When Nirmala Sitharaman rises to present the budget (a vote on account, as she has emphasised), India’s first full-time woman Finance Minister will be on the verge of completing a full term in the job too. This is a seminal achievement. And to mark the occasion, it will be fitting if she gives space in her address to one of the seminal challenges facing us as a nation -- jobs.
Our employment problem is one of the most complex economic and social problems that we face. It is a problem that has been in the making for many decades, as the employment level has grown slower than the growth in population just too often.
Our employment level between 1999 to 2019 grew by just 1.0%, whereas our population grew at an annual rate of 1.44%, resulting in the employed persons to population ratio falling from 39.7% to 36.4%. It then came as no surprise that the Periodic Labour Force Survey (PLFS) for 2017-18 showed the unemployment rate to be 6.1% -- a 45-year high.
In some sense, we have achieved the distinction of being the most populous country in the world without solving the problem of employment or even finding a solution that can take us in the direction of providing quality earning opportunities for our youth.
Declining unemployment does not always lead to economic progress
The recent PLFS reports suggest that the unemployment rate has declined from its 45-year peak of 6.1% to 4.2% in 2020-21 and further to 3.2% in 2022-23. The decline in the unemployment rate does not help solve the real economic problem, as it has on the back of people going back to agriculture. That is, we have not solved the employment problem, we have ended up making it invisible.
We are back with the old problem of under- or disguised employment, as agriculture and allied activities are largely seasonal activities and don’t keep people busy for more than a few months in a year. It is, therefore, not surprising that the government is having to extend the national food subsidy programme (PMGKAY) to cover 80 crore people for another five years.
Disguised employment implies an ‘in-your-face’ productivity loss
RBI maintains a comprehensive database, titled India KLEMS, that helps measures productivity at the industry level. The chart and the table below support the earlier statement that we have created a productivity problem while hoping to solve the employment problem by letting people go back to agriculture. Agriculture now employs nearly as many people as it employed in 2009 and 20% more than what it employed in 2019.
The movement back to agriculture lends no credence to the government’s policy statement that urbanisation will drive India’s growth.
Employment in manufacturing and services sector too is coming with lower productivity
Manufacturing, as we all know, has been a laggard in creating employment opportunities for many years. It had, however, been delivering greater productivity. On the other hand, the services sector created a higher level of employment, but with a lower growth in productivity. However, each of these sectors has been creating a relatively high proportion of low value-adding jobs as seen in the chart below.
The pandemic has made the situation even more intractable by causing productivity to shrink in both these sectors. Consequently, the aggregate productivity growth during the last two years has declined by over 12%.
While we do expect employment and productivity in these two sectors to go up as soon as we recover from the pandemic-related losses in these two sectors, the question still is: Will these sectors recover the losses soon enough and help us reduce dependence on agriculture?
We need these two sectors to create 40 million jobs to take back employment in the agricultural sector to the level we had in 2019.
Lower labour productivity hurts our ability to grow
Any decline in productivity has long-term consequences for household as well as business’ well-being and potentially hurts India’s ability to build a competitive economy. A country’s ability to grow is not a function of higher employment alone -- it is a function of higher employment with greater productivity. It is, therefore, important that we celebrate the tag of “fastest growing major economy” with caution.
The current year’s economic growth of 7% comes on a low base produced by pandemic related output losses and in a year where the government has been front-loading its expenditure to paint a positive picture in an election cycle. We had seen a similar surge in Q3 of FY18 to Q1 of FY19 (Y-o-Y growth ranging from 7 to 8%) during the earlier election cycle, which fell to an average of 6% during the following three quarters.
Labour force surveys don't augur well
The table below supports our observations made based on KLEMS database above. The Labour Force Participation Rate (LFP) has increased for rural areas, where economic activity is still centred around agriculture, at a much faster pace than in the urban areas. The conditions for employment for our young, particularly the urban young continue to be poor. The youth workforce participation below 50% does not augur well for India’s future.
