After two years of lost growth, India’s economy needs a major structural transformation towards a high long-term growth trajectory of both output and employment. Why the difference between employment growth and output? And why is a major structural change necessary for high long-term growth? To address these questions and point out a possible way forward, I will draw upon several useful papers by Amit Basole, Alakh Sharma, Mahendra Dev and KP Kannan, among others, at the 62nd Annual Conference of the Indian Society. were presented. of Labor Economics at the Indian Institute of Technology, Roorkee.
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As Sharma pointed out, despite the massive withdrawal of youth from the labor force, they still account for the bulk of the country’s unemployed. Out of 28 million unemployed persons in 2019-20, the number of youth workers in the age group of 15-29 was 24 million. Thus, the problem of unemployment in India is largely the problem of unemployed youth. Sharma also cited a McKinsey Global Institute report that said 90 million jobs would need to be created between 2023 and 2030 to clear the backlog of youth unemployment before the ‘demographic dividend’ window (i.e. 1.5 percent). annual growth), the higher working age portion of the total population begins to wear off. Basol has estimated that the growth elasticity of employment – growth in employment relative to growth in gross domestic product (GDP) – is not only low, but is also declining in India compared to some other Asian comparators; It declined from 0.38 during 1991-2000 to 0.11 in 2010-18 (see chart). This implies that an annual employment growth of 1.5% would require an annual GDP growth of over 13%!
Compare this with the real view of GDP growth. After reaching a peak of 8.3% in 2016-17, the growth rate during the next twelve quarters slowed down to a low of 3.7% in 2019-20 when the pandemic hit, leaving the economy at (-)6.6% in 2020-21 contracted up to (see chart). Growth in 2021-22 was primarily driven by the base effect of sharp contraction from the previous year. For 2022-23, those who had forecast a growth rate of 7-8% are now adjusting their forecasts down to 6-7%. Bhattacharya and I held our necks last December projecting 5.2 per cent growth in 2022-23 and have stuck to that. Repeated shocks, culminating in the 2020-21 mega-shock, have significantly curtailed the economy’s growth potential due to high mortality rates of businesses, especially micro and small enterprises, and supply-chain disruptions (See my column in Mint of Mint, 18 March 2022). But it is not clear whether our modest forecast will even materialize after the global disruptions caused by Russia’s Ukraine war. Clearly, the challenge of high unemployment cannot be solved without radical structural change through GDP growth alone.
While imagining the possible direction of such a structural change, it is necessary to take into account the profile of India’s youth workforce. Of those who are employed, 90% are employed in unskilled or low-skilled jobs. It is equally disturbing that the unemployment rate among graduates and technical graduates ranges from 35-40%. Obviously, despite a relatively high level of education, many unemployed graduates are not employable. What kind of change would absorb a labor force with such characteristics? In addressing that question, it is useful to compare the structure of the Indian economy with global norms seen at comparable levels of per capita income. The workforce share of industry in India is above the norm at 6%, while that of services is less than 15%.
The additional part of the industry is solely responsible for the high and rising employment share of construction, which is far above the norm, as Basole points out. On the other hand, the reduction in the employment share of services is mainly attributed to high value-added services such as financial and business services, information technology and communication services, etc., which are not employment-intensive. In other words, the transfer of labor from agriculture has been very slow and workers have mostly moved to low-skilled or unskilled jobs in the construction industry as well as in trade, hotels and transport.
Given the low skill profile of the workforce and sectors where labor absorption has been highest, various policy approaches will be necessary to address India’s employment challenge in the medium term and long term. This is also important given the limitations of the state’s capacity. The government needs to focus on some strategic sectors and pull other sectors through its backward and forward linkages driven through the market. In the medium term, the focus will have to be on manufacturing and low-skill services. These are the only types of jobs that the bulk of the labor force is currently equipped to handle. Remember that major infrastructure programs such as railroads in America have often been the foundation for strategic changes.
Large-scale expansion of high-value jobs should be a long-term goal. This will require far-reaching changes in the skill profile of the Indian workforce and will take time. A strong program of good quality education and skills linked to learning outcomes, more effective than ever experienced, will be the key to the success of this long-term strategy.
The two nodal ministries to implement the medium and long term components of the strategy are cabinet members Nitin Gadkari and Dharmendra Pradhan. Fortunately, both have a working reputation.
These are personal views of the author.
Sudipto Mundle is the President of the Center for Development Studies, Thiruvananthapuram.