Far from being a lost decade, the period between 2004-05 and 2011-12 saw the shoots of inclusive growth, since non-agricultural employment grew reasonably and a structural shift towards industrial and services sector employment intensified, according to National Sample Survey data on employment.

The non-farm sectors drove employment generation. Such employment increased between 1999-2000 and 2004-05 by 37.5 million over the five-year period. The increase was 7.5 million new jobs in industry and services per annum. Similarly, the number of non-agricultural jobs between 2004-05 and 2011-12 increased by 52 million over the seven-year period—that is, by 7.5 million per annum again (despite the fact that total employment hardly increased at all between 2004-05 and 2009-10 and manufacturing employment fell by 3 million). In other words, there was no difference in the number of jobs created in industry and services together between 1999-2000 and 2004-05 on the one hand, and 2004-05 and 2011-12 on the other.

The more important point is that there has been a faster pace of structural transformation since 2004-05, compared with the preceding five years. By contrast, there was structural retrogression between 1999-2000 and 2004-05. Of the 60 million addition to the workforce that took place between 1999-2000 and 2004-05, one-third (20 million) was in agriculture. This is an indication of growing rural distress on account of the slow growth in agriculture between 1996 and 2005. By contrast, between 2004-05 and 2009-10, 23 million workers, mostly landless labourers, left agriculture.

It was only after 2004-05 that there was an absolute decline in the number of workers in agriculture, for the first time in the history of India. The share of the agricultural workforce in the total workforce has been declining for several decades (from 60% in 1999 to 49% in 2001-12). However, the absolute number in agriculture had always grown to 2004-05. Not only did the number of people in agriculture fall by 23 million in 2009-10 (compared with 2004-05), but an additional 13 million left agriculture in the two years between 2009-10 and 2011-12. In other words, a Lewisian structural shift in employment away from agriculture and towards non-agriculture hastened significantly after 2004-05.

The challenge since 2004-05 has been that millions were leaving agriculture, and had to be absorbed in manufacturing, construction and services. So not only the new entrants to the labour force, but also those who were leaving agriculture had to be absorbed (although there was some overlap between these two).

Construction employment increased only by 8 million (from 17 million to 25.6 million) from 1999-2000 to 2004-05. But it grew much more sharply after 2004-05 to 50 million by 2011-12; an increase from under 2 million a year to 7 million a year. Infrastructure investment was driving employment in construction. When workers left the agricultural sector, they mostly joined construction activity. Part of this increase in construction employment was in housing real estate, but most was accounted for by infrastructure (roads, bridges, airports, ports, energy projects) investment. Thus, rural areas saw growth in non-farm construction-related employment as government investment grew in rural housing for the poor (Indira Awas Yojana), rural roads (Prime Minister’s Gramin Sarak Yojana and Mahatma Gandhi National Rural Employment Guarantee Act, or MGNREGA), and other rural construction investment (MGNREGA). In addition, $500 billion worth of infrastructure investment materialized during the 11th Five-Year Plan (2007-2012), 62% through public investment.

The recent Crisil report’s prophecy that employment in manufacturing will fall in the next five years, and workers will go back to agriculture, is baseless. If anything, the 12th Plan aims to invest $1 trillion in infrastructure in 2012-2017, which should sustain the pace of employment growth. Besides, employment in manufacturing grew by an unprecedented 9 million in two years after 2009-10.

The increase in employment was accompanied with rising wages. Wages were stagnant between 1999-2000 and 2004-05, especially rural wages. However, two factors drove wages upwards after 2004-05. First, as a result of MGNREGA, a floor wage was created in the rural areas. This coupled with an increasing demand for labour in the construction sector led to a tightening of the labour market in both rural and urban areas. This resulted in a rise in real wages. This rise in rural wages led to a knock-on effect on urban unskilled wages as well. A second reason for the rise in wages for unskilled and semi-skilled workers was the demand for labour by the construction sector.

Why did non-agricultural employment rise rapidly between 2009-10 and 2011-12? After 2004-05, there was a rise in consumption expenditure all the way to 2011-12. This rise of consumption expenditure shows itself in a decline in the poor from 407 million (Tendulkar line) in 2004-05 to 356 million in 2009-10, and further to 269 million (2011-12). For the first time in the history of India, there was a decline in the absolute numbers of the poor after 2004-05. Until then, for nearly 30 years (between 1973-74 and 2004-05), the incidence of poverty fell, but the absolute numbers of the poor remained the same (322 million poor in 1973-74 and 302 million poor in 2004-05, by the Lakdawala poverty line).

Poverty fell because real wages rose. This rise in real wages and increase in consumption expenditure has driven demand for consumer goods at the bottom of the pyramid, as poor people emerged out of poverty.

When poor people come out of poverty they demand simple manufactured consumer goods and telecommunication services. The rise in consumption expenditure is reflected in the rise in demand for manufactured goods: food processing (for example, biscuits, milk); leather goods (for example, shoes and sandals); furniture (for example, plastic chairs and tables, simple wooden furniture); textiles; and garments and apparel. The newly non-poor are also likely to buy mobile phones, and as a result, telecom services have seen a rise in value-added services. All these product areas and services have seen a dramatic increase in employment in the two years since 2009-10, primarily because these simple, low-end products are produced in the unorganized sector, which is precisely where the employment has increased.

Santosh Mehrotra is director general at the Institute of Applied Manpower Research, Planning Commission.

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