While the rural population has had it better, the value added for rural economic activity is invariably lower than in the urban areas, which implies lower earnings for rural population. The Situation Assessment of Agricultural Households (SAAH) Survey, 2019, confirms this fact. The average monthly income for the agriculture household (not per capita) was Rs 10,084 per month or Rs 121,008 per year, which is less than one-fifth of the average national household income.
In addition, the following factors too point towards the existence of a grim employment and household earnings situation:
· Slowdown in growth of private consumption.
· Decline in the household savings rate.
· Growth in temporary and contractual employment.
· Stagnant real wages for blue- as well as white-collar workers.
· Large scale workforce reduction in the IT and many new age startup sectors.
· Struggle that elite management schools are having in providing even the summer internship jobs for their students.
It is, therefore,important that the government engages with all the stakeholders and makes creation of gainful employment for our young as its most important priority.
What the budget can do
We can start with by articulating a long-term vision for employment in the budget -- a vision that focuses on creating employment opportunities with greater earnings through higher productivity. We also need to ensure that the economic risk is not shifted to low-income households, which are in no position to bear that risk.
It would require the government to rethink the following premises that have been governing its policy choices during the recent years:
· Minimum government and maximum governance -- the government must not absolve itself of the responsibility to create opportunities for employment of our youth. During the last three decades, the US public sector employment has gone up by 0.77%, against its population growth rate of 0.95%. Slogans don’t help govern; people do.
· Incentives given to large Indian and multinational corporations will help solve the employment problem. The reduction in income tax rates during 2019-20 is yet to encourage private sector investment. Even with a significant increase in government capital expenditure, we are not seeing any signs of “crowding in” of private capex.
· Fiscal, not monetary, policy is the most important instrument at this stage of India’s development. Credit and liquidity can support growth for a few quarters and not for a few years. We need fiscal policy support for building the capability to growth over the next few decades.
Government employment is the solution, not a problem
Our government employment peaked at 1.96 crore during 1996-97, with the central government peaking even earlier -- 1990-91. At the end of 2011-12, the last year for which the data is available, government employment had fallen to 1.76 crore. During these three decades, India’s population grew at a CAGR of 1.7%, but our public sector employment declined at an annual rate of 0.7%.
We must go beyond making pious statements about “sabka saath, sabka vikas” and invest to raise the level of employment in the government and start paying fair wages, which would force the private sector firms to accept the fact that they too must pay a fair wage. The private sector can deal with providing fair wages, as it has a much higher ability to drive productivity and value-creation through innovation.
The government must invest to build scale in key economic and social infrastructure sectors and get the private sector to execute these projects with higher efficiency. We need immediate investment in urban infrastructure -- an investment that focuses on increasing the productivity of our urban workforce by helping them save on travel time and helping them breathe clean air. Large vanity projects rarely create local employment opportunities -- not for a few hundred million youth.
We need capacity for quality education and healthcare and not provision of education loans or protection through health insurance. In other words, we need to add capacity for public service in these sectors – the capacity that creates quality employment for young people with basic (care and administration) to professional (educators and doctors) skills.
Reimagining incentive plans
The Production-Linked Incentive (PLI) Scheme must be replaced with an Employment and Productivity Linked Incentive (EPLI) Scheme. In addition, we must make large investments in building innovation cluster where public, private and education sector come together to build long-term capability for growth through high value-adding work.
We would still be able to build national champions, and they would be globally competitive. We don’t have to encourage lazy manufacturing through PLI schemes that costs thousands of crores without any significant impact on employment or in enhancing India’s ability to grow.
If there are businesses that need government support, they are our MSMEs. We must provide them with equity support through productivity and innovation-linked capital subsidies, as they are the ones who can solve our employment problem.
Both the Prime Minister and the Finance Minister must well know that self-employment is a solution only in situations where the households have sufficient risk capital and support the entrepreneurial activities of their young. The Indian financial sector, despite all the recent effort, still does not provide adequate risk capital for private enterprise. So, here is hoping that energies and imagination will be focused where they must be.
Professor Anil K Sood is the co-founder of the Institute for Advanced Studies in Complex Choices (IASCC) based in Hyderabad.
