15/01/2017 2:20 PM IST | Updated 20/01/2017 9:24 AM IST

How India Can Reverse The Trend Of Jobless Growth

Are we up for the formidable challenge of employment generation?

Babu Babu / Reuters

Providing gainful employment opportunities is essential for enabling people to improve their life quality and have a decent standard of living. This economic benefit goes hand in hand with significant positive impacts on a person's independence, self-esteem and confidence. For a country like India, which has surplus labour and a strong affinity for new technologies, employment generation in the 21st century poses a new challenge. More recently, the sluggish growth of various sectors of the economy, especially post demonetisation, has made this challenge more severe.

During 2005-10, while the Indian economy grew by an average of 8.7%, employment reportedly grew by a mere one million.

The trend of significant gap between the pace of GDP growth and that of employment growth has given rise to the phenomenon of "jobless growth" in India. This clearly indicates that increasing the economic growth rate is not enough. It is a necessary but not a sufficient condition for creating economic opportunities. During 2005-10, while the Indian economy grew by an average of 8.7%, employment reportedly grew by a mere one million. In contrast, an estimated 12 million people join the workforce annually in India. Moreover, according to data released in 2016 by the Labour Bureau, job generation observed a sharp decrease to 135,000 (2015) from 421,000 (2014).

The declining trend in employment generation is deeply disconcerting. It obstructs the benefits of growth from reaching the masses. And it dilutes the advantages that accompany high growth. It is, therefore, crucial to analyse the structure and sources of employment in order to address this complex challenge.

One of the ways of doing so is to note the employment elasticity for different sectors, as done by various studies. Employment elasticity is a measure of the percentage change in employment associated with a 1 percentage point change in economic growth. Thus, it indicates the ability of an economy to generate employment opportunities for its population as a share of its growth. Papola and Sahu (2012) have estimated the employment elasticity as 0.20 for 1999-00 to 2009-10, which is consistent with the Planning Commission's estimates. This implies that for every 10% change in real GDP, there is about 2% change in employment. An RBI paper ("Estimating Employment Elasticity of Growth for the Indian Economy") recorded considerable variations in elasticities across sectors. It was noted to be 0.02 for agricultural employment, between 0.29-0.33 for manufacturing and 0.30 for services. Within manufacturing, employment elasticity for the organised manufacturing sector lies in the range of 0.4-0.5 for the 2000s according to various estimates. Accordingly, apparel, furniture, leather products, motor vehicles, rubber products and electrical equipment were identified as being employment-intensive sectors during the 2000s. Therefore, the recent (post 8 November 2016) slowdown in the manufacturing, mining and construction sectors has huge implications for employment generation in India.

The declining trend in employment generation is deeply disconcerting. It obstructs the benefits of growth from reaching the masses.

Given India's historically anaemic labour laws and disposition towards substitution of labour by capital, this trend is hardly surprising. The bias against capital gets magnified by the rapid pace of technological change worldwide. Swift global technological progress has thus mandated adoption of up-to-date technology by India to maintain its competitive edge. This has hurt the country's interests as India is a labour-intensive country with already significant levels of unemployment—even among the educated.

In this backdrop, the low employment generation capacity of Indian economy is becoming increasingly worrisome. In addition to the existing backlog, there are fresh additions to the pool of unemployed workers per year. To address this issue, several government programs are already underway, such as MGNREGS, Make in India, Start-Up India, Skill India and so on. However, much more needs to be done.

More focus on labour-intensive sectors to generate employment

India's apparel sector has immense potential for employment generation. It provides employment to over 45 million directly and 60 million people indirectly according to Apparel Export Promotion Council estimates. Alluding to the sector's importance for employment, a World Bank report ("Stitches to Riches") points out that a 10% rise in apparel prices in China could help India create at least 1.2 million jobs. Increasing wage costs in China and the country's move to higher value-added exports are therefore expected to provide opportunities for labour-intensive sectors (like apparel) in countries like India.

The agriculture sector needs a boost

Agriculture continues to play a vital role in India's economy. As one of the most important sectors for providing livelihoods in India, low agricultural productivity and significant disguised unemployment have hit this labour-intensive sector hard. Moreover, the vulnerability of the sector to climate conditions puts this labour at the mercy of the unreliable monsoons. As a result, there is a general trend of shift in labour out of this sector. Further, as the Union Budget 2016 identified weakening rural demand as a dampener to overall economic growth, productivity-enhancing measures need to be pursued in agriculture sector. This will also be helpful in arresting the flight of labour away from the sector and add to the unemployment backlog.

Special attention needs to be focused on employment-intensive sectors such as apparel, furniture, leather products, motor vehicles, rubber products and electrical equipment.

Enhance the role of MSMEs

Migration of labour from agriculture to non-agriculture sectors and from rural to urban areas is a common phenomenon in India. This largely unskilled labour needs to be absorbed by other sectors of the economy. In this context, the MSME sub-sector in manufacturing has an important role to play. The nearly 5.77 crore MSMEs, contributing nearly 40% to India's manufacturing output, employ around 14 crore people. Noting the much higher employment potential of MSMEs, the Central government had launched the ₹20,000 crore Micro Units Development Refinance Agency (MUDRA) Bank last year. In the wake of the recent trend of lacklustre global demand and India's weak exports, the MSME sector needs special attention. Diversification of their exports basket as well as of export markets is the need of the hour.

Address the issue of "skills instability"

Government schemes such as Make in India, Skill India and Digital India are expected to generate employment in the manufacturing as well as services sectors. However, the issue of "skills instability" shall be crucial in the light of increasing technological advances. According to the WEF report, rapid changes in skills requirements shall lead to skills instability in over 40% of top skills required across all jobs in Turkey, China, India and Italy over the next five years. Therefore, India will need to enable its workforce to adapt to the changing skills requirements accompanying technological progress.

Smarter regulations

Regulation of enterprises is a major factor that affects job creation in an era of continuous technological progress. While over-regulation tends to reduce employment, under-regulation is against long-term public interest. Therefore, simplification coupled with "smarter regulations" is the way to go.

Up-to-date facts and figures

The credibility of employment-unemployment data needs to be established. At present, the source used for estimating the employment/unemployment rate in India is NSSO data. However, this data is not available annually. Since 12 million people enter the labour force annually, frequent periodic assessment of the labour market is essential. Moreover, the estimates are dubious of the labour force in the informal sector, self-employed, seasonally unemployed or in disguised employment. Given the high share of such labour in India's total labour force, unreliable estimation of the same is a serious drawback in employment statistics.


The ILO observes that a shrinking youth labour force has kept the youth unemployment rate high (around 13%, which is above the pre-crisis level of 11.7%). This is in spite of the registered decline in the number of unemployed youth worldwide. For countries where the population is ageing (like Japan, Italy and Germany), technological disruption is perhaps not as critical an issue as for India. However, as India adopts modern technology in various sectors it cannot do so blindly. Special attention needs to be focused on employment-intensive sectors such as apparel, furniture, leather products, motor vehicles, rubber products and electrical equipment. Technological adoption in these sectors needs to go hand-in-hand with enhancing labour productivity. Already, the UNDP's "Asia-Pacific Human Development Report 2016" has warned that India is likely to face a critical shortage of jobs in the coming 35 years. Hence, while raising economic growth is definitely a desirable goal, India must adopt a more targeted growth strategy to benefit a much wider and needier section of its population.

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mployment generation- A formidable challenge