Structural Change and India’s Jobless Growth

Since the turn of the century, India has enjoyed annual growth rates of 6-7%, and between 2014-18  it was the world’s fastest-growing major economy, surpassing even China.[1] The concept of pro-poor growth envisages acceleration in economic growth with associated growth in employment opportunities for the poor.

Contrary to this,  there have been concerns over the jobless nature of India’s growth. Jobless growth is an economic phenomenon whereby the macroeconomy experiences growth despite maintaining or decreasing its level of employment, as emphasised below.[2]

Furthermore, the strong macroeconomic performance has not been sufficient in improving human development, albeit while causing a significant decline in the rate of poverty.[3] This is highlighted by India’s relatively modest increase in GDP/Capita, which is often used as a proxy for living standards. As highlighted in Figure 2, it is currently half of the second-lowest among the BRICS nations.

In this backdrop of ‘jobless growth,’ the challenge of creating an environment of ‘pro-poor’ growth becomes more pronounced. While solutions to this problem will require a multi-dimensional response to implement public policy reforms, infrastructure development, and reducing rural and urban disparities, this article analyses the cause of the persistent lack of employment opportunities to provide a framework for future strategies.

STRUCTURAL DEVELOPMENT

Most industrialised countries have followed a similar developmental growth path. At low levels of GDP/Capita, the agricultural sector dominates both output and employment composition. As countries achieve rapid and sustained growth, Kuznets documents that resources are transferred to the industrial and manufacturing sectors; subsequently, at the final stages of development, industry shares stabilise, and services become the key driver of economic prosperity.[4]

However, the sectoral reallocation of economic activity in India has followed a different path. Over the seven decades after India began development planning, agricultural activities declined sharply: from 55% in 1950 to 16% in 2019.[5] However, in notable contrast with other East Asian and developing countries, India’s diversification occurred largely from agriculture to services but not to the industry. At relatively low GDP/capita levels, the role of the service sector has become more prominent at relatively early stages of economic de­velopment. This is compounded by the fact that the rate of output growth produced in the service sector has been greater than the growth rate of the aggregate economy.[6]

EXTENSION TO THE ‘JOBLESS’ NATURE OF EMPLOYMENT

This structural reallocation of economic activity has not been met with proportional changes in sectoral employment level, as demonstrated below. In 2018, agriculture retained 45% of total employment but only produced about 15% of value-added in the Indian economy. On the other hand, services currently account for over half of value-added but employ about 30% of the workforce.

Although India may be considered as a service-oriented country in terms of total production, it still remains primarily agrarian in terms of its occupational structure. At the sectoral level, industrial and service sectors have seen positive (albeit small) growth in employment terms, however, the negative contribution of the agricultural sector outweighs said growth, and this pattern of structural change defines the employment challenge in India.

In order for India to begin on a path to pro-poor growth, the driver behind this jobless growth must be accurately identified.

POPULAR EXPLANATIONS

The prevailing consensus is that since India is labour abundant, the tertiary sector has disproportionately absorbed the displaced agricultural workers at low levels of earnings.[7] However, the service sector has seen significantly higher wages over the period, suggesting the resource reallocation across the three principal sectors has been productivity-led (standard economic theory states that wages equal productivity).[8] Therefore the heart of the problem does not seem to be excess absorption of labour into services but the persistence of low productivity in the industrial sector.[9]

There has been extensive literature arguing that the slow growth and low productivity of India’s manufacturing employment result from a high degree of rigidity in the country’s labour market through a labyrinth of regulation, with this largely being attributed to the 1947 Industrial Disputes Act and its sequential amendments. However, this applies to less than 3% of its workforce.[10] Furthermore, the weakening of the labour union movement since 1980 and the projection of an ‘investor-friendly’ image has resulted in poor implementation of labour regulations across the country. This is evident from the 1996/7 and 2001/2 periods of the industrial recession, where manufacturing output fluctuations corresponded to variation in factory employment.[11] Such trends indicate at least some degree of flexibility in the post-liberalisation period.

