Countering India’s labour market imbalances
India is dealing with slow job creation in some sectors and shortage of skills in others. These imbalances need to be checked
With less than a year remaining for 2019 Lok Sabha elections, the issue of jobs has come into focus. While economic growth has been impressive over the last couple of decades, job creation has been relatively slow. The increase in the share of young adults in total population, often called India’s “demographic dividend”, has turned out to be a problem rather than an asset.
Whether or not job creation has slowed down in recent years has been debated vigorously, primarily owing to the poor quality of jobs data. However, a recent Mint article by Udayan Rathore and Pramit Bhattacharya, drawing on multiple data sources, clearly shows that job opportunities in India are, at present, limited, with the average annual addition to regular jobs during 2012-16 falling to 1.5 million from 2.5 million in 2004-12. Besides, the authors show that job creation in India’s organized manufacturing sector experienced a sharp fall in 2012, later recovering only to a level considerably below any prior year during 2006-12. Furthermore, the share of regular workers with any form of social security has declined from 45% in 2011-12 to 38% in 2016.
The observation by some commentators about India’s jobless growth isn’t new. NITI Aayog’s Action Agenda (AA), published over a year ago, attempted to counter that claim. It argued that the unemployment rate, calculated by whichever method one likes, has been fairly low. According to the AA, underemployment and poor job quality have been the real problems. While nobody doubts the seriousness of these problems, the unemployment issue cannot be disregarded. No formula for the unemployment rate factors in India’s low labour force participation rate—the proportion of working-age people looking for jobs or working. It stands at its lowest in two decades, at 54%, compared to 62% in the late 1990s (it is currently around 70% in Brazil, China and Indonesia).
The AA, however, has provided several good ideas for job creation, including labour law reforms at the state level, recognizing the difficult national political landscape as well as the wide cross-state variation in the nature of political constraints. Recent progress in this regard includes raising the minimum firm-level employment threshold for the application of the Industrial Disputes Act (that puts severe constraints on the hiring and firing of workers) from 100 to 300 workers in Andhra Pradesh, Haryana, Madhya Pradesh, Maharashtra, Rajasthan and Uttarakhand. The AA has also identified labour-intensive sectors, such as apparel, electronics, food processing, gems and jewellery, financial services, and tourism, where employment needs to be encouraged. Furthermore, the report emphasizes the role of exports in job creation and recommends establishing coastal employment zones (CEZs), similar to China’s special economic zones (SEZs), which need to be provided with relatively flexible regulatory schemes for land and labour.
The recent increase in tariffs on entry-level labour-intensive products, however, amounted to India’s open acceptance of failure to grasp its natural comparative advantage. But this situation will probably be rectified, at least partially, by a recent national labour-law reform. This reform allows workers to be employed on fixed-term contracts at wages and benefits similar to those of permanent workers, thereby providing producers flexibility in responding to demand and technology shocks to compete with their foreign rivals.
India’s situation is one of job shortages in the aggregate, but not in every sector. There are some real imbalances across the economy, with some key sectors facing a shortage of skills and personnel. Such shortages are primarily in social services like health and education. The quality of these services, especially those available to low-income, remote and rural households, is shockingly low owing to the scarcity of quality doctors, nurses and teachers. While robotization can displace jobs in sectors facing adequate labour supply, it can be quite useful in filling the gap created by the shortage, if any, of skilled personnel. Another recently released NITI Aayog document, titled “National Strategy For Artificial Intelligence #AIforall”, proposes a strategy based exactly on such a principle of filling up the skill gap. For example, specialized software can be used to diagnose diseases (and prescribing appropriate medications) or grading students’ written work and providing feedback, thereby enabling large-scale online education.
India’s information technology (IT) sector, until recently, had been able to create a number of high-skilled jobs due to a significant amount of offshore outsourcing by developed countries. In future, the support and maintenance services for AI, rather than IT, may be in demand, given that IT support itself is being robotized. For its future growth, India’s IT (and AI) sector needs to reinvent and position itself in a more innovative role, which will require considerable capacity building. The new NITI document provides some specifics in this regard. However, like the AA, this document does not take seriously any job displacement threats from AI, and, therefore, is unable to incorporate it in its overall AI strategy.
Thus, there are serious imbalances, varying across sectors, between the availability of jobs and the supply of skills and workers. While good ideas to deal with them exist both within and outside the government, implementation is key. This is where the government often does not perform well. Think the goods and services tax.
Devashish Mitra is professor of economics and Cramer professor of global affairs at the Maxwell School of Citizenship and Public Affairs, Syracuse University. Comments are welcome at email@example.com
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