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Policies that can revive job growth in India

Policies that can revive job growth in India
Highlights

 Expectations from India’s manufacturing sector are high. These include, among other objectives, job creation, exports and a force that will drive...

S Expectations from India’s manufacturing sector are high. These include, among other objectives, job creation, exports and a force that will drive future economic growth.
S In India’s highly segmented labour market, there are at least three demographic groups that are in urgent need of jobs: a growing number of better educated youth; uneducated agricultural workers who wish to leave agricultural distress behind; and young women, who too are better educated than ever before.
S India is indeed the fastest growing large economy in the world. Growth should be inclusive and sustainable. One of the crucial determinant of the same is it should be employment intensive. There has been a low job growth due to several factors such as low investment, capacity utilization in industry, agriculture growth and low plant load factor.
S Although growth is relatively high it is the pattern of growth that is an area of concern. One of the concerns is that manufacturing sector has not been the leading sector driving growth. Manufacturing should drive productivity in the whole economy. Services cannot, as services by definition ‘service’ the distribution of produced goods.
S Growth generates employment and employment generates further growth. In general, employment corresponds to the qualitative aspect of growth. If a country is on the growth trajectory, it will generate more employment opportunities and while the growth declines, people start losing jobs.
S Jobless growth is an economic phenomenon in which a macro economy experiences growth while maintaining or decreasing its level of employment.
S The aim should be at growth that is driven both by improvements in productivity and modernizations of its labour force — especially since better jobs are crucial to improving the lives of millions.

Jobless growth
In India jobless growth has been more dramatic in the last two years. It is probably the main issue of the Indian economy today. It is largely responsible for demonstrations by young Patels of Gujarat and Jats of Haryana in the name of reservations. Since they can’t get jobs in the private sector, they fall back on government jobs.
S It is true that there will be no demographic dividend without growth in industrial and service sector jobs. The underlying logic behind a dividend is that as jobs grow, incomes rise and so do savings. Based on higher savings, the investment rate to GDP grows, resulting in faster GDP growth.
S This was the reason behind the phenomenal growth in savings to GDP from 24% in 2002-2003 to 38% in 2007-2008 and investment from 25% to 39% of GDP and in 2015-16 from 39% to 45& investment.

How is India’s economic performance
in recent years?

S India’s economic performance in recent years has been outstanding in relation to the global economy.
S Between 2010 and 2016, the annual real gross domestic product (GDP) growth in India averaged 6.7% despite a relatively weak post-crisis global economy that averaged only 2.7% annual gains.
S Yet the economic optimism in recent years is tempered by growing deficiencies in the economy and if not effectively addressed, could undermine future growth.

Indian economy and jobless growth
S Job growth averaged only approximately 2% a year in the formal sector.
S Such growth is basically flat when adjusted for the growing population.
S In the coming decades, some 12-15 million Indians will enter the labour force each year, and if the current job growth trends persist, fewer than half of them will be able to secure formal employment of any kind.
S For those who fail to find formal employment, their only option is to work in the informal economy.

Informal economy in India
S About 80% of India’s labor force works in
the informal economy.
S Jobs in the informal economy are typically insecure, with neither employment contracts nor regular pay, and very often workers are engaged on
a day-to-day basis.
S The working conditions in the informal economy
therefore resemble a low-productivity trap.
S Employers have no incentives to invest in training workers who are seen as transient and interchangeable or to invest in better tools and equipment for them.
S Without some assurance of future income, workers find it difficult to plan for the long term, let alone find the means to invest in learning new skills.
S The informal economy thus embodies the exact opposite of inclusive growth: workers are effectively excluded from accessing many of the resources they need to make them more productive and thereby improve their life chances.

What are the main factors of
India’s jobless growth?

S The transition peasants into factory workers requires basic training, which is not keeping in pace with job needs.
S Moreover the main contributor in India’s GDP is service sector which is not labour intensive and thus adds to jobless growth.
S The other factor is related to small and medium enterprises (SMEs). Their labour intensity is four times higher than that of large firms.
S SMEs, which employ 40 per cent of the workforce of the country and which represent about 45 per cent of India’s manufacturing output and 40 per cent of India’s total exports, are in a better position to create jobs. But it is not able to do so because of poor infrastructure, lack of skilled labour and also they don’t have easy access to loans.

Reasons behind the jobless growth
In India, growth is attributed to service sector, whereby both employment and wages have seen a rise.
But as figures say, the biggest employing sector in India is the Agriculture sector, employing 45% of the population but contributing 15% to the GDP, whereas Service sector is the biggest contributor to the GDP but employs less than 30%.
IT and Financial services are drivers of service sector growth in last two decades however both of these sectors are not employment intensive, thus contributing to jobless growth in India.
Labour –intensive manufacturing sector did not become the engine of growth in India. In fact, it was the knowledge-intensive services sector which along with some segments of capital intensive manufacturing was the engines of growth in India. But these sectors by their nature were not employment-intensive.
Stagnation in manufacturing output and employment and contraction of labour-intensive segment of the formal manufacturing sector: (Due to)
(a) Excess rigidity in the formal manufacturing labour market and rigid labour regulationshas created disincentives for employers to create jobs
(b) Industrial Disputes Act has lowered employment in organized manufacturing by about 25% (World Bank Study)
(c) Stringent employment protection legislation has pushed employers towards more capital intensive modes of production, than warranted by existing costs of labour relative to capital.
Therefore, the nature of the trade regime in India is still biased towards capital-intensive manufacturing.
The nature of Indian manufacturing is not employment-friendly. Most of them are automated and any employment is highly skilled. Thus they have contributed to growth, but not necessarily to employment.
The labour intensity of MSME is four times higher than that of large firms - but they are not treated well in India they have poor access to credit and they are plagued by many serious problems which has limited there growth potential.
Impediments to entrepreneurial growth in small firms (such as high costs of formalisation) along with a long history of small scale reservation policy which has prohibited the entry of large scale units in labour intensive industries.
The tax incentives, subsidies, depreciation allowance all are solely linked to the amount invested and not to the number of jobs created. Sluggish process in education and skill levels of workers.

