Headlines trumpeting India as the “fastest-growing economy” or being the “fifth-largest economy” might appease the affluent. But for the aspirational classes, especially the increasingly well-educated youth, the availability of non-farm jobs in towns is the real indicator of progress. Instead of relying on doles and handouts, India must adopt an inclusive growth path, where jobs grow commensurately with GDP numbers
With private sector jobs stagnant, youth around the country have resorted to agitations—from Marathas in Maharashtra and Jats in Haryana to Patidars in Gujarat and Kapus in Andhra Pradesh—while Bihar and other Hindi belt states have witnessed the mobilisation of Yuva Halla Bol. All of them have been demanding either more government jobs, or at least reservations within them. But the demand for government jobs exceeds the supply exponentially, a scenario that is unlikely to change anytime soon. Only private sector job growth can fulfil youth aspirations. It is also the only way to ensure inclusive growth and mitigate income inequality.
How can this path of inclusive growth be achieved? The short answer is faster GDP growth and labour intensive growth, where workers of all levels of education and skill are able to secure employment.
A contrast between then and now
During India’s period of 7.9 per cent annual GDP growth between 2004 and 2014 (despite a global economic crisis in 2008), around 75 lakh non-farm jobs were created every year on average. Such jobs are the only ones that matter since we must avoid additional over-dependence on agriculture for meaningful economic growth.
Ahead of its demographic dividend ending (before 2040), India needs a consistent annual GDP growth of at least 8 per cent to generate sufficient non-farm jobs for its young population. However, no major projection (other than Bloomberg) puts India’s 2023-2030 growth rate at anywhere close to 8 per cent. Other projections for the near future, including OECD and IMF, are generally in the 6-6.5 per cent range.
Given this scenario, questions arise about the employment generation potential of the current government’s growth model, if it returns to power in 2024. India can achieve 8 per cent growth again, but only if it generates jobs and wages, in turn fuelling substantial demand across all social sections, not just the middle class and above. Reliance on welfare schemes, or “freebies” as they are often called, for the poor is not a fiscally sustainable growth path.
Between 2004 and 2014, the proliferation of non-farm jobs reduced the absolute numbers of the poor, thus raising consumption demand. Like the growth rate in this period, this was an unprecedented achievement.
Simultaneously, young people were getting better educated. Not only did the Right to Education Act 2009 guarantee universal elementary education, child labour also dropped sharply. Moreover, children stayed enrolled in schools for longer. Secondary enrolment shot up to 85 per cent in 2015 from 58 per cent in 2010. Higher education enrolment grew from 10 per cent in 2001 to nearly 27 per cent by 2016.
Hence, the worker population rate fell during 2004-14 for a good reason—not the bad reasons suggested by Finance Minister Nirmala Sitharaman in Parliament in response to former FM P Chidambaram’s critique of economic growth not translating to job creation.
Job growth was very rapid between 2004-05 and 2011-12. This kept youth and total unemployment low and pulled workers out of agriculture at an unprecedented scale—a characteristic of the structural transformation undergone by China and other industrialised countries.
However, the employment situation worsened quickly under the new government. According to Periodic Labour Force Survey (PLFS) data, overall unemployment in India touched 6.1 per cent in 2017-18. This was the highest unemployment rate experienced by India since labour force surveys began 45 years earlier. Even in 2022-23, I have estimated it was 14 per cent, more than double its 2012 level. At the same time, the rate of unemployment among rural men (15-29 years), which was 5 per cent in 2012, skyrocketed to 17.4 per cent in 2017-18.
Regressive trends
A notable aspect of the 2004-14 growth period was the accompanying acceleration of structural change in employment. In manufacturing, employment rose from 53 million in 2004 to 60 million in 2012.
While the share of workers in agriculture had been falling since 1973-74, their absolute numbers had continued to rise until 2004-05. This trend finally reversed after 2004, tightening the labour market and leading to rising real wages, first for rural workers and then, as a knock-on effect, for their urban counterparts across the economy. However, real wages have stagnated over the last decade.
Like China, India saw many low-skill agricultural workers being absorbed into the construction sector, where employment increased from 26 million in 2004 to 51 million in 2012. This growth was driven by increased public and private investment (which reached 38 per cent of GDP in 2008), particularly in infrastructure, as well as expansion in the services and manufacturing sectors.
However, PLFS data shows that post 2013, the creation of new non-farm jobs fell from 75 lakh per annum to just 29 lakh in 2019. Further, the contribution of manufacturing to GDP, which was a constant 17 per cent in 1992–2015, fell to 13 per cent before returning to 17 per cent in 2022–23. This slow recovery despite the “Make in India” mission.
Why has non-farm job growth collapsed?
Pre-2015 job gains have reversed in subsequent years, coinciding with the average annual GDP growth rate falling to 5.7 per cent over 2015–23.
MSMEs, which generate most non-farm jobs, were dealt a double blow by demonetisation (as they deal mostly in cash) and a poorly designed and implemented national Goods and Services Tax (GST) six months later. These measures harmed largely unregistered MSMEs, contributing to the GDP growth rate slowing for almost three years, dropping to about 4 per cent before the Covid-19 pandemic hit.
