes like NREGA.
Further, not all new jobs went to entrants into the workforce - a large chunk of it includes previously self-employed individuals from agriculture and trade who moved mostly into construction.
To put it in perspective, while new job addition in the five-year period was 27.5 million, the number of self-employed people also reduced by 25.5 million, leading to a net increase of 2 million in the employed population.2
The quality of new jobs added is also distressing. The construction sector created 18 million jobs, but a major chunk was in the form of casual labour. On the other hand, services contributed only 3.5 million jobs, while the manufacturing sector actually lost 5 million jobs. While corporate India suffers from a chronic shortage of high and medium skilled people, estimates suggest that India will create a surplus of 30 million low skilled unemployed youngsters by the turn of the current decade. Further, reduction in self-employment (by a whopping 25 million in five years) is beginning to affect entrepreneurship - the lifeline of future job creation.
To compensate for this period (2005-10) of jobless growth, the Indian economy needs to create 150 million jobs between 2010 and 2020 to assimilate new entrants into the workforce and people looking to move out of self-employment. We are already in 2013-14, growth has taken a nosedive since 2011 and there is no evidence to show that the economy is moving away from jobless growth. The facts, in short, are dismal and alarming.
Job creation is a gradual and involved process - it is a culmination of the right economic setting, capital inflows, capital allocation, skilling and most importantly, the right policy. However, the unfurling of today's economic nightmare that is reminiscent of an era gone by, has been a tortuous process where market forces have had to cower and adapt to policymakers who have been absent for the most part and worse, whose excesses have lead to disastrous consequences both on the fiscal front and on job creation. While there are differences on whether the method of collecting employment statistics accurately captures the full measure of employment in India, what cannot be disputed is the disturbing trends in employment based on available data.
The growing Indian economy has long provided a fertile setting for movement of people from agriculture into manufacturing and construction. A combination of rising productivity in an extremely backward agricultural sector and rising aspirations will naturally push people from agriculture into industry. While this exodus is visible in the drop of 14 million agricultural jobs between 2005 and 2010, the troublesome reality has been that India's manufacturing sector too has lost 5 million jobs in this period.
While India's manufacturing sector has grown by 9.5 per cent per annum in the 2005-2010 period, employment intensity of manufacturing (measured as number of people employed per Rs. 1,00,000 in output) has fallen from 1.2 to 0.73. In effect, manufacturing has become more capital intensive and productive. This is the backdrop for possibly one of the most glaring shortcomings of the India growth story - the virtual absence of large-scale labour intensive manufacturing.
This absence can be mostly explained by India's archaic and rigid labour laws, something that is in dire need of reform. Creaking infrastructure, poor power supply and land availability issues are other commonly cited reasons for the fact that India has seen no addition of labour intensive manufacturing units. Manish Sabharwal, CEO of TeamLease, the country’s largest people supply chain company, describes this succinctly. "India’s labour laws make an employment contract the equivalent of marriage without divorce. There are many obvious steps to making India a better habitat for job creation - infrastructure, lower regulatory cholesterol, more credit flow to Small and Medium Enterprises, etc, but the low hanging fruit has been picked and we need to confront the difficult, controversial but important issue of labour law reform,” he says.
In the absence of labour intensive manufacturing, the overarching macro employment trend over 2005-2010 has been the exodus of workers from agriculture into construction. The growth in construction employment has been guided by an increase in infrastructure investment during the 11th Five Year Plan (2007-12) from 4 per cent of GDP to 7.5 per cent of GDP in 2012. This pull of construction growth in rural and urban areas has been the silver lining to an otherwise disastrous employment scorecard. But even here, growth has come at the expense of some dangerous economic policies.
The NREGA has been the flagship social scheme of the UPA government since 2008. Utilising roughly $7.5 billion (Rs 40,000 crore) per annum, the programme provides roughly 2.5 billion days of employment (with a 100 day employment guarantee) for minimum wages of Rs 130 per day. The ambitious programme, with a lofty aim to stopping migration of workers from rural areas, has been instrumental in driving rural construction and has contributed to reducing rural poverty. But the unintended consequences of the scheme, apart from the apparent fiscal misadventure, could come to haunt the Indian economy over the next decade.
