Abheek Barua: India's jobless growth story

Last Updated: Wed, Jan 02, 2013 05:24 hrs

There appears to be some optimism at least within our small community of financial market economists that growth seems to have bottomed out. The next financial year, 2013-14, is likely to post somewhat better numbers for GDP growth than the median forecast of 5.5 per cent for the current fiscal year. This optimism seems to be based on a number of things: the government finally shaking off its policy funk, which could both improve overall business sentiment and get public sector projects going; the likelihood of the Reserve Bank of India lowering interest rates in response to a moderation in inflation; a marginally better external environment and so on. I have a similar view and see no reason to take a contrarian stance. However, before we all get caught up in the process of predicting how quickly the business cycle turns up and how high the growth rates are likely to go, I would spare a thought for our employment statistics.

The fact, as has become clear, is that while economic liberalisation pushed up the growth rate, it did not achieve as much in reversing the secular decline in the employment rate output since the early 1970s. Going by estimates provided by T S Papola and Partha Pratim Sahu in a paper done for the Indian Council of Social Science Research ("Growth and structure of long-term employment in India", March 2012), the average annual employment growth was about 2.4 per cent in the 1970s. In the 1993-94 to 2009-10 period, it averaged around 1.65 per cent.

In fact this post-liberalisation average was shored up by a somewhat spectacular and unexplainable blip in employment growth to 2.8 per cent between 1999-2000 and 2004-05. In the 2004-05 to 2009-10 period, in which GDP growth hit historically its highest levels, job growth collapsed to virtually zero. (Some have incidentally tried to put a positive spin on this decline in employment: they claim that it was really the result of lower participation rates in the labour force because of higher school enrolment and so on. This does not, however, take away from the fact that the long-term secular trend for employment continued into the post-liberalisation phase.) This is not the end of it. Employment growth in the organised sector has moved in the same direction as aggregate employment, but in absolute terms it has fared much worse. It seems to have been virtually zero in the post-liberalisation period.

Sector  1972-83 1983-1993 1993-2009
Primary  1.7 1.4 0.7
Secondary  4.4 2.8 4.3
Tertiary  4.2 3.8 3.1
Total 2.4 2.0 1.7

The desirable rate of employment growth over the next two decades is incidentally three per cent (going by Professor Papola and the Planning Commission's estimates), if everyone entering the workforce were to be given a productive job and the backlog of unemployed and "underemployed" were to be cleared up. That is roughly twice the employment growth achieved in the post-liberalisation period.

There are many reasons why we should perhaps be paying a little more attention to the "employment potential" of growth this time around. First, this is a period over which our "demographic dividend" is scheduled to pick up as the dependency ratio (roughly the ratio of dependents to the pool of working-age population) plunges. This intensified pressure of "de-ageing" will put more pressure on policy makers to find jobs for those entering the labour force. Second, growth itself cannot sustain itself beyond a point if it does not translate into an increase in livelihoods. In the absence of jobs and income, domestic consumption expenditures that constitute the bulwark of demand for Indian goods and services will flag and drag growth down with them.

There are two options. Either we could find ways of making growth more employment-intensive, which then sets off a virtuous circle of more consumption, greater demand and higher growth. Or else we will continue to depend on somewhat ad hoc schemes like the Mahatma Gandhi National Rural Employment Guarantee Scheme, with its attendant adverse consequences for the fisc and the risk of aggravating macroeconomic imbalances that breed inflation.

Do the disaggregated data on employment give us any clues as to what a viable employment strategy should be going forward? The "service" sectors have done consistently well, led by financial services. Average employment growth in all the service sectors put together is close to three per cent for the two decades after liberalisation. However, one has to be careful before one uses this to advocate a services-led growth strategy. The problem is that in the case of some leading sectors like "financial services", the wedge between the share of output and the share in value added is enormous.

In 2009-10, for instance, the share of value added of financial services was close to 16 per cent, yet its share in total employment was just 2.2 per cent. The IT sector put together employed a meagre 1.76 million people in 2008-09 and, at best, it would employ 2.5 million now. In any case, the education and skill levels needed for employability in these sectors are high and they cannot be part of a formula for mass employment. The only sector that has substantial employment potential is "trade and transport", where both the share in employment and its growth have been high. Construction has fared well during the last two decades partly because of the rural job guarantee scheme. A pickup in infrastructure activity could help sustain this.

The idea is not to get lost in the minutiae of employment statistics; there is a need to recognise the fact that without changes in the economic structure growth does not guarantee jobs. Inclusive growth is not about cash transfers or job guarantees for unproductive jobs. Instead, it is about ensuring that the growth process itself absorbs more workers in productive jobs.

For a start, we need to revisit the question of whether India can skip the "missing middle" (to borrow economist Anne Krueger's phrase) of rapid labour-intensive manufacturing and jump to a phase of "services"-driven growth. If the answer is that we cannot do that and have to fall back on manufacturing, so its share in GDP needs to rise sharply. Besides, the organised sector has to constitute a larger share of the sector. If this is indeed the solution to the problem of jobless growth, then much more needs to be done on the policy front to achieve this.

The author is with HDFC Bank. These views are personal

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