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The mega challenge of job creation

LiveMint logoLiveMint 25-05-2017 Montek Singh Ahluwalia

The challenge of creating jobs has moved to the centre of the political stage all over the world, and India is no exception. However, the scale of the problem in India is not easy to measure. The latest National Sample Survey (NSS) data for 2011-12 show unemployment was only 2.2% of the labour force, which is very low. On this metric, unemployment in India is much less of a problem than in other countries. On the other hand, we often hear reports of hundreds of thousands of applications every time a few hundred low-level government jobs are to be filled.

The low unemployment rates are misleading because many of those shown as employed are actually engaged in low-paid jobs that they take up only because there is no alternative. Economists call this “disguised unemployment” or “underemployment”. Equally, the hundreds of thousands of applications for a few government jobs are misleading because the applicants are not all unemployed. Since government jobs at the lower levels pay much better than the market rate, those employed in the private sector want to switch to government jobs if they can.

A recent survey of youth unemployment shows that educated youth face greater problems. The unemployment rate for 18-29-year-olds as a group is 10.2%, but for illiterates it is only 2.2%, rising to 18.4% for graduates. As more and more educated youth enter the workforce in future, we can be sure that unless the quality of jobs available for them improves dramatically, dissatisfaction will mount.

At the macro level, three structural changes are needed to tackle the problem.

First, the workforce employed in agriculture must decline. In 2011-12, agriculture accounted for 18% of gross domestic product (GDP) and it absorbed about 50% of the workforce. Productivity per person in agriculture was therefore 18/50 = 36% of the national average. If the economy as a whole grows at 7.5% per year over the next 10 years, and agricultural growth accelerates to 4%, the share of agriculture in GDP will fall to around 11% by 2027-28. To maintain agricultural productivity at say 36% of the national average, the share of employment should decline to 31%. This is almost certainly too sharp a decline, but even if the employment share declines to 35%, it implies a major shift out of agriculture. This places a huge burden of on non-agricultural employment, which will have to expend sufficiently to absorb the shift out of agriculture plus the normal increase in the total workforce.

The second structural change needed is to reduce the expectation from manufacturing as a provider of non-agricultural jobs. Faster growth in manufacturing has long been central to our economic strategy and must remain so. However, we have to recognize that technological change is likely to make manufacturing less employment generating than in the past. Even if Artificial Intelligence and 3D printing are distant developments in India, there can be no doubt that any successful manufacturing strategy will involve application of capital-intensive techniques, especially if we propose to integrate more fully with the world and with global supply chains.

At present, manufacturing accounts for about a quarter of total non-agricultural employment. Another quarter comes from non-manufacturing industry (mining, electricity and construction) with services accounting for the remaining half. Most of the growth needed in non-agricultural employment will have to come from construction and the services sector, including health services, tourism-related services, retail trade, transport and logistics and repair services. A careful review of policies is needed to see how impediments to expansion in these sectors can be removed.

The third structural change needed is a shift from informal sector employment to formal sector employment. The NSS data for 2011-12 showed about 243 million people employed in the non-agricultural sector, and as many as 85% of these were in the “informal sector”, including both self-employment and wage employment. However, much of the demand for “high quality” employment opportunities today is a demand for jobs in the formal/organized sector. A shift away from the unorganized/informal sector to the organized/formal sector is desperately needed if we want to meet the expectations of the young.

It is obvious that no single policy initiative can achieve all the structural changes listed above. Multiple interventions are needed at different levels and some general pointers are given below.

Rapid growth has to be central to any employment strategy for the simple reason that a faster growing economy will generate more jobs. Any notion that we can generate the employment we need without high growth would be seriously misleading. We can probably generate low quality, low productivity employment even if we fail on the growth front, but that is not what young people want. This means all the policies that are likely to accelerate growth are also critical for generating employment.

The biggest opportunity for generating more employment in manufacturing lies in exporting simpler consumer goods to the world market, an area which China has long dominated, but which it is now likely to exit, as its wages rise. How well we can do this depends upon our ability to compete with others such as Bangladesh, Vietnam. Paradoxically, becoming competitive would involve faster modernization of these industries, which will involve a shift away from labour intensity, but if it allows an increase in the scale of operations, total employment could increase.

Small and medium enterprises generate much more employment than large capital-intensive enterprises but we have not done enough to encourage this segment. India’s industrial structure suffers from what is called “the missing middle”. There are a few large enterprises, as is the case every where, and at the other end there are a large number of firms at the very small or micro level. There are too few middle-sized firms, employing between 100 and say 1,000 workers, and it is these firms that can upgrade technology, increase productivity, and demonstrate competitiveness in world markets.

The policies needed to develop this middle group include lowering of corporate tax rates and abolition of incentives that favour more capital-intensive units, better public infrastructure, especially access to quality power supply at reasonable rates, improved logistics, greater ease of doing business, better access to finance, ample availability of skilled labour, and more flexible labour laws. Development of skills through a combination of apprenticeships and training institutes run by the private sector, with an eye to the demand for skills in the market, is also critical.

We have the advantage of being located in Asia, which is the fastest-growing region in the world and which has not turned inward. We should work to reach an early conclusion of the Regional Comprehensive Economic Partnership (RCEP) agreement with the Association of Southeast Asian Nations (Asean) + 6. Indian industry has been ambivalent about RCEP because it fears that lower duties will make it difficult for them to compete. This underestimates the ability of the industry to become competitive if it has to. However, industry has legitimate concerns about having to pay high duties on inputs from outside the RCEP group, which would make us uncompetitive. The solution lies in lowering our general customs duties as much as possible.

The imminent introduction of the goods and services tax (GST) will help by providing a level playing field for domestic producers competing with imports in the domestic market. This is because the same tax will also be levied on all imports, which is not the case today because imports escape state indirect taxes. Any additional support needed for competitiveness can come from a judicious use of exchange rate policy.

Start-ups are a new phenomenon and India has made a good beginning in this area. Technically skilled and business-oriented youth should be encouraged to explore the entrepreneurship option, and create jobs, rather than looking for secure wage employment. The ecosystem required for start-ups to flourish includes scientific and technical universities acting as innovation hubs, tax policies which encourage angel investing and other forms of start-up financing, a legal system which supports high standards of corporate governance, and supportive tax policies which encourage start-up financing. It goes without saying that a large proportion of start-ups will fail. They should be allowed to do so, without government stepping in compulsively to shore them up all the time. Those that succeed will expand and generate much more employment than the employment lost in the failures.

Finally, we need to deploy all policy instruments to promote the shift from the unorganized/informal to the organized/formal sector. This is relevant in both manufacturing and services. In the past, there has been a tendency to view the unorganized sector as a potential source of employment, and this has at times been used to justify a more lax attitude, especially in the matter of applying regulations. Ideally, all discrimination against the organized/formal sector should be phased out to create a level playing field. If the exempted level in the GST is not adjusted over time, if safety regulations are strictly enforced for both small and larger firms, if tax avoidance by smaller firms is plugged, and if labour laws are made more flexible, there will be a strong incentive for units to move progressively into the organized/formal sector. This will improve the quality of employment, which is a major concern today.

Montek Singh Ahluwalia was the deputy chairman of the erstwhile Planning Commission-

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