POLARISATION IN INDUSTRY AND THE PERSISTENCE OF INFORMAL EMPLOYMENT

However, the manufacturing sector has seen significant polarisations, with a strong bi-modal employment distribution and a ‘missing middle’ as few technologically advanced sectors coexist with a vast informal sector, causing significant and wage differences between the two.[12]

The capital-intensive, organised segment of the industry has seen fast rates of value-added growth; however, there are only about 12 million workers engaged in factory work, compared to 402 million in industrial activities as a whole.[13] The remainder of manufacturing employment may be attributed to the labour-intensive industries in the unorganized sector, mainly in export-oriented industries such as garments and textiles. To provide an indication of this, from 2003-2006, the combined share of textiles, garments, leather goods and footwear in the factory sector value added was only 8.8%, but these industries accounted for 32.2% of all unregistered manufacturing workers in the country.[14]

This has caused a stagnation in the growth of markets for manufactured goods, limited skilled labour and entrepreneurship growth, and caused a detrimental impact on allocative efficiency and inequality.[15] The low performance of manufacturing due to this dualism’s persistence has prevented it from achieving dynamism and playing a central role in productivity growth.

However, the presence of the informal sector is more systematic than just in the industrial sector. The National Commission for Enterprises in the Unorganised Sector (NCEUS) has defined the informal/ unorganised sector as “all unincorporated private enterprises owned by individuals or households engaged in the sale and production of goods and services operated on a proprietary or partnership basis and with less than ten workers.” According to this definition,  informal sector workers form more than 90% of India’s total employment, and almost 50% of the national income derives from this sector.[16]

CONCLUSION

This article makes the argument that the emphasis on labour market rigidity is misguided, and the challenges to solving informalisation are multi-faceted and that a single device like deregulation alone cannot address it completely. Given the strong relationship between employment quality and social poverty characteristics,[17] the ability to generate an enabling environment in the development of formal, organised labour markets are central in raising productivity and job quality by transitioning away from the informal sector. The growth of the middle segment will help address persistent regional, gender and social disparities in labour market outcomes and hopefully expand to rising living standards across India.

Bibliography:

• A Srija & Shrinivas Shirke, 2014. “An Analysis of the Informal Labour Market in India,”Working Papersid:6353, eSocialSciences.
• Thomas, J. J. (2013), “Explaining the ‘jobless’ growth in Indian manufacturing”, Journal of the Asia Pacific Economy, Vol. 18, No. 4, pp. 673-692.
• https://www.statista.com/topics/6583/employment-in-india/
• Verma, R. (2012). Structural transformation and jobless growth in the Indian economy. The Oxford handbook of the Indian economy.
• Mazumdar, D. (2009). The employment problem in India and the phenomenon of the “missing middle”. The Indian journal of labour economics : a quarterly journal of Indian Society of Labour Economics, 52(1), .
• https://en.wikipedia.org/wiki/Economic_development_in_India#cite_note-Chatterjee_2007-7
• Sissons, Paul, Green, Anne E. and Lee Neil. (2017). Linking the sectoral employment structure and household poverty in the United Kingdom. Work, Employment and Society. ISSN 169-8722
• Smith, Lisa (2010-08-17). “Jobless Recovery: The New Normal Since 1990 | Investopedia”. Retrieved 2016-08-17.

[1] World Bank Development Indicators

[2] Smith, Lisa (2010-08-17). “Jobless Recovery: The New Normal Since 1990 | Investopedia”.

[3] https://en.wikipedia.org/wiki/Economic_development_in_India#cite_note-Chatterjee_2007-7

[4] Structural Transformation and Jobless Growth in the Indian Economy (Rubina Verma, 2012)

[5] Explaining the ‘jobless’ growth in Indian manufacturing (Jayan Jose Thomas, 2013)

[6] Structural Transformation and Jobless Growth in the Indian Economy (Rubina Verma, 2012)

[7] The Employment Problem in India and the Phenomenon of the Missing Middle

[8] The Employment Problem in India and the Phenomenon of the Missing Middle

[9] The Employment Problem in India and the Phenomenon of the Missing Middle

[10] Explaining the ‘jobless’ growth in Indian manufacturing (Jayan Jose Thomas, 2013)

[11] Explaining the ‘jobless’ growth in Indian manufacturing (Jayan Jose Thomas, 2013)

[12] The Employment Problem in India and the Phenomenon of the Missing Middle

[13] https://www.statista.com/topics/6583/employment-in-india/

[14] Explaining the ‘jobless’ growth in Indian manufacturing (Jayan Jose Thomas, 2013)

[15] The Employment Problem in India and the Phenomenon of the Missing Middle

[16] An Analysis of the Informal Labour Market in India (A. Srija & Shrinivas V. Shirke)

[17] Sissons, Paul, Green, Anne E. and Lee Neil. (2017). Linking the sectoral employment structure and household poverty in the United Kingdom. Work, Employment and Society. ISSN 169-8722