The Phenomenon of India’s Jobless Growth

The facts

India experienced a job growth of 3% p.a in the 70s at a time when our economy grew at 3-3.5% p.a but over the last 3 decades our economy grew at over 5-8% p.a but our job growth has been close to 1% p.a.

Employment elasticity, percentage growth in employment for one percent growth in GDP, has fallen from close to unity in the 70s to 0.4 in the 90s to less than 0.1 today. Hence, the phenomenon of India’s jobless growth.

The employment elasticity has gone down further and is estimated to be less than 0.1 and despite GDP growing at over 7% p.a, the growth in employment is close to 0.6%.

India has over 18 million people who turn 18 every year and we have over a 100 million more people in agriculture than required. Unless we create 20 million jobs annually, we are in deep trouble.

So, what do we need?

There are around 400 million employed people in India. In order that we create 20 million new jobs each year in India, employment needs to grow at 5% per annum. 

We are currently adding less than 2 million jobs a year because we are growing only at 5-6% (pre-pandemic) and with an employment elasticity close to 0.1. If we continue to grow our economy and even accelerate it further without dealing with the issue of employment elasticity, the jobs crisis is not going to disappear.

We need to grow at over 10% per annum for the government and society to have resources for poverty alleviation and to spend on education and healthcare but we also need to simultaneously increase employment elasticity to over 0.4 so that this time round, the growth is not a jobless one.

Is employment elasticity the same across all sectors

No, some sectors like construction have a high employment elasticity while sectors like manufacturing and agriculture have declining employment elasticity. 

Why has employment elasticity declined?

India’s job growth was one that was based on declining productivity, protectionism, and growth in the public sector, but it made us very uncompetitive and bankrupted India.

Liberalisation in India opened the economy and unshackled industry towards growth. This was accompanied by the public sector exiting various sectors, traditional monopolies were unseated and there was overall rise in productivity and competitiveness.

However, it comes at a price. In order that companies become competitive, they need to improve productivity through better management and use of technology. This meant higher growth could be achieved with the current number of employees.

Skill gaps also meant that industries that had lower employment elasticities grew while those that required a linear growth in number of people struggled to grow due to scarcity of people.

Use of technology, opening up to international competition coupled with skill gaps all have led to a lowering of employment growth. Women have been disproportionately impacted by this change and this has led to abysmally low women’s labour force participation rate.

What can be done to increase employment elasticity?

Promote growth in sectors with high employment elasticity. Many gig jobs have high employment elasticity. If the government takes a hands-off approach to gig work and does not kill it with too much regulation, this sector can grow by leaps and bounds over the next decade.

Government spending in infrastructure will lead to growth of the construction industry which has a high employment elasticity and spending on infrastructure will have a ripple effect on numerous other industries. India needs world class infrastructure and there is huge potential to invest in this space. History is full of stories of how infrastructure spending has helped kick start economies.

Preferential credit to rural women can provide more jobs as studies show women entrepreneurs are likely to invest in areas with higher employment elasticity and this especially true of rural women.

Artificial intelligence threatens many jobs and people and governments across the world are taking note of the disruptive potential of AI. AI has the potential to eliminate hundreds of millions of jobs but there is no running away from it. The worst thing we can do is to become ostriches and hope AI leaves us alone. The right thing to do is to embrace AI, promote responsible AI and create an eco-system where the latest and greatest technology is nurtured and grown. Even as AI disrupts, those who build AI tools will thrive. 

Conclusion

GDP growth is critical. Without GDP growth, government will not have the resources required to defend our borders, provide succour to the poor and maintain law and order. However, GDP growth without increased employment elasticity will lead to greater inequality and stresses in society. Jobless growth is better than no growth but growth with equity is a better goal.