Job growth in India since 1999
Between 1999-2000 and 2004-2005, around 12 million people were joining the labour force every year. However, only 7 million have been added to the labour force annually since 2005. This is due to a declining population growth rate and rising educational levels.
S Also, 7.5 million new non-agricultural jobs were created annually between 1999-2000 and 2004-2005. An additional 7.5 million new industrial and service sector jobs were created annually between 2004-2005 and 2011-2012.

What led to higher employment rate
between 1999 and 2005?

Increase in infrastructure investment was the main factor behind this growth. Starting with the Golden Quadrilateral Highway network which began construction in 2001, infrastructure investment picked up. As a result, the number of workers in construction rose from 17 million in 1999-2000 to 26 million in 2004-2005.
S Investment in infrastructure rose strongly thereafter, and during the 11th Five Year Plan, infrastructure investment in the public and private sector together grew by $475 billion. The result was that employment in construction jumped from 26 to 51 million in 2011-12, trebling from the turn of the century.

Job growth since 2004
After 2004, real wages increased significantly until 2012 and share of agricultural jobs came down. The combined effect of non-agricultural job growth plus real wage growth led to a boom in consumer demand in both rural and urban areas. The combined demand and supply effects of investment plus job growth resulted in sustained economic growth at a rate unprecedented in India’s economic history.
S However, job growth has been much slower since 2012. According to Labour Bureau’s latest figures, 1.35 lakh jobs were created in 2015, the lowest figure since 2008, lower than the 4.9 lakh new jobs in 2014 and 12.5 lakh in 2009.
S Also, according to the report underemployment remains a major problem in the country. Only 60.5% of persons aged 15 and above who were available for work for all the 12 months were able to get work during 2015.
S More worrying is the fact that for the 7 million young people who are joining the labour force, the open unemployment rate is 10 times higher than that for those 30 years and above. Unemployment for 15- to 17-year-olds is 10.2% and for 18- to 29-year-olds is 9.4% in 2013, but 0.8% for over- 30-year-olds.
Reasons for slow pace
S While the share of organised sector jobs is increasing, most of the job increases are still taking place in the unorganised segment of industry and services, and in informal jobs.
S While construction had been booming from 2000 to 2012, its growth dipped since 2012, and has begun to revive only since late 2015 as infrastructure investment revived.
S Since 2004-2005, for the first time in Indian history, 5 million agricultural workers have been leaving agriculture per annum. They are mostly absorbed in low-skilled construction employment.
S With infrastructure investment tapering off during the fiscal years 2012-2013, 2013-2014 and 2014-2015, construction employment growth is likely to have fallen sharply, compounding the already greater rural distress caused by drought in 2014 and 2015.
S Education enrolment levels of youth joining the labour force have been increasing every year since 2010 or so. As a result, secondary gross enrolment ratio has increased from 62 to 79% between 2010 and 2014. The educated youth are unlikely to join agriculture and will look for non-agricultural jobs in urban areas.

Key trends in job creation in last few years
During the last decade (2001-11), the growth rate of the labour force (2.23 per cent) 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 Census 2011, the average growth rate of the economy was 7.7 per cent per annum, when it was only 1.8 per cent for employment.
66th round of the National Sample Survey Office (NSSO) data on employment in 2011 revealed between 2004-05 and 2009-10, only 1 million jobs were added per year; in a period when the economy averaged a record 8.43% growth annually.
An Indian Labour Bureau survey of 2015 showed that 2,000 companies in eight sampled industries generated all of one lakh jobs, a fall from the four lakh generated in 2014, even though growth in 2014 was lower than in 2015.
A HDFC Bank report on India’s tapering jobs growth says that “employment elasticity” in the economy is now close to zero – for every one point rise in GDP, jobs grow only 0.15. Fifteen years ago, it was 0.39

What can policy-makers do to revive job growth?
An industrial and trade policy is needed.
S The Department of Industrial Policy and Promotion (DIPP) is preparing an industrial policy. National Manufacturing Policy came in 2011, was not implemented fully.
S While the DIPP is preparing the industrial policy document, it is essential that trade policy is consistent with such an industrial policy. Otherwise the two may work at cross purposes and undermine each other’s objectives. Excessive imports have been decimating Indian manufacturing.
S An inverted duty structure has the following features: higher duty on intermediate goods compared to final finished goods, with the latter often enjoying concessional customs duty. As a result, domestic manufacturers face high tariffs leading to higher raw material cost at home, emanating from the unfavourable inverted duty structure.
S This has prevented many manufacturing sectors from growing since economic reforms began. This must be corrected.
S The automobiles sector in India faced no inverted duty structure, and has thrived. India has become in the last decade one of the largest producers of vehicles of several kinds in the world now. Electronics faced an inverted duty structure, but due to changes made, electronics manufacturing has shown slow growth.
Special packages are needed for labour-intensive industries to create jobs
S There are a number of labour intensive manufacturing sectors in India such as food processing, leather and footwear, wood manufacturers and furniture, textilesand apparel and garments.
S The apparel and garments sector received a package from the Government of India roughly a year back.
The other labour intensive sectors have been ignored.

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