Government of India has envisaged adding 100 million jobs in manufacturing by 2022. This column finds that the structure of the country's manufacturing sector is misaligned with the objective of job creation. Subsectors that have low potential to generate jobs dominate the manufacturing profile. To generate jobs, more employment-intensive subsectors should be promoted.

Creating employment in the manufacturing sector is a key strategy for economic development in India. A number of initiatives have been taken over the years with the intent of generating the required jobs. Under the Make in India¹programme, the government has envisaged adding 100 million new jobs in the manufacturing sector by 2022.

In this column, I show that the linkage between the potential of a manufacturing subsector to create jobs and its size in the overall manufacturing index is relatively weak, inhibiting the capacity of manufacturing to meet the target. I compare the importance of manufacturing subsectors in the overall manufacturing sector index (as measured by their percentage contribution²) with their employment elasticity³as worked out by Misra and Suresh (2014) in a Reserve Bank of India (RBI) paper⁴.

Manufacturing sector growth

The Indian manufacturing sector has experienced fluctuating growth rates over the last decade.

Table 1. Growth of index of manufacturing production (base year 2004-05)

Source: Central Statistical Office (CSO); https://data.gov.in/catalog/time-series-indices-industrial-production accessed on 30 August 2016⁵.

As seen in Table 1, after a period of double-digit growth rates in the manufacturing index between 2005-06 and 2007-08, the sector slowed down considerably during 2008-09, the year the global financial crisis hit. A brief recovery was experienced in 2010-11 owing to fiscal stimulus. However, in the last five years, the index has expanded at 3% or less, including a contraction in 2013-14.

This five-year stretch of sub-3% growth rate in the manufacturing index is probably the longest post-independence, indicating deep distress afflicting the sector⁶.It is a result of continued problems in global economic conditions as well as moderate domestic demand due to poor monsoons, high inflation, declining investments, and other factors.

Data on employment in the sector from the National Sample Survey (NSS) is available only up to 2011-12. Share of manufacturing employment in the total employment in the economy increased from 11.9% in 1999-2000 to 13.6% in 2011-12. In absolute terms, this is an increase of about 17 million jobs in the sector over this period, outpacing the overall growth rate of employment (Misra and Suresh 2014).

Employment elasticity in manufacturing

Misra and Suresh (2014) calculate employment elasticity of the manufacturing sector and subsectors for the period 2001-02 to 2011-12, with all-India manufacturing elasticity at 0.41.

Comparing the average elasticities of the subsectors with the weights of these subsectors in the manufacturing index, it is found that there is weak linkage between the two. This implies that the manufacturing subsectors with high presence in India's overall industrial landscape have low employment-creation capacity. The top 12 sectors for employment elasticity have a combined weight of just 36.5% of the manufacturing index (with manufacturing index at 755.27 of the IIP for NIC (National Industrial Classification, 2004).

Table 2. Top 12 manufacturing subsectors by employment elasticity, and their weights in manufacturing index

Sources: RBI analysis, and CSO.

Notes: (i) Industry codes are from NIC (2004) (ii) Percentage weights have been calculated as percentage of weight in total manufacturing sector in IIP (iii) Weight for 'Manufacture of computer, electronics, and optical products' is for codes 30, 32 and 33 in NIC (2004) as Misra and Suresh (2014) is based on NIC (2008).

By contrast, the top 10 sectors by weight in the manufacturing index make up 79% of the total manufacturing sector (Table 3 below). But the average employment elasticity of these sectors is 0.43, barely higher than the overall manufacturing employment elasticity of 0.41.

The top five sectors by weight in the manufacturing index have employment elasticities that are far below the average for manufacturing as a whole. In fact, the chemicals sector shows fewer jobs with increase in value addition.

Table 3. Top 10 manufacturing subsectors by weight in IIP, and their employment elasticities and growth rates

Sources: RBI analysis, and CSO.

Note: Industry codes are from NIC (2004).

Food processing and textiles are generally believed to be high employment generators, but the jobs created by them per unit of growth appear to be less than those in more employment-elastic subsectors. These sectors account for 9.6% and 8.2% of total manufacturing sector by weight, respectively. However, their share in unorganised employment is the highest (Goldar and Sadhukhan 2015). The growth of these subsectors has been uneven, but both expanded at an average pace that was much faster than the overall manufacturing index.

