India’s massive employment problem and some ways out

In the recent announcement of India’s Union Budget 2024-25, significant emphasis was placed on the need for job creation. In this post, Pranab Bardhan presents a four-pronged strategy for the sustainable generation of good jobs in the long run: mass-scale vocational education and apprenticeship; replacing capital subsidies with conditional, wage subsidies; providing extension services to non-farm household enterprises; and boosting demand via a basic income supplement for vulnerable groups.

Commentators usually cite unemployment figures in household surveys by the National Sample Survey Organisation (NSSO) or the Centre for Monitoring Indian Economy (CMIE) to indicate the magnitude of the employment crisis that India has been facing for some time. They overlook the fact that even larger numbers are underemployed (or in ‘disguised’ unemployment) – as most of them are too poor to be seeking jobs for any length of time and instead scrounge around in low-productivity, dead-end jobs. (This is consistent with the fact that the more educated are also more unemployed in the data).

It is generally perceived that in the recent elections the lack of good-quality jobs, particularly for India’s burgeoning young population, was a critical issue. Election results in some states show that welfarism in the sense of handouts (often dispensed as ‘gifts’ from leaders) is not enough to placate large sections of the electorate. Although the pre-election Congress manifesto showed a bit more sensitivity to the job issue than that of other parties and came up with some concrete suggestions (though not fully worked out), it is well-known that joblessness has actually been a persistent problem over many decades and all regimes. Those who think growth will automatically solve the job problem ignore that 50 years of NSSO surveys on employment and unemployment have made it clear that India’s job availability has not kept pace with the rate of economic growth. If left unattended, this is a socially explosive problem. It is already smoldering in the form of youth restlessness, violence, vandalism, lynchings, and local mafia-style tyranny and protection rackets rampant in many parts of the country. It is high time that all political parties, both at the Centre and the states, give concentrated attention to details of design, cost-effectiveness and implementation issues for different types of job-promoting policies. In this post, I shall give some examples of such policies and draw attention to the available experience on them in India and other developing countries.

Why employment guarantee schemes are not enough

Of course, we now have some accumulated experience of running rural employment guarantee schemes, introduced at the national level in 2005. These schemes are for manual, often back-breaking, work under a scorching sun for the very poor. But even here, parts of the original law remain as yet largely unimplemented – like the worker rarely receiving unemployment benefits if job is not provided within 15 days, the inordinate delays in wage payments, work being provided on average for not even half of the stipulated 100 days per household, and so on.

There has been some talk of having such a central programme of employment guarantee in the urban sector (beyond scattered attempts in some states, most recently in Rajasthan). This requires serious consideration – there has been some discussion around a proposal in September 2020 on this by Jean Drèze titled “Decentralised Urban Employment and Training” (DUET) scheme in Ideas for India (revised by Drèze in March 2021 for a scheme to be run by and for urban women). One may particularly think of various ways of putting people to work on improving, maintaining and repairing urban infrastructure and water bodies and other local environmental resources. It will be, of course, costly; estimates for giving jobs to, say, 20 million urban casual workers easily run to above Rs. 1 trillion. To get an idea of comparative magnitude, in September 2019 the Ministry of Finance in a single stroke substantially reduced the corporate tax rate that amounted to a revenue loss of Rs. 1.84 trillion rupees over the next two years – all this without any success in the purported objective of increasing private investment.

But such rural and urban employment guarantee schemes are mainly concerned with relief or ‘distress’ employment, however necessary, for the poor. We actually need, on a long-term basis, an array of sustainable programmes of reasonably good jobs that go beyond short-run relief. Let me suggest four such areas which may have a lot of potential.

Long-term, sustainable strategy for creating good jobs

Mass-scale vocational education with links to apprenticeship: A part of our unemployment problem is really a problem of employability at the current level of low skills and training. A mass-scale vocational educational programme with links to apprenticeship in business firms needs to be started on a war footing to make up for decades of negligence on this issue. There are a great deal of successful cases to learn from: in Germany, potential employers contribute to vocational programmes into which school-leavers stream, saving worker-screening costs for those employers; in California, the community college-cum-vocational system works in partnership with local firms. Even in developing countries there are now some relatively successful cases that have been studied and analysed in the policy literature, like the Kenya Youth Employment and Opportunities Project, Generation India programme, Youth Building the Future Programme in Colombia, the Harambee Youth Employment Accelerator projects in several African countries, etc. Coordination between firms, local governments, business associations and civic organisations are essential in most cases.

