The Telegraph
Since 1st March, 1999
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- India’s economy is not well poised to generate employment

The deadly riots occasioned by the Railway Recruitment Board exams in Ass- am and Maharashtra, were a grim reminder of a potentially serious social crisis India might face in the near future. Amidst all the upbeat predictions being made about the India economy, one item is conspicuous by its absence. This is a problem few politicians dare mention by name, few statisticians are trying to measure accurately, and even fewer economists have bright ideas about unemployment. All the impressive gains in poverty reduction made during the Nineties, all the optimistic predictions about growth during the coming dec- ade hide the fact that India’s economy is not well poised to generate employment. While economic reforms are not the cause of this crisis, the current nature of those reforms will not help us deal with the fact that we seem to be largely experiencing jobless growth.

Indian unemployment statistics are notoriously contorted. Most aggregate measures of the phenomenon are meaningless (on these measures a gross unemployment rate of around 7 per cent makes us better than most countries which belong to the Organization for Economic Cooperation and Development), and the extent of underemployment, or undercounting is a matter of considerable debate. One very gross proxy is the number of people registered in unemployment exchanges. This figure, for all its problems, now stands at a staggering four and a half crore. Emigration, both within and from India, is another good indicator that finding a job remains an insurmountable challenge. But there is considerable agreement that the level of unemployment has possibly only increased since the Nineties, or at best remained stagnant.

There are many reasons why employment levels are not rising despite all the good news about the economy. The elasticity of growth to employment has been the lowest during the Nineties. By one estimate, generating a 2.5 per cent growth in employment per annum, which is roughly the addition to the labour force every year, requires a growth rate of almost 6.8 per cent. Actual growth in employment has been close to two per cent, less than what is required to keep the backlog even. This is not entirely surprising because growth has taken a lopsided pattern.

Post-reform employment-generation has been slower because of a number of related factors. As Harvard’s Devesh Kapur has pointed out, most of our spectacular growth has come from capital-intensive sectors like IT and telecom. Second, the fact that firms now face a tougher competitive environment has led to gains in productivity and efficiency. But this means that a lot of existing companies shed jobs in order to remain competitive. Third, and most significantly, there has been a net decline in public investment in rural areas, both in agriculture and non-agriculture- related activities. This has meant a possible decline in rural non-agricultural employment. Finally, the rate of growth of public sector jobs that constituted two-thirds of all jobs in the organized sector itself has gone down considerably.

It is often argued that the real gains in job-creation come from the unorganized sector, and the fact that organized-sector employment remains stagnant is not, therefore, such a significant fact. There is some truth in the claim that a considerable amount of economic activity is generated in this sector. But the recourse to the unorganized sector as the saving grace of the economy in terms of employment is a bit disingenuous. This is because the extent of unemployment and under-employment in that sector is anybody’s guess. Second, the idea that India will break with all comparative experience (including China’s) and simply bypass the need for a broad manufacturing-related growth in the organized sector is a little bit of wishful thinking. Third, given the constraints on credit and entrepreneurial activity in the unorganized sector, it is difficult to imagine that self-employment is an easy option.

What can be done about this' This is a matter for economists to probe, but the beginning of wisdom lies in understanding this. We should be clear that the slowness in job-creation is not a result of reforms. It rather results from the limits of the reform we have undertaken. It is quite clear that our labour laws remain an impediment to the expansion of the organized sector; they give an incentive to invest in capital-intensive industries, or to invest in ways that lead to a bigger unorganized sector. It is possible that the economies of scale and so on required for a competitive manufacturing base, cannot be achieved with the current labour laws that protect a minuscule percentage of workers, but impede the welfare of the rest. In addition, the regulatory structure for small and medium enterprises still discourages entrepreneurship; the state still impedes, rather than promotes, self-help and innovation.

Finally, there is no doubt that there will have to be significant public investment in agriculture and rural non-agriculture-related activities, such as rural infrastructure. And this investment can come only from the state. But the reform of the state, privatization, shrinking of the bureaucracy and so forth has to be linked imaginatively to this investment. A state with huge fiscal deficits cannot do much of anything. Unfortunately, our politics is polarized in such a way that the left and other organized groups impede any reform of the state, while the economic right, as it were, is less inclined to think in terms of public investment. We need to privatize, reduce the size of the government so that public investment becomes an option.

There is another area that merits some attention — education. If the unemployment exchange figures are anything to go by, graduate employment is at a staggering level, as high as 20 per cent in some states. This is a class of population, which is too educated to be part of the blue-collar workforce, but has also been mis-educated enough to ensure little demand for them on the job market. Nor are they capable of the entrepreneurial skills required for self-employment. There continues to be a mismatch between the market and the education system. The University Grants Commission is seeking to correct this by introducing more vocational courses, and allowing the simultaneous pursuit of vocational training and degree courses. I suspect this will not do much to address the problem. There is a false distinction being made between vocational and degree courses. After all, Harvard philosophy majors are routinely employed by Wall Street, and Oxford classics majors could easily get into investment-banking. The issue is more the quality of education. We have a system with degree inflation, but low quality.

It is revealing that in most of the annual assessments of the economy, the government relies upon, like the Reserve Bank of India reports, employment is seldom discussed openly. And despite the prime minister’s tall claims that the National Democratic Alliance government will add one crore new jobs, most of the discussions of our economic future simply avoid asking the question: how much employment will all this undoubtedly spectacular growth generate'

As the terrible history of urban violence around the world shows, and as the gruesome events in Assam reminded us, the social costs of large pools of educated unemployed youth, tottering on the brink of an understandable crisis of self-esteem, can be quite significant. The fact that we still have tens of thousands of students competing for a handful of clerical jobs is not an indication that we are still prisoners of an old mindset that said “a government job or bust”. It is rather symptomatic of the fact that the private sector is still not generating enough jobs, and there can never be enough regulatory support to make us all self-employed. Like the proverbial dog that did not bark, what we are not saying about the economy reveals its weaknesses more than the cacophony of discussion we usually hear. Let us focus a little more single-mindedly on a simpler measure of economic robustness: how many jobs are we capable of creating'

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