The process of economic transformation that entails labour transitioning from low- to high-productivity activities, been much slower in India than in other Asian countries like China. Why is this so and what can be done to generate more productive jobs in India or make existing jobs more productive, faster? In this editorial, Ashok Kotwal discusses the challenge of job creation in the Indian economy.

Ashok Kotwal will be moderating a panel discussion on this topic between Kaushik Basu (Cornell University), Renana Jhabvala (SEWA), and Pronab Sen (IGC India), on Monday, 18 December 2017, 7 pm, at IIC Delhi.

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Whether in the US or India, the principal challenge for policymakers today, is to create, not just growth, but growth with jobs, and not just jobs but good jobs.

Not just jobs but good jobs

In the US, for a few decades during the post-war prosperity, a blue-collar worker could comfortably raise a family with hopes for even a better future for his children. But globalisation and automation have made manufacturing jobs disappear in the US and have hollowed out the middle class. When skilled machine workers have to resort to delivering pizza, they still have jobs but it is a climb down leading to frustration and a blow to their self-esteem. The result has been devastating: widening inequality and growing anger toward the ‘establishment’ culminating in the election of Donald Trump. Economic growth unaccompanied by a growth in good jobs has the potential to tear the social fabric of a society. There is a lesson to be drawn for India here.

Main question

The Indian media is full of reports about the layoffs due to the current slowdown in economic growth partially caused by demonetisation and poor implementation of GST (goods and services tax). Alarming as this may be, this is not what this article is about. The focus here is on the long-run course of Indian development. The main question I would like to explore is why the process of economic transformation that entails labour transitioning from low- to high-productivity activities, has been much slower in India than in other Asian countries like China. Another way of asking the same question is: Why has the Indian economy not been faster in producing more productive jobs or making the existing jobs more productive?

How did China do it?

Globalisation may have been responsible for moving jobs out of the US to low-wage countries but, if anything, it should have been a boon to emerging economies like India and China. These two populous Asian countries had similar levels of poverty in 1978 when the Chinese reforms began. Since then China has transformed itself into an industrial powerhouse. From 1978 to 2007, the per capita income in China grew at an astounding 8.12% per annum. Nearly 78% of the growth in per capita GDP (gross domestic product) in China over the period 1978-2007 can be attributed to the growth of total factor productivity (technological improvement). As productivity increased, so did wages and output. Poverty at $1.90 at 2011 PPP (purchasing power parity) fell from about 80% in 1978 to 26% in 2007; by now saying that China has eradicated poverty at that level would not be an overstatement. How did they do it?

The answer is: they did it in stages and charted their course carefully to avoid huge social upheavals. In 1978-79, when the Chinese reforms began, China was still an agrarian economy. Initially, when the transition began in 1978, China emphasised productivity growth in agriculture. When farm incomes grew, the demand for non-farm services and locally produced simple goods rose, creating rural non-farm sector jobs. During 1978-1984, total factor productivity in agriculture grew at 5.62% per annum; agricultural output grew by 47% and the share of labour force in agriculture declined from 69% to 50%. After a brief pause, agricultural productivity started growing again as new technologies were introduced. It grew at 5.1% per annum from 1988 to 1998.

Throughout this period, China was gaining in its manufacturing productivity, first through its institutional innovation of ‘Township and Village Enterprises’ (TVEs) whereby it mobilised the local resources and human capital to initiate manufacturing activities. This innovation served as an intermediate step in its transition from an agrarian economy to an industrialised one. It made the transition smoother by avoiding mass unemployment and limiting rural to urban migration.

By 1995, TVEs had been gradually replaced by private firms sometimes started by workers and managers from TVEs. Throughout the 90s, China absorbed foreign technology speedily, managed to skill its vast labour force, and became a manufacturing colossus. In 1999-2000, it was admitted to WTO (World Trade Organization) and through the decade of 2000-2010, it became the factory for the whole world. In 1993, Chinese share of global merchandise exports was 2.5%; by 2014, it had grown to 12.7%.

