India’s Growth-Employment Paradox

India is grappling with a paradox of jobless growth, where remarkable Gross Domestic Product (GDP) expansion is not translating into a corresponding increase in employment opportunities.

Current Scenario of Employment and GDP growth in India

• Economic Growth and Employment Trends
  • GDP Growth: India has been the fastest-growing major economy in the world, with an impressive GDP growth rate of 6.5-7% annually between 2011-12 and 2022-23.
  • Employment Growth: Despite the strong GDP growth, employment grew at a much slower pace of only 1.9% annually during the same period.
• Employment versus Labor Supply Dynamics
  • Employment Growth: Employment increased from approximately 466 million in 2011-12 to about 577 million in 2022-23.
  • Labor Supply Growth: The labor supply grew from 477 million in 2011-12 to approximately 595 million in 2022-23.
• Unemployment Backlog
  • Unemployment Increase: The difference between the growth of employment and labor supply led to a rise in unemployment. The number of unemployed individuals grew from around 10 million in 2011-12 to over 19 million in 2022-23.
  • Unemployment Growth Rate: This represents an annual growth rate of over 5.6% in unemployment, which is significantly high and not much lower than the GDP growth rate.

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Key Insights

• Jobless Growth: The data indicates a scenario of “jobless growth,” where economic expansion is not accompanied by a proportional increase in employment opportunities.

• Productivity vs. Employment: While some divergence between output growth and employment growth is expected due to productivity improvements, the significant gap suggests that economic growth has not been inclusive enough to generate sufficient jobs.
• Implications for Unemployment: The slow pace of employment growth compared to labor supply has led to an increasing unemployment backlog, indicating that economic policies need to focus more on labor-intensive growth and effective job creation strategies.

Definition of Employment 

A person is considered employed if they are engaged in any economic activity, defined as any work, whether for wage/salary, profit, or family gain during the reference period specified. 

Reasons for Economic Growth Not Corresponding with Sufficient Job Creation

• Premature Deindustrialization: India is facing premature deindustrialization, where the manufacturing sector’s share in GDP and employment is declining at a much lower income level than in developed countries. 
• Skill Gap Issue: There exists a notable disparity between the skills required by employers and those that workers currently possess. Despite efforts like the Skill India initiative, these programs have fallen short of their goals, resulting in high rates of both unemployment and underemployment.
• Prevalence of Informal Employment: More than 90% of India’s workforce is engaged in the informal sector, which is marked by low productivity, a lack of job security, and minimal social protection.
  • Although the gig economy presents new employment opportunities, it often lacks stability and career advancement prospects, exacerbating job insecurity.
• Challenge in Job Creation and rising working population: With approximately 12 million new individuals joining the workforce each year, India must create 10-12 million jobs annually to harness its demographic dividend and prevent it from becoming a demographic liability. However, the current rate of job creation is insufficient, posing a risk of social unrest and economic challenges.
• ‘Missing Middle’ in MSMEs: India’s industrial structure is polarized between very small firms and large corporations, with a lack of mid-sized enterprises that are typically most effective at generating employment. The MSME sector, crucial for job creation, continues to struggle following demonetization and the COVID-19 pandemic.
• Job loss due to AI and automation: The rise of automation and AI is reshaping job markets, with the potential to displace up to 9% of India’s workforce by 2030. These advancements typically demand a highly skilled workforce, which could increase unemployment rates among lower-skilled workers.
• Misalignment of Academic Curriculums with Industry Needs: India’s education system does not adequately prepare students for modern job markets, leading to a situation where only 47% of graduates were employable in 2019. This mismatch creates inefficiencies, with a significant number of job seekers unable to meet industry demands.

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Strategies to make Economic Growth More Labor-Intensive

• Lowering Wage-Rental Ratio: To promote labor-intensive growth, policies should lower the wage-rental ratio, making labor cheaper relative to capital. Lowering this ratio can make labor-intensive sectors like construction and textiles more profitable, encouraging investment.
  • However, lowering wages is not feasible in India due to already low wage levels.
• Focus on Labor-Intensive Sectors: Labour intensive sectors like construction, trade, transport, and textiles, which currently employ about 240 million people, could benefit from a shift in resource allocation if the wage-rental ratio is reduced.
• Employment-Linked Incentives: Implementation of a robust employment-linked incentive (ELI) scheme, like the Production-Linked Incentive (PLI), to promote job creation in labor-intensive sectors.
• Addressing Labor Market Rigidities: Simplify labor laws and reduce the compliance burden, which currently hinders employment growth, by drawing on comparative evidence from different states.
• Raising the cost of Capital: In India, government-controlled low capital costs, influenced by artificially low interest rates, fail to reflect true scarcity. This discourages labor-intensive investments. Raising capital costs could shift focus towards more labor-intensive sectors, promoting job creation.
• Adjusting exchange rates to make imports more expensive and exports cheaper, though this could lead to accusations of currency manipulation.

Challenges to Lowering Wage-Rental ratio 

• Low Wage Levels: The wages in India are extremely low, with regular employees earning about ₹1,000 monthly, casual laborers earning ₹4,500 monthly, and self-employed individuals making around ₹7,000 monthly in 2022-23. The already depressed wage scenario limits the option of reduction of wages..
• Controlled Capital Costs: Capital costs are indirectly controlled by the government’s dominant borrowing and lending practices. 
  • For instance, the yield on 10-year government securities has remained stable at 7-7.5%, and the real interest cost of capital is around 2%, which is relatively low and sometimes negative, not reflecting the true scarcity of capital.
• Import Dependent Nation: However, as an import-dependent nation, currency depreciation could lead to significant negative externalities.

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Way Forward

• Efforts for developing Skilling Ecosystem: Focus on developing localized skill hubs that provide training aligned with local industry needs, creating a direct pathway for skilled workers to meet regional employer demands.
• Empowering Gig Workers through Cooperatives: Promote the creation of cooperatives owned by gig workers to strengthen collective bargaining, optimize resource sharing, and provide financial stability, all while maintaining the flexibility that gig jobs offer.
• AI Skills Enhancement Initiative: Develop a national program to train the workforce for roles that incorporate AI technology, focusing on emerging job sectors where human abilities are complemented by AI, thereby increasing efficiency and employment opportunities.
• Jobs in Circular Economy Hubs: Create dedicated hubs for circular economy practices, offering employment in recycling, repurposing, and sustainable design, thereby fostering job growth while also promoting environmental conservation.

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