The subsector with highest employment elasticity in the RBI list is furniture manufacturing. The weight of this subsector is less than 4% and its growth has been varied, declining substantially in three of five years from 2011-12 to 2015-16, but expanding by a huge 44% in the last financial year.

The second highest employment elasticity is found in wearing apparel, which has 11^th highest ranking by weight. It may also be counted among the subsectors to be especially promoted, and its growth potential is evident from the fact that in two of the last five years, it expanded by an average of 15%.

The subsectors 'other non-metallic mineral products', 'fabricated metal products' and 'motor vehicles' are promising as both their contribution to the manufacturing index and rank in employment elasticity is high. While the first has generally grown faster than manufacturing as a whole, the vehicles segment suffered during the low-growth years, and picked up only over 2015-16. Fabricated metals too have not performed well with negative growth rates in three of last five years. Given their above-average employment elasticity, these three subsectors could be targeted in terms of policies to boost and stabilise their growth.

In terms of growth rates, it is heartening to note that the 10 subsectors with highest five-year average growth rates, led by wearing apparel and furniture, have an employment elasticity that is higher than average (Table 4). This may indicate that the shift to more job-creating subsectors is underway, despite relatively lower weights.

Table 4. Top 10 fastest-growing subsectors, and their employment elasticity and weight in IIP

Conclusion

It may be noted that the weightage accorded to the subsectors comprising the IIP is undergoing revision and the new index with base year of 2011-12 is expected to be introduced by end of 2016. Possibly, this may reveal new insights into the structure of India's manufacturing sector.

In this column, I find that the structure of the manufacturing sector is misaligned with the objective of job creation. The subsectors with the highest presence, or weights, in IIP have low employment elasticities, while the subsectors with high employment elasticities do not figure significantly in terms of weight.

My analysis suggests that if India is to generate more jobs in manufacturing, a strategy to promote the most employment-intensive sectors is required. The sectors which should receive greater policy attention are wearing apparel, other non-metallic mineral products, fabricated metals, motor vehicles, and furniture.

In general, my somewhat back-of-the-envelope calculation points to the need for a more comprehensive analysis of the structure of India's manufacturing sector in terms of employment-generation capabilities. If growth continues to be largely in subsectors with low employment elasticity, the manufacturing sector overall would not be able to meet the job creation objective. Industrial policy for employment generation would need to consider several other factors as well, including total employment in the sector, labour productivity, domestic and export demand, and investment potential.

It is necessary to introduce sectoral industrial policies that synergise with India's asset of a large working class, and choose the right subsectors that will drive employment growth.

Views are personal.

Notes:

1. The Make in India initiative was launched by Prime Minister Narendra Modi in September 2014, with the goal of transforming India into a global manufacturing hub.
2. Manufacturing sector is part of the Index of Industrial Production (IIP), which also includes mining and electricity. The weights of manufacturing subsectors in the IIP are calculated by the Central Statistical Office (CSO) periodically; these were last estimated in 2004. In my estimate of percentage contribution, I have calculated weights of manufacturing subsectors as percentages of the general manufacturing index.
3. Employment elasticity is a measure of the percentage change in employment associated with one percentage point change in a sector or economy.
4. This article uses data from the RBI paper and does not verify it.
5. Value addition in the manufacturing sector, as per the CSO estimates of GDP growth, has higher growth figures than growth of the manufacturing index. For 2015-16, growth of value addition in manufacturing was estimated at 9.3%. Please see: http://pib.nic.in/newsite/erelease.aspx.
6. Planning Commission provides data on growth rates at factor cost at constant (2004-05) prices from 1951-52 at http://planningcommission.nic.in/data/datatable/data_2312/DatabookDec2014%2010.pdf. The CSO data from 1980-81 as per the IIP is available at https://data.gov.in/catalog/time-series-indices-industrial-production.

Further Reading

• Goldar, B and A Sadhukhan (2015), 'Employment and wages in Indian manufacturing: Post-reform performance', Employment Policy Department EMPLOYMENT Working Paper No. 185, International Labour Organization, Geneva.
• Misra, S and AK Suresh (2014), 'Estimating Employment Elasticity of Growth for the Indian Economy', Reserve Bank of India, 24 June 2014.