The salient features of Chinese rapid transformation were: High rate of agricultural productivity growth in the initial stages; phased transition through an institutional innovation of TVEs to absorb rural labour being released by agriculture; rapid absorption of foreign technology through foreign investment; and export-led industrialisation targeting the markets in developed countries. Chinese course of development, unlike that of India, was clearly navigated by the State.

Indian course of development, on the other hand, was guided by happenstance. In order to understand this we should first take a good look at the structure of Indian economy.

Structure of Indian labour market

Table 1 below points out the glaring disparity between the average wages paid in the organised sector (more than 10 worker firms) and those of the workers in the unorganised sector where most of India makes its living. Even within the organised sector, half the workers are either informal (no contractual benefits even for long-run employment) or casual (temporary workers with no benefits or no security). They earn respectively half and a quarter of what the formal workers make. The privileged workers are thus organised formal workers who constitute only 8.4% of India’s labour force. The productivity growth that propelled India’s post-1991 growth spurt took place mostly in the organised sector and it had a direct impact on the wages mostly of these workers, widening the inequality between them and the rest of the labour force.

Another noteworthy thing is the predominance (48.4%) of ‘self-employed’ in the labour force. The entry in the column on wage index for the self-employed is blank because NSS (National Sample Survey) has no information on the earnings of the self-employed – it would be a good guess that this is one of the poorest classes. They include a large number of small and marginal farmers and artisans who are struggling to survive. This is why the category of unemployed is not very meaningful for labour in India. The unemployment rate is low because nobody can afford to be unemployed. They hustle to survive and get classified as self-employed or casual workers.

Table 1. Composition of India’s labour force

Source: India Employment Report 2016 (Ghose 2016)

Anatomy of Indian growth spurt

In the 1990s India became a major beneficiary of outsourcing and Indian growth was spearheaded by exports of software and business services just as it was coming out of the shackles of the ‘License Raj’. As the surplus of Indian engineers and managers absorbed the easily available IT technology, the sector grew from 1.2% of GDP in 1998 to 9.5% of GDP in 2014-15. However, it directly employs less than four million people, which is a negligible part of India’s labour force of 511 million. In other words, the fastest growing sector in India that helped India become a fast growing economy failed to create a lot of jobs directly. Similarly, other segments of the organised sector (for example, auto, pharma, hotels, finance, real estate, communications, etc.) experienced some productivity growth but its impact on the overall employment was small. A thin layer of educated professionals experienced an improvement in their productivity and hence in incomes, raising aspirations for all.

The increases in productivity and hence in incomes in the organised sector, of course, had an indirect impact on the incomes in the rest of the economy. The income increases in the organised sector created demand for the products of the organised sector (for example, consumer durables, houses, leisure activities) and also some of the unorganised sector (for example, horticulture, dairy, poultry, construction, and retail trade). In addition, there is a great deal of outsourcing that goes on between the organised and unorganised sector. This was the process of trickle down in India.

Too few good jobs

However, the organised sector has failed to absorb much labour from the unorganised sector where the productivity increases have been modest, if any. Table 2 shows that the lion’s share of labour released by agriculture has been absorbed in ‘construction’ – still an unorganised sector with a moderately higher level of productivity than in agriculture. The net result is that the improvement in the average productivity of Indian labour has been modest.

Table 2. Sectoral composition of Indian economy and changes therein

In the 1990s, India got a lucky break. It had a surplus of engineering graduates and managers coincident with a suddenly emerged worldwide demand for software services which allowed it to make its presence felt in that sector. This received a further lift due to the good reputation built by the Indian diaspora in the Silicon Valley. Times have changed. The advent of artificial intelligence has automated many jobs such as data entry, call centres, and testing software for foreign countries at cut-price rates.

The turmoil in the US caused by the loss of manufacturing jobs there has raised the ugly spectre of protectionism there. The nationalist currents in the whole developed world do not bode well for either India or any other developing country to try to emulate the East Asian model of export-led growth. Raghuram Rajan had already suggested that India should consider a ‘Made for India’ strategy. But unless what we make for India is ‘Made in India’ it will not serve the purpose of job creation. Will we be able to compete with Chinese imports, or at the low end with Vietnam, Thailand, and Bangladesh?