Replacing capital subsidies with conditional, wage subsidies: In India there is a plethora of capital subsidies in different sectors in the name of encouraging investment. They distort investment in a labour-replacing, capital-intensive direction. We should take stock of these capital subsidies and replace many of them with wage subsidies, particularly for large firms in the organised sectors, on condition that they create new regular jobs. In the recent Union Budget tiny steps have been taken toward what effectively amount to wage subsidies – borrowing from the Congress pre-election manifesto – but their temporary nature largely inhibits any sustained incentive for private companies in their labour-hiring decisions. Economist Pronab Sen has argued for altering the structure of interest rates, making capital costlier on long-term loans and cheaper on short-term working capital that is used mainly for paying workers, thus tweaking the business incentive away from capital-intensive projects and toward more employment-friendly ones.

The business press and some economists are vocal in their opinion that the restrictions on layoffs in our labour laws (acting effectively as a labour employment tax) are mainly responsible for less labour-intensive methods of production. However, if you look at disaggregated firm-level data from the Annual Survey of Industries there does not seem to be much evidence of the importance of this effect of labour law restrictions – there is, for example very little bunching of firms near about the size thresholds in these restrictions that one would have expected if the labour laws were much of a binding constraint.

The above arguments are primarily for the organised sector. But the employment problem is particularly substantial and severe for smaller-sized firms, or a major part of the so-called MSME (Micro, Small and Medium Enterprises) sector. To the extent that some of these firms are in strong supply-chain relationship with the organised sector, growth in the latter sector will pull them up. But one of many aspects of data scarcity in India is that no one has a good idea about what proportion of informal sector firms has a significant supply-chain relationship with the organised sector. We now know from the latest survey of unincorporated enterprises that millions of such enterprises were wiped out in recent years – possibly due to the disastrous effects of demonetisation, botched introduction of GST (goods and services tax), and the unnecessarily harsh lockdown – with the attendant devastating job losses and policy neglect in adequate relief measures. The provision in the 2024-25 Budget for credit guarantee for the surviving firms in the MSME sector can help in sustaining jobs in that sector, if the banks seriously follow it up in their loan-giving policy. My subsequent policy suggestions are particularly relevant to the MSME sector.

Extension services for non-farm household enterprises: We are familiar with agricultural extension services, but now we should pay equal attention to technical assistance and extension services (including management training) to non-farm household enterprises to help them in productive job-creating directions. There have been similar cases of helping community health and care-giving workers (like the case of software aid to ASHA¹ workers in some districts of Uttar Pradesh, which has been studied).

Boosting demand via basic income supplement: Finally, much of the usual discussion on job promotion seriously ignores the demand deficiency problem that our private investors face in the mass consumer market. This problem has been accentuated by our large income and wealth inequality, where the benefits of growth are concentrated at the top and people at the bottom suffer from stagnant wages and employment. As a result, the Indian economy is increasingly displaying the structural duality that characterises unequal Latin American economies: A limited sector caters to an affluent elite demanding relatively capital-intensive and skill-intensive goods, whereas much of the general economy (substantially informal) suffers from insufficient demand and under-utilisation of capacity, and thus low private investment and productive employment.

Raising incomes of people in these latter sectors will boost demand and thus create more jobs on a large scale. One relatively efficient way to do it is to give all such groups (not just the farmers, as currently) a basic income supplement. A minimum income also gives a poor worker trapped in a ‘bad’ job the means to seek better jobs (and attain more qualifications for such jobs).Where will the money for such basic income supplement come from? As I have discussed elsewhere – most recently in Chapter 8 of my book, “A World of Insecurity” (2022) – a modest basic income supplement can be funded by drastically reducing the direct and indirect subsidies that the government currently gives to the better-off. This can be supplemented by more taxation of the rich. In India, a land of hereditary plutocracy, where the data show that wealth inequality is galloping, inheritance and wealth taxes are zero, the capital gains tax rate even after the recent lift in the Budget is much lower than in the United States, and the local property taxes as percentage of GDP (gross domestic product) is one of the lowest among major economies.

Of course, these actions will require political courage and imagination.

Notes:
1. ASHAs (accredited social health activists) are community health workers, instituted by the Ministry of Health and Family Welfare as part of the National Rural Health Mission.