To make matters worse, India imposed one of the world’s strictest lockdowns, grinding all economic activity, including that of MSMEs, to a halt. Sixty million city workers returned to agriculture between 2020 and 2022-23, shows PLFS data. This pushed agriculture’s share of employment from 42 to 46 per cent — a reversal of the earlier structural transformation.
Most of these returning workers haven’t re-migrated to cities, as evidenced by PLFS figures. This has led to stagnant wages and incomes in rural India, especially in the major out-migration states.
Finance Minister Sitharaman was right when she said in Parliament that the worker population rate (WPR)— the percentage of people employed in the total population— rose post Covid, but that happened only for regressive reasons.
First, 60 million were added to agriculture, a sector already employing 42 per cent of India’s workforce but contributing only 15 per cent to GDP (2020). Therefore, unproductive agriculture was made to bear a greater burden. It’s also why MGNREGA work demand has been at a historic high since 2020. This reflects a ‘waste’ of public resources at a time when MSMEs continue to close in the face of sluggish consumer demand—the very factor that drove workers back to villages.
Second, a significant portion of the post-2019 WPR increase stems from a rise in ‘unpaid family labour’. Although they receive no wages, they are still counted as workers—hence an optical rise in WPR—but their increase reflects economic distress. This phenomenon, which occurred in both rural and urban areas, is often given a misleading spin. For instance, women returning to family farms is being claimed as a rise in female work participation. This even as India already has among the lowest (and declining) rates of female work participation in the world. Regular work share in total employment fell, while some who were laid off ended up becoming self-employed own-account workers—a regressive development that not only reduces income but also makes it more vulnerable and variable.
In cities, a street vendor who sells pakoras may be helped by the free labour of his wife and children, but their work is still included in the WPR numbers, celebrated by the FM and government economists. This also manifests as a ‘fall’ in the unemployment rate (to 5.3 per cent). However, the CMIE survey, which adheres to international standards and excludes unpaid family labour, estimates that the actual unemployment rate is 10 per cent as of October 2023.
What govt must prioritise to create jobs
Harnessing the demographic dividend in India means creating non-farm jobs for three population groups—the millions who returned to agriculture during the reverse migrations of 2020–21, the better-educated youth (especially girls), and, finally, the openly unemployed. India needs at least 10–12 million new jobs each year to absorb these three groups.
To restore non-farm employment and high GDP growth, India must adopt a manufacturing strategy akin to China’s, focusing on labour-intensive manufacturing. While a slow global economy may limit export demand, boosting domestic demand can create jobs. A primary focus on services is unlikely to suffice, despite calls to this effect.
For instance, former RBI governor Raghuram Rajan and economist Rohit Lamba, in their book Breaking the Mould, suggest a focus on high-quality services exports using India’s digital infrastructure, as well as IT-based services growth for the domestic (and export) market.
However, this ‘New India’ economy constitutes less than 15 per cent of India’s total economy and a fraction of that in employment. It cannot single-handedly drive an 8 per cent GDP growth rate. Although Rajan is not proposing services exports at the expense of manufacturing growth, his strategy will generate jobs mainly for highly skilled persons, rather than the millions in the three groups searching for non-farm jobs.
To absorb these groups, several different factors must come together. First, construction activity needs to continue at its current brisk pace and possibly even accelerate further, led by public sector investment for the next year or two since private sector investment remains sluggish. Doubling construction employment within the next five years depends on a revival of private investment.
Second, labour-intensive manufacturing by MSMEs needs a sustained boost in the wake of the twin blows of demonetisation and Covid. While the government is focusing on large companies—its ‘national champions’— and encouraging them through subsidies, these resources might do more for employment generation if they were instead targeted towards MSMEs.
The third area where serious employment can be generated is, as Rajan and Lamba argue: services. IT services are, of course, an area where India excels, but we do well in healthcare as well. Rajan and Lamba argue that compounders, skilled in mixing chemicals to produce medicines, can be formally trained in basic healthcare to form a vital link in the chain. These trained compounders would handle simpler ailments, referring patients to doctors only when necessary. This approach not only eases the load of doctors, but also creates a critical tier within the healthcare structure, offering formal employment to thousands who currently are in the informal sector.
Similarly, numerous ancillary services associated with airlines, railways, tourism, auto services, and banking have provided good quality jobs in recent years. Public employment in health and education also needs to expand rapidly. Only then can India’s health and education services (including quality vocational skills expansion) catch up to East Asian levels and attract more FDI.
A renewed focus on MSMEs across these sectors is crucial. Inclusive growth requires rapidly growing jobs at the bottom, and not just the top, of the wage and skill distribution pyramid. In the absence of such a comprehensive strategy, the demographic dividend is indeed threatened.
Santosh Mehrotra is Visiting Professor at the Centre for Development Studies, University of Bath. Books authored by him include Reviving Jobs: An Agenda for Growth (Penguin, 2020). Views are personal.
(Edited by Asavari Singh)