Obstacles to job creation

The obstacles to the expansion of the organised sector have been discussed for years. The list is long: overleveraged banks, labour legislation, land acquisition, bankruptcy laws, and infrastructure. The relative importance of these has been a source of debate but nobody disputes that all of these are significant problems that need to be solved. These are merely the impediments for investments by corporate India. In addition, there are the standard labour market problems such as mismatching of workers to their jobs, the weak educational background of workers, and the paucity of professional internships to impart skills.

Even after the problems mentioned above are addressed, there remain some generic problems. It is challenging to improve labour productivity with a ‘Made for India’ strategy. When a firm is aiming for an export market, the demand is no constraint. If costs and quality can be managed, the vastness of the market offers huge rewards inducing risk-taking investment and spurring innovation. On the contrary, producing for a domestic market can be a constraint. Even for a populous country, the market for sophisticated high-value goods is limited to the high-income segment of the population. Small markets do not generate capitalist dynamism of competitive markets.

Note also that in the organised manufacturing sector, most productivity-enhancing technology seems to be skill-intensive; it replaces a lot of unskilled labour by a few skilled workers working with robots. Given how low the wages are in India, this is less likely to be so in India than in developed countries. Yet, robots and automation are already here. Despite low wages, the threat of labour-displacing technology is still real in India. Under the circumstances, how much of India’s labour force is India’s organised sector likely to absorb?

Under the present circumstances, the prospect of the organised sector expanding rapidly and absorbing labour at a brisk rate seems a bit remote. Given the insignificant share of labour force in the organised formal sector and the enormous size of India’s labour force, relying solely on the organised sector to move labour from low- to high-productivity activities seems unrealistic.

What then are some other avenues open for policymakers?

The importance of the unorganised sector

The first that comes to mind is to think of ways to improve the productivity of the activities in the unorganised sector starting with agriculture. After a succession of droughts and the misadventure of demonetisation, the farming sector is indeed in distress. It would be timely to pay serious attention to the improvement of agricultural productivity. If farm incomes go up, they add to the market for industrial goods and services. Indeed, the NSS data shows that high-value agricultural goods like dairy, poultry, and horticulture in unprocessed and processed form are the sort of goods that rising urban incomes spill into. They respond to local tastes and can more easily withstand the pressure of foreign imports.

Improving productivity of the unorganised sector amounts to improving human capital, and access to all other things – such as the access to insurance, credit and banking services, and rural and urban infrastructure – that would make the self-employed and the workers in the unorganised sector more productive. A lot of this can only be done if the functioning of local institutions (for example, panchayats¹) improves – surely a herculean task.

There are many instances where NGOs and civil society organisations have worked to improve local governance by making governments accountable for their actions or filled in gaps where the government was just absent (for example, schooling by Seva Mandir in Rajasthan, skilling of rural migrant women by SEWA (Self Employed Women's Association)).

Even if there are jobs opening up in the cities, our urban infrastructure is hopelessly inadequate to handle a steady stream of rural migrants. They leave their homes looking for livelihood and end up in slums not fit for human beings. Investment in urban infrastructure should be considered as a contribution to the project of improving the productivity of Indian labour.

Perhaps, it is unrealistic to expect that India will follow in the footsteps of China. The world is different today than it was in the 1980s. Yet, India, in the eyes of the world, is one bright hope. For millions of Indians who have longed for ‘Acche Din’ since the last election, it would be a crushing disappointment if the bright future that the Prime Minister had promised does not arrive in near future. Frustrated aspirations have the potential to cause a huge social upheaval. Policymakers need to ensure this does not happen.

Note:

1. A gram panchayat is the cornerstone of a local self-government organisation in India of the Panchayati Raj system at the village or small-town level and has a sarpanch as its elected head.

Further Reading

• Brandt, L and X Zhu (2010), ‘Accounting for China’s Growth’, IZA (Institute for the Study of Labor) Discussion Paper No. 4764, February 2010.
• Ghose, AK (2016), India Employment Report 2016: Challenges and the Imperative of Manufacturing-Led Growth, Institute for Human Development, Oxford.