Besides squeezing available farm labour and consequently driving up minimum support prices for agricultural commodities, there is enough empirical evidence to show that NREGA has led to rising urban construction wages, food inflation and shifting of workers from skilled professions (artisans, weavers) to low skilled construction. At the end of the day, sustained job creation requires policy that focuses on skill development and productive job creation. The New Manufacturing Policy may provide the answer to creating such an environment. But for now, it is becoming increasingly clear that these social sector schemes have led to real wage growth without any corresponding improvement in productivity. The saying goes “Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime”. Unfortunately, there has been a lot of fish showered down from helicopters these last few years.
The economic and social repercussions of jobless growth are all too well known. With an estimated 12-15 million new entrants into the workforce every year, there is every possibility of India's touted demographic advantage turning into a social nightmare if these employment trends continue. The fiscal misadventures of the Indian state during the heady days have meant it cannot sustain guaranteed employment schemes in case of a protracted slowdown.
Another consequence of the India growth story since 2005 has been the rise of low productivity and informal construction jobs. The economic survey 2012-13 prepared by the country's chief economist Raghuram Rajan also notes that India is creating jobs mainly in low-productivity construction and not formal jobs in manufacturing, which typically yields higher productivity. The urgent need of the day is to improve exports amidst a more inclusive employment pattern and not surprisingly, both are linked to the growth of labour intensive manufacturing.
India story's Missing Link
The answers to these grave trends and projections lie in a handful of policy initiatives that will promote manufacturing. The limitations of India's much touted agriculture-to-services-to-knowledge model are slowly being exposed. It is time to build this missing link of export-oriented manufacturing into the India growth story.
Among the solutions put out by experts and industry leaders, the most urgent one seems to be the reform of India's labour laws. The very fact that a small-scale manufacturing enterprise cannot fire employees even while facing bankruptcy keeps the real cost of labour very high. Also, there is an urgent need to make the law more flexible to ensure higher formal employment by “reducing the costs of formality”, as Sabharwal puts it. “We have to make the employment contract more symmetric by redoing irrational legislation like the Industrial Disputes Act. We also need to reduce the amount of payroll confiscation (49 per cent of salary is currently deducted at source in a CTC world) because low wage worker cannot live on half their salary”, he adds.
Labour intensive manufacturing requires certain key ingredients - better power and transportation, easier land availability and finally, access to medium level skills in large numbers. Growing a strong export oriented “light industrial sector” requires strong focus of the state in providing this infrastructure, of entrepreneurs in developing the right industries with existing pockets of medium skilled labour and of public-private partnerships in galvanising large scale skilling initiatives for such medium-level skills.
Arun Maira, Member, Planning Commission, says he believes the focus on manufacturing has to be bottom-up and the key is to improve the lot of small entrepreneurs, both by providing economic incentives and ground level administrative reform that reduces their cost of operations. “It is the government’s responsibility to incentivise these small enterprises by providing economic support to build and sustain them. Since we are still a people-intensive economy, it needs concerted efforts from the government to incentivise those establishments that require more person time and person efforts. This bottom-up approach will enable smaller enterprises to be more productive and make more profits”, he says.
Simultaneously, the services sector faces acute shortage of high-skilled labour and supply constraints in such skills need to be addressed by reforms in education.
Most importantly, these handful of initiatives - labour laws, infrastructure, land accessibility, SME incentivisation, skilling, education reform - need to happen in sync and soon. It’s time for India's policy makers to respond.
Source: IAMR Occasional Paper No. 9/2012, Institute of Applied Manpower Research, Planning Commission, Government of India, December 2012; Employment in India: Uneven and Weak, A study by CRISIL Centre for Economic Research, August 2011