India’s growth narrative often assumes that output expansion automatically generates jobs. However, rising adoption of capital-intensive technologies, weak demand linkages, and declining wage share challenge the sustainability of this growth model.

Output–Employment Linkages

• Decoupling Trend: Output growth does not always translate into employment growth.
• Capital-Intensive Technology: Raises output but often excludes labour, reducing mass demand.
• Labour Input Rise: May not boost output if jobs are low-wage and redundancy persists.

Demand-Side Dynamics

• Effective Demand Crucial: Employment and wage expansion fuel sustainable growth.
• Inequality Risk: Productivity gains concentrated in a few hands increase inequality and reduce aggregate demand.
• Short-Term Gains, Long-Term Loss: Capital-driven output expansion is not sustainable without broad-based demand.

Stability and Empirical Findings

• Vector Auto-Regression (VAR) Model Evidence: Empirical analysis using the vector auto-regression model shows that both employment growth and output growth require long time horizons to stabilize after price shocks.
• Slow Adjustment: While producers may increase production in the short run, stability in employment and output is limited in the long run.
• Price–Employment Link: Employment growth accounts for 26 to 34% of price variance, while price changes explain little variation in employment growth.
• Employment’s Dominant Role: Employment growth influences output variance more strongly than output growth itself, underscoring the demand linkage.

Policy Implications

• Employment Decline Leads to Output Decline: Demand contraction becomes the key transmission channel.
• Wage and Job Augmentation: Essential for sustaining growth, not just labour cost-cutting.
• Price Incentives Limited: Inflationary inducements only work in the short term; non-price factors like employment and demand expansion matter more.

Limitations of Productivity Gains

• Distorted Benefits: Gains benefit skilled workers and entrepreneurs, not the mass workforce.
• Unsustainable Growth: Risks of demand slowdown, rising inequality, and Balance of Payments (BoP) stress from skewed resource allocation.

The Path Ahead

• Rebalance Growth Models: India must gradually shift from capital-intensive, labour-saving approaches towards employment-oriented strategies that create widespread livelihood opportunities.
• Strengthen Demand-Side Foundations: Policies should focus on enhancing wages and generating quality jobs, thereby ensuring broad-based purchasing power and stronger domestic demand.
• Redefine Sustainability: True sustainable growth rests on the integration of employment, rising incomes, and effective demand, rather than relying solely on output expansion.

Conclusion

Economic growth without employment generation and wage enhancement is inherently unstable. India’s long-term growth requires rebalancing towards labour-intensive, demand-driven strategies, ensuring both productivity and inclusivity.

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