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Is India going through an era of jobless growth?

By Subuhi Karim

As Narendra Modi completes three years as the prime minister of India, he must seriously worry about his government’s inability to meet the single biggest promise he had made in his election speeches in 2014–providing jobs to new entrants in India’s labour market. “I can’t do much about those in their fifties but I want to transform the lives of those in their twenties who are seeking new employment,” Modi had said.

Providing gainful employment opportunities is essential to enable people to improve their standards of living. For a country like India, which has surplus labour and a strong affinity for new technologies, employment generation in the 21st century poses a new challenge. More recently, the sluggish growth of various sectors of the economy—especially post demonetization—has made this challenge more severe.

High growth but declining job creation

According to the labour ministry’s 27th Quarterly Employment Survey of eight employment intensive industries—textile, leather, metals, automobile, gems, transport, IT, and hand and power loom—there are 43,000 job losses in the first quarter of FY 2015-16. The second quarter was somewhat better, with 134,000 new jobs.

During the last decade (2001-11), the growth rate of the labour force (2.23 percent) was significantly higher than the growth rate of employment (1.4 per cent), which itself was several-fold less than the growth rate of the economy. According to the 2011 Census, the average growth rate of the economy was 7.7 percent per annum, when it was only 1.8 percent for employment.

The trend of a significant gap between the pace of GDP growth and that of employment growth has given rise to the phenomenon of “jobless growth” in India. The limited impact of booming growth on employment generation is captured in an indicator called “employment elasticity”, or the rate of change of employment per unit of gross domestic product (GDP) growth. This has been steadily declining in the 2000s from 0.44 from 1999-2000 to 2004-05 to a near-zero level of 0.01 from 2004-05 to 2009-10.

The situation has worsened due to weak industrial growth, a struggling agriculture sector with widespread drought, cost rationalisations in several sectors, and the knock-on effect of a global slowdown. Additionally, traditionally labour-intensive industries are beginning to increasingly mechanise their operations. While it makes them more productive and profitable, it also shrinks job opportunities. The economy has become less labour-absorbent.

Growth in the organised sector—a manipulation of numbers?

In 2015, the government expanded the scope of organised industry from just eight manufacturing sectors to include some key service industries such as education and health. This was clearly done to bump up the employment growth figures because the manufacturing sector was showing a very poor growth trend—around 1.5% annually—whereas the service sector was doing much better and growing at 7-8%. Adding service sectors to the organised sector employment data has helped the government show a slight improvement in new jobs growth in 2016.

Prima facie, it is difficult to believe that industries were hiring when the economy was paralysed by notebandi for about four months. The bulk of the organised industry was busy managing the new situation caused by demonetization, with a fall in the sales of manufactured items.

Sluggish manufacturing and more layoffs

Large manufacturers are trimming operations, throwing many jobs into jeopardy. Nokia, locked in a tax dispute with Indian authorities, shut down its factory in Chennai in November 2014, rendering 8,000 workers jobless. Zomato, a food tech company, laid off 300 employees (10 percent of its workforce) last year as the business went through a squeeze.

Currently, the manufacturing sector has an overall employment share of 12-13 percent. While this share has been growing, the manufacturing sector has been losing people to the services sector, which is seen as more glamorous, better paid, and an opportunity to gain international exposure.

Yet, there are some areas that still stand out when it comes to job creation, notably the financial services and the financial technology sectors. Ever since the RBI granted licenses to around 21 banks in 2015, employment opportunities have been growing. The banks have been opening new branches and hiring personnel to augment their services. Similarly, the entry of outfits such as PayTM which combine technology with financial services is also giving a new impetus to job creation.

There is a need to understand that there will always be a trade-off between technology and the workforce previously performing that task. Jobless growth will only ensure that the demographic dividend becomes a demographic curse.

State reform and regulation ahead

There are several steps the government would need to take to bring the country out of this jobless growth trap. One of them is the reform of labour regulations. Labour law reform that encourages greater flexibility while providing a safety net for the unemployed is equally necessary. Rajasthan has set an example through a recent state-level amendment where it raised employment threshold for enforcement of some of the restrictive provisions of the Factories Act and also raised the minimum membership for the registration of a labour union from 15 to 30 percent of the firm’s employment.

Encouraging states to make their own amendments is a step in the right direction. Additionally, the Centre has set up a web portal for the self-filing of compliance reports pertaining to various Central Labour Acts. India also needs to enable its workforce to adapt to the changing skills requirements accompanying technological progress.

Regulation of enterprises is a major factor that affects job creation. Simplification coupled with “smarter regulations” is the way to go. Encouraging people’s entrepreneurial instincts will generate sustainable outcomes. The government could incentivise job creation by giving infrastructure a push. The credibility of employment-unemployment data also needs to be established. At present, the source used for estimating the unemployment rate in India is National Sample Survey Office (NSSO) data. However, this data is not available annually. Since 12 million people enter the labour force annually, frequent periodic assessment of the labour market is essential.

The current phase of jobless growth is not sustainable for India’s future. Proactive government intervention and regulation is essential for better employment generation.


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