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Six ways to turn around the India job crisis

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Despite the politically-charged nature of the debate around jobs, we need to debunk one needless myth: India’s problem is not one of jobless growth. We may have periods of low or no jobs growth, and then we have catch-up years in which jobs grow faster than usual. For example, the period from January 2017 till recently, when we saw huge disruptions—from demonetization to the implementation of the goods and services tax and the crimp on bank lending due to an attempt to resolve bad loans by recourse to bankruptcy courts—may have seen low or even negative jobs growth in some months, but the economy has a basic potential to create jobs most of the time.

The World Bank, in its publication South Asia Economic Focus, Spring 2018: Jobless Growth?, says that over the long-term, India has been creating 7,50,000 new jobs for every one per cent rise in gross domestic product (GDP); at an average of 7% growth, India should be creating at least 5.25 million jobs, if not more.

In fact, this figure is not very different from the pessimistic estimates of the Centre for Monitoring Indian Economy’s (CMIE’s) four-monthly unemployment surveys. Between the January-April survey and the September-December one in 2016, nearly 5.7 million jobs were created. Since then, given the great disruptions, there has been a levelling off of jobs growth, with the latest survey (May-August 2018) showing a dip of nearly 3.5 million jobs from the previous survey.

The government, for its part, has been trying to dispel the gloom—and political embarrassment—by citing the jobs numbers thrown up by the Employees Provident Fund Organization (EPFO) since last year. We need to present a caveat here: one, growth in EPFO subscription numbers may largely represent formalization of informal sector jobs, and/or job churn among young workers. Not all of it may be a net addition to jobs. So, useful as the new data source is on formal sector payrolls, it is not conclusive evidence that the jobs market is in rude good shape right now.

Moreover, assessing real job trends cannot be done with point-to-point data of the type the government puts out once in a while, for the choice of base year matters. The Census, which is the gold standard in job counts, happens once in 10 years; the National Sample Survey Office’s surveys happen once in five years, and the Labour Bureau’s employment surveys, which use methodologies similar to CMIE’s, also happen with large time lags. There hasn’t been one since 2015-16.

Here, one cannot but blame the government for not being proactive enough in creating the right survey design and building the necessary infrastructure for the collection of monthly, or at least quarterly, jobs data. If CMIE can do it, surely it cannot be beyond the scope of government, with its access to unlimited resources and talent, to get this done pronto? There is clearly some lack of political will here.

Point-to-point data is of limited use in developing an appropriate response to the challenge of job creation as it does not tell us anything about the underlying dynamics. The reason is simple: jobs growth does not happen consistently all the time. There are years in which no growth happens (example: 2008-09, due to the global financial crisis), and then, there is a spurt as employers suddenly begin hiring (2009-12), when economic optimism returns. It is only when we capture jobs data frequently that we will get a long-term trend line on jobs.

This brings us to the first conclusion: if we want to fix our jobs problem, we must first get our hands on the right high-frequency data. Without this, we can’t even define the nature of our jobs problem. (If this article contains only one kind of data, from CMIE, it is because it is the only high-frequency information available to us as of now.)

Link between growth and jobs

The old link between growth and jobs is now much weaker than before. In the 1990s, the employment elasticity in India was nearly 0.4. This number measures how much a given rise in growth impacts jobs. At 0.4, a one per cent rise in GDP growth gives us a 0.4% rise in employment; 5% growth gives jobs a 2% boost. Now, this elasticity is down to 0.2 or lower. This means, for every percentage rise in growth, we get only a 0.2% impact on employment. Put another way, we need a minimum of 10% GDP growth to give us the kind of jobs kick we used to get in the 1990s.

Secondly, this falling employment elasticity is partly the result of large-scale substitution of labour with capital and automation. This is easy in a world with surplus capital, and especially in a country with restrictive labour laws. It is a no-brainer for promoters to use capital and automation when labour is going to be heavily regulated. For some time now, the world has been spewing capital surpluses like nobody’s business.

If we put these two factors together, huge surpluses of global capital, and the economy’s declining ability to create jobs given a certain rate of growth, we can begin to understand the real challenges of job creation not only in India, but anywhere. This should lead us to another simple conclusion: don’t worry too much about GDP growth, worry about jobs. If we focus on jobs, GDP will take care of itself.

If we accept this basic proposition, the next thing to do is to measure our performance on jobs, and define the current jobs gap. If, we can normally create 750,000 jobs for every one per cent growth in GDP, and if 5-6 million jobs can be created in most “normal” years, what is the real gap between the availability of jobs and those wanting one?

Here, we need to make some assumptions. If, as is generally touted, some 15 million Indians enter the 15-plus working age group every year, and if we assume that 50% of them will actively seek jobs (i.e., they won’t go for higher studies, and/or seek to become homemakers, etc.), we are talking about 7.5 million people in the active labour market. The gap between jobs created and jobs sought will be just over 1.5 million annually. This is the core of our jobs problem right now, but it could change if more people, especially women, actively seek to enter the jobs market. If the figure rises to 60% of people in the working age group, we need to create nine million jobs every year. And this number will keep accumulating till our numbers in the working age group start falling.

