There will be no demographic dividend without growth in industrial and service sector jobs. The underlying logic behind a dividend is that as jobs grow, incomes rise and so do savings. Based on higher savings, the investment rate to GDP grows, resulting in faster GDP growth. This was the reason behind the phenomenal growth in savings to GDP from 24 per cent in 2002-2003 to 38 per cent in 2007-2008 and investment from 25 per cent to 39 per cent of GDP.
Economic growth is meaningful only as long as it creates new non-agricultural jobs. Job growth leads to an increase in consumer demand which has the effect of sustaining GDP growth and reducing volatility in the output growth rate.
So, how many jobs need to be created every year? Between 1999-2000 and 2004-2005, around 12 million people were joining the labour force every year. This has the resulted in the myth that since 2005, 12 million people have been joining the labour force annually. The fact is that only about 7 million have been added to the labour force annually since 2005. This is due to a declining population growth rate and rising educational levels. Contrary to what the media believes, the period from 1999 to 2004 was very unusual in India’s history as 12 million people were joining the labour force every year. Never before 1999 and never after 2004 has this been the case.
While the employment elasticity of output has been falling since 2000, the good news is that 7.5 million new non-agricultural jobs were created annually between 1999-2000 and 2004-2005. An additional 7.5 million new industrial and service sector jobs were created annually between 2004-2005 and 2011-2012. In other words, if the economy continues to grow rapidly, India has already demonstrated an ability to generate at least 7.5 million new jobs annually over a 12-year period from 1999-2000 to 2011-2012 — or at least the same number as new entrants to the labour force.
Increase in infrastructure investmentOne of the most important sources of increased consumer demand since the turn of the century was the increase in infrastructure investment. Starting with the Golden Quadrilateral Highway network which began construction in 2001, infrastructure investment picked up. As a result, the number of workers in construction rose from 17 million in 1999-2000 to 26 million in 2004-2005. Investment in infrastructure rose strongly thereafter, and during the 11th Five Year Plan, infrastructure investment in the public and private sector together grew by $475 billion. The result was that employment in construction jumped from 26 to 51 million in 2011-12, trebling from the turn of the century. Unlike in the five years preceding 2004, real wages increased significantly until 2012. The combined effect of non-agricultural job growth plus real wage growth was a consumer demand booming in both rural and urban areas. The combined demand and supply effects of investment plus job growth resulted in sustained economic growth at a rate unprecedented in India’s economic history.
But job growth has been much slower since 2012. The Labour Bureau of the Ministry of Labour has compiled data for job creation in labour-intensive non-agricultural sectors each quarter since the 2008 global financial crisis. The latest figures show that 1.35 lakh jobs were created in 2015, the lowest figure since 2008, lower than the 4.9 lakh new jobs in 2014 and 12.5 lakh in 2009. Similarly, for the first time in any nationwide sample survey, the Labour Bureau’s Annual Employment-Unemployment Survey Report in 2013-2014 showed that underemployment remains a major problem. Only 60.5 per cent of persons aged 15 and above who were available for work for all the 12 months were able to get work during that year. More worrying is the fact that for the 7 million young people who are joining the labour force, the open unemployment rate is 10 times higher than that for those 30 years and above. Unemployment for 15- to 17-year-olds is 10.2 per cent and for 18- to 29-year-olds is 9.4 per cent in 2013, but 0.8 per cent for over- 30-year-olds.
Reasons for slow paceThis pace of job growth is even more worrying for the following three reasons. First, while the share of organised sector jobs is increasing, most of the job increases are still taking place in the unorganised segment of industry and services, and in informal jobs.
Second, while construction had been booming from 2000 to 2012, its growth dipped since 2012, and has begun to revive only since late 2015 as infrastructure investment revived. Since 2004-2005, for the first time in Indian history, 5 million agricultural workers have been leaving agriculture per annum. They are mostly absorbed in low-skilled construction employment. With infrastructure investment tapering off during the fiscal years 2012-2013, 2013-2014 and 2014-2015, construction employment growth is likely to have fallen sharply, compounding the already greater rural distress caused by drought in 2014 and 2015.
Third, education enrolment levels of youth joining the labour force have been increasing every year since 2010 or so. As a result, secondary gross enrolment ratio has increased from 62 to 79 per cent between 2010 and 2014. The educated youth are unlikely to join agriculture and will look for non-agricultural jobs in urban areas. The revolution in rising expectations is already causing social movements (the Patel and Jat agitations in Gujarat and Haryana, for instance).
This raises the question whether government efforts to revive growth and create jobs add up. Certainly the revival of infrastructure investment will create more construction jobs to absorb those leaving agriculture (more than 5 million per annum).
Three important schemesIn addition, three schemes of three Ministries stand out. First, the Ministry of Labour is finalising the scheme to offer to pay 8.33 per cent of the salary as contribution for a pension scheme for new employees getting formal sector jobs. The scheme will be applicable to those with salary up to Rs.15,000 per month. Second, the Ministry of Commerce is customising incentives for labour-intensive export sectors. It has already initiated an Interest Equalisation Scheme and the Merchandise Exports from India Scheme to support declining exports, given that exports have been declining for 15 months. In the Budget, the government also announced that 100 per cent FDI in food retail will be permitted on the condition that the goods have to be manufactured in India. Third, under the Stand Up India scheme, Scheduled Castes, Scheduled Tribes and women entrepreneurs will get support such as free pre-loan training and facilitating loan and marketing. There will be a Rs.10,000 crore refinance window to the Small Industries Development Bank of India (SIDBI), and the National Credit Guarantee Trustee Company will create a corpus of Rs.5,000 crore. SIDBI will engage with the Dalit Indian Chamber of Commerce and Industry and other institutions to take the scheme forward.
However, government schemes rarely create many jobs. International evidence is that when consumer demand grows consistently, whether from domestic or international markets, that is when jobs grow. That requires an industrial policy. Ease of doing business improvement and infrastructure investment increases should improve the economic environment. But they don’t necessarily add up to an industrial policy, which has been lacking in India ever since economic reforms began in 1991. The international evidence on incentives to employers for creating jobs (which is the idea behind the first scheme) is not promising, certainly not in creating jobs on the scale that India needs.
Santosh Mehrotra is Professor of Economics, Centre for Informal Sector and Labour Studies, JNU.
