Near Jobless Growth in India, An Anomaly or an Outcome of Economic Reforms

According to surveys of the National Sample Survey Office, employment in India grew by about 2.8 per cent a year between 1999 and 2005. Between 2005 and 2010, when the economy was growing faster than at any time in its history, employment grew by only about 0.1 per cent a year. In a country that adds roughly twelve million people to its working age population every year, this was a striking result. Output rose and jobs did not. The phrase near jobless growth was coined to describe it, and the topic asks whether it is a puzzle with a narrow explanation or the natural outcome of the economic reforms begun in 1991.

Economists measure the link through the employment elasticity, the percentage change in jobs for each percentage change in output. India's elasticity fell from about 0.4 in the 1980s to below 0.2 in the 2000s. Part of the fall is a good sign. Many people withdrew from the labour force because they were studying, as school and college enrolment rose, and the fall in farm work was partly voluntary. Some of the workers had been underemployed and were now more productive. By this reading, the figures overstate the problem.

But the larger part of the answer lies in the structure of growth. After 1991 the economy was opened to trade and competition, licences were removed and the service sector boomed. Software, telecom, banking and business services grew fast and now account for more than half the output. Yet these sectors employ few people relative to their output and need skilled workers, whom the large mass of labour could not supply. Manufacturing, the sector that took millions of workers off farms in China, Korea and Taiwan, stayed at about sixteen per cent of national income for decades. Jobs created in the services mostly went to the educated minority.

Jobs created in the services mostly went to the educated minority.

The pattern within manufacturing was also tilted. Reform encouraged firms to compete, and Indian firms chose capital intensive methods, partly because of the cost of labour and its legal rigidity. Chapter V B of the Industrial Disputes Act requires firms with more than a hundred workers to get government permission before retrenching them. Some employers avoided growing beyond that size, a tendency noted by economists as the missing middle. There are many tiny firms and a few large ones, but few of medium size, which have the potential to create jobs and raise productivity. The labour laws were meant to protect workers but protected only the thin layer of those in permanent jobs.

For most Indians work lies in the informal sector. The National Commission for Enterprises in the Unorganised Sector reported in 2007 that about ninety two per cent of workers were informal, without contracts or social security. Even in the organised sector, a growing share of workers were hired through contractors, which meant lower pay and less security. This means that when the figures speak of jobs, the question is also about the quality of jobs. Growth did create work, but much of it was casual and low paid, and the working poor remained in poverty.

Agriculture shows the other side. About half the workforce still depends on farming, which provides less than a fifth of output. Between 2005 and 2010, jobs in farming fell sharply, and construction absorbed many of those leaving, aided by the rural employment guarantee scheme and a building boom. But construction is a precarious source of work, and the boom slowed after 2011. Small and fragmented farms and poor rural infrastructure keep farm incomes low and prevent a smooth shift to other jobs. Women in particular dropped out of work, and female labour force participation, already low, fell to around a quarter.

Is the result an anomaly? Not in the sense of a statistical accident. Several countries have experienced growth with weak job creation, and India's path, from agriculture to services skipping a labour intensive manufacturing phase, was unusual in its scale. The economist Raghuram Rajan has asked whether India can grow without the stage that took East Asia from poverty to prosperity. The pattern was visible before 1991, when the licence system also favoured capital intensive industry, and reforms did not create it. But the reforms did not fix it, either, as they left untouched labour laws, land acquisition, the supply of credit to small firms and the state of schools. In that sense the outcome came from the reforms that were not made.

Policy since 2014 has recognised the problem. The Make in India campaign of 2014 aims to raise the share of manufacturing to a quarter of output. Skill India of 2015 seeks to train hundreds of millions. The Pradhan Mantri Mudra Yojana provides credit to small enterprises. The Goods and Services Tax is expected to unify the national market. None of these has yet produced a clear change, partly because global demand is weak and partly because deeper bottlenecks remain. Education quality is a core problem, since many graduates lack the skills employers want. Employers complain of a shortage of employable people even as millions are out of work.

There is a further worry that the future will be harder than the past. Automation and robotics are reducing the labour needed in manufacturing everywhere, and countries that industrialise late may find the ladder shortened. Services, too, can be automated. A path that relied on cheap labour to attract factories may not offer the same promise to India as it did to China. A strategy for jobs may have to put more weight on construction, small firms, tourism, care work and agriculture linked industries.

Near jobless growth is therefore a story about the many choices behind a number. India chose, deliberately or by default, a path in which prosperity reached those with skills and capital first. Whether that path can be widened soon enough to include the millions who will enter the workforce in the coming decade is uncertain, and so is the cost of failing. The number of jobs is a figure that governments publish, and the weight of that figure in people's lives is not on any survey.