Three tipping points

Agriculture can no longer support half the population, and the fresh pressure on jobs will come from rural workers migrating to urban areas for jobs. The demand of traditional landed castes like the Patidars, Gujjars, Jats, Marathas and Kapus for job reservations must be seen as a symptom of the overburdened farm sector seeking an outlet in the urban jobs market. Moreover, growth itself is under threat, thanks to trade wars and short-term de-globalization trends—and changing demography. Ruchir Sharma, head of emerging markets and global macro at Morgan Stanley Investment Management, has said that growth in the world’s working age population has been down to 1%, and even in India’s case it will be 1.5% in the coming few years. This means global growth will fall by 1%, and India will find it tough to achieve the desired 8-10% growth rates on a sustainable basis.photo

Finally, since the world is awash with capital, this money is fuelling large investments in automation and technology. While technology will surely create some jobs somewhere, what it does in the short-term is polarize jobs (the demand will be for very high skills, or very average skills, with middle-skilled jobs being phased out). This is why cyber-security, artificial intelligence (AI) and machine learning experts are in short supply, while jobs at the bottom-end are proliferating.

This is visible when you look out of any urban window and you see Ubers and Olas providing thousands of jobs, and Flipkart, Amazon, Swiggy and Big Basket delivery boys whizzing past every few minutes. “Blue collar” service jobs are booming in logistics, warehousing, home services, mobility, retailing, etc. Education, tourism and healthcare will also throw up millions of jobs in the years ahead. Jobs that will disappear are middle skill ones like plain-vanilla java coders or bank branch staff and telecom back-office workers, as technology upgradation and business consolidation gather pace in India. When the number of mobile services companies drops from eight or more to just three private big players, you know that jobs can’t be multiplying in this sector as it consolidates.

The remedies

If we understand the jobs problem using these lenses, the remedies will become clearer. The Narendra Modi government rightly focused on boosting skilling, but the plan to skill 500 million Indians over five years fell flat for a simple reason: skilling increases the supply of labour, but jobs emerge only when there is a demand for specific skills.

So, the first important thing we need to do is to improve our labour market information system. This way, emerging demand for skills are spotted quickly and the necessary training and certifications for the same are created quickly. This calls for an agile public-private partnership in capturing demand for skills and following through with quick investments in skill-building to match demand with supply. A related requirement: jobs and skills planning need not be centralized in New Delhi; it has to be done at state and district levels, where there is granular information on education, skills and job options. Jobs and skill commissions are best created at state and district levels, with Delhi only providing the guidelines, the tech infrastructure and funding for them.

Two, and this has been obvious for a long time, we need labour market reforms. Some good moves have been seen over the last few years, with the Apprentices Act being modified to make it more attractive for employers to hire young workers, and the extension of fixed-term labour contracts from textiles to all industries in the last budget. This is good, but not good enough. The “regulatory cholesterol”, is still too high, says Manish Sabharwal, co-founder of TeamLease manpower services firm, with the statutory deductions (PF, ESI, etc.) from salaries below ₹15,000 being as high as 40%. Clearly, deductions need to come down, or the employer and/or government must subsidize social security payments to ensure jobs growth. This is why the real issue is not jobs, but jobs with the right take-home wages.

Three, the key to employment growth is not the big company or factory that employs thousands of workers, but medium-scale units. The enterprises-to-jobs multiple is highest for medium-scale units. India needs to nurture and expand its equivalent of the German Mittelstand. This can’t happen without deep changes to labour laws and access to credit.

Four, there may still be jobs in light manufacturing (apparel, leather, cellphone assembling, et al.), but manufacturing as a whole is automating in a big way, and won’t directly create jobs. When this author spoke to Nandan Nilekani, chairman of Infosys and first chief of the Aadhaar project, for a perspective on jobs, he had this to say: “I think we may need to evolve away from a notion of large monolith factories hiring thousands of people. That’s not going to happen. But you could have a new model of manufacturing which is high-skilled, high-end cottage manufacturing, where, perhaps, every town, every nook and corner, has a 3D printer person. He just downloads the latest designs from the computer and makes the product. So, it will be small-scale manufacturing with high-tech.”

Five, smart urbanization is key. The link between good urbanization and jobs growth is positive, and unless India’s urbanization is concentrated in narrower areas and serviced by good infrastructure, job creation will be sub-optimal. Governance in urban areas is decentralized and empowered. Currently, urban development is centralized at the state level, and mayorships are merely ceremonial titles.

Finally, there is large scope for more employment expansion in government—but of the right kind. Despite the general assumption that government is too bloated, the reality is that governments—at central, state and local levels—have a low capacity to employ more people due to their tendency to spend state budgets on freebies (deeply subsidized food, farm loan waivers, etc.) instead of public goods (good policing and legal systems, good schools and hospitals). Once this spending pattern changes, even governments will employ more people. It is an observed fact that as economies move from basic poverty levels to middle and higher income levels, the size of government grows—and so will employment.

 

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