Economists' Forum

This piece is the first in an occasional series on the Indian economy.

What’s happening to employment in India? We know that every year there are nearly 13m new entrants into the nation’s labour force. Are they getting half-way decent employment opportunities? What proportion of the labour force is unemployed? How widespread is under-employment? What sort of job security do workers enjoy? What are the trends in real wages? The truth is we don’t know, at least not for any year after financial year 2004/5, the last year for which the National Sample Survey 61st Round gives reasonably good employment information.

Those inclined to paint a rosy picture point to the unprecedented, rapid growth of total employment at 2.9 per cent a year between 1999/2000 and 2004/5 (according to NSS data), which was far higher than the 1 per cent per annum growth recorded from 1993/4 to 1999/2000.

They note the remarkable acceleration in gross domestic product growth in the years between 2004/5 to 2007/8 and infer that employment trends must have been equally bullish. Yes, the global financial crisis of 2008/9 took its toll of output and employment, but that seems behind us now. Just look at the improved placements from elite institutions of technology and management.

But that’s only part of the story. There is a darker side. First, even the 2.9 per cent annual growth in employment between 1999/2000 and 2004/5 is marred by the fact that nearly all the increment in employment occurred “in the least productive, unorganised and often informal part of the economy”, as the 2007 Organisation for Economic Co-Operation and Development Survey of India puts it.

Indeed, although total industrial employment grew by more than 6 per cent annually, organised industrial sector employment fell by 1 per cent per year, bringing the share of organised industrial sector employment down from 18 per cent (of total industrial employment) in 1998 to only 10 per cent in 2004. Thus, India’s industrial workforce was severely “casualised” during the employment boom in the first half of the decade that has just ended.

Second, if one takes a longer view of employment trends in India, the most striking fact is the slow shift in the composition of the labour force from agriculture to non-agriculture, especially in comparison to other developing countries. Thus, between 1960 and 2006, the share of agriculture in the total labour force fell from 75 per cent to 42 or 43 per cent in China and Indonesia and from 84 per cent to 42 per cent in Thailand (see table). In India the decline was much smaller, from 73 per cent to 56 per cent. And this was despite a rapid fall in agriculture’s share in GDP, from 50 per cent in 1960 to 18 per cent in 2006.

The reasons behind this slow structural transformation of India’s labour force include heavily anti-foreign-trade policies (until the 1990s) and small-scale industry reservation policies, both of which greatly slowed the rapid expansion of labour-intensive manufactured exports of the kind exemplified by east Asian development. They also include India’s exceptionally restrictive labour laws which discourage fresh employment in organised industry.

The broad numbers certainly suggest that there is a huge pool of under-employed labour, constrained to eke out a living in low productivity agriculture or informal urban occupations because of limited opportunities for decent, low-skilled jobs in industry and services.

This general view is vindicated by anecdotal evidence. For example, the Business Standard reported in November that there were 3.4m applicants for 11,000 clerical posts (paying a monthly wage of rupees 8,000 per month (or about £107/$173) at the State Bank of India. The fact that the majority of the candidates had engineering or MBA degrees suggests that the job market for “skilled” labour (except the ones from a handful of elite institutions) also remains pretty horrible.

These stark supply/demand mismatches in the labour market contribute significantly to some of the major social and economic problems in contemporary India. The prevalence of rural distress and growing “Naxalism” in large swathes of the country is surely not unconnected to the slow growth of decent employment opportunities for low-skilled entrants to the labour force.

Similarly, there are growing signs of labour market dualism in India’s cities and towns, with a minority of well-skilled graduates earning high and rising pay packets, while a majority of semi or unskilled aspirants struggle to make a living at low and uncertain wages. The dangers posed for social and political cohesion are obvious.

Labour market distortions are also part of the explanation behind India’s unfulfilled industrialisation. Manufacturing accounts for only 16 per cent of GDP in India, in contrast to 33 per cent in China, where GDP is nearly three times larger. That means China’s manufacturing sector is about six times larger than India’s. Why is China the “workshop of the world” when Indian labour is even cheaper and her entrepreneurs admired worldwide? There are many reasons, including (until recently) the anti-foreign-trade policies and small-scale industry reservation policies, noted earlier, as well as poor infrastructure in power, roads, water and ports. Perhaps even more important are the restrictive labour laws and certain other regulations, which encourage Indian manufacturing units to “stay small”, thereby forgoing the classic industrial economies of scale and scope.

Finally, the continued prevalence of weak demand (relative to supply) for low-skilled workers tempts successive governments into overspending for very inefficient safety net programmes (such as the National Rural Employment Guarantee Programme) and food/fertilizer subsidies, thus diverting scarce public resources away from more growth-enhancing projects and programmes and helping to sustain a prolonged pattern of high fiscal deficits.

So what’s to be done? Revival of high economic growth should help. As would improvements in infrastructure and other policy impediments to rapid industrial expansion. But to make that growth more inclusive and “jobfull”, the best way is to reform the restrictive labour laws that discourage employment in organised industry.

Over the years, numerous academic studies and official reports, including the Second National Labour Commission Report (2002), have recommended major reforms of India’s labour laws. The problem is absence of political will. Until that will can be mustered, the expansion of decent non-agricultural jobs will continue to fall far short of burgeoning supply (the “demographic dividend”), condemning many millions to insecure and ill-paid, informal urban employment (or even unemployment) and mounting underemployment and distress in rural India.

The writer was chief economic adviser to the Indian government for eight years up to 2001. His latest book is “India and Global Crisis”. This piece appeared earlier in Business Standard.

Table: Share of Agriculture in Labour Force and GDP