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One Factor Holding Back India’s Long-Term Growth Potential
It is that time of the year when professional economists put out their growth forecasts for India for the year 2023 and the next financial year (2023-24). The World Bank believes India will grow at 6.6% in 2023-24. The Reserve Bank of India (RBI) has forecast that growth from April to June 2023 will stand at 7.1% and at 5.9% for the following three months.
The International Monetary Fund has forecast a growth of 6.1% for 2023-24. In comparison, Nomura has forecast that India will grow by 4.5% in 2023, attributing this to “global headwinds amid the domestic K-shaped recovery [something that this newsletter has also extensively dwelt on].”
I find it very difficult to get my head around how economists manage to forecast on something as complicated and big as the economy, right up to the last decimal point. I guess this is because people like confident experts making confident forecasts. The world deserves the experts it gets.
That apart, my feeling is that India should be able to grow by 5-6% in 2023-24 simply because the economy is yet to catch up with the pre-pandemic growth trajectory. In real terms (adjusted for inflation), the per-capita income in 2022-23 is expected to be at Rs 1.14 lakh. This is only marginally better than the per-capita income of Rs 1.08 lakh in 2019-20.
In the years to come, the one major factor holding back Indian economic growth will be the falling labour force participation rate. The rate has been falling for nearly a decade and a half now and isn’t a recent phenomenon.
The labour force participation rate is defined as the ratio of the labour force to the population greater than 15 years of age. The labour force comprises individuals 15 years or older who are employed or are unemployed and willing to work and actively looking for a job.
So, what does this mean? It means that every year the proportion of individuals over the age of fifteen who are a part of the Indian labour force is shrinking. One reason for this could possibly be individuals spending more time in school and college.
The other major reason for this is that many individuals simply stop looking for a job when they cannot find one and drop out of the labour force in the process. Even to be counted as unemployed, individuals must actively look for a job.
Now let’s compare India’s labour force participation rate to the rates of a few other countries.
Clearly, India’s labour force participation rate is very low. Of course, other than Bangladesh, these countries have a per-capita income higher than India’s. So, a good exercise here would be to check the labour participation rate of these countries when they had a per-capita income similar to India’s present per-capita income.
I carried out this exercise in a recent piece I wrote for the Views page of Mint. Nonetheless, given the limitations of space there, I will get into much more detail here.
So, data from the World Bank suggests that India’s per capita income (in constant 2015 dollars) in 2021 stood at around $1,937. What was the labour force participation rate in the countries considered above (except Bangladesh) when their per capita income was similar to India’s per capita income in 2021?
South Korea had a per capita income of $1,977 in 1970. However, World Bank data for labour force participation rate is available from 1990 onwards. The same data problem happens in the case of Brazil as well.
China had a per-capita income of $1,910 in 1998 and had a labour participation rate of 77.3%. Vietnam had a per capita income of $1,927 in 2009 and had a labour participation rate of 76%. Indonesia had a per capita income of $1,944 in 2002. It had a labour participation rate of 66%. Clearly, India’s economic growth is more unequally distributed than the countries considered above.
Let’s dig deeper into the data and consider male and female labour participation rates separately. The following chart plots the male labour participation rate across different countries.
The labour force participation rate for Indian males in 2021 stood at 70%, which was higher than that of Brazil at 68%, and not much less than that of other countries. So, the real story lies in the female labour participation rate.
This chart tells us the real story. India’s female labour participation rate in 2021 stood at 19%. It was lower than that of Bangladesh at 35%. It was also lower than that of Saudi Arabia at 31% (not in the chart). What this tells us is that less than one in five Indian women aged over 15 are a part of the labour force. And that is very worrying.
Now, look at the following chart, which plots the Indian female labour participation rate over the years.
The female labour participation rate in India peaked in 2005 at 32%, which means that around one in three Indian women over the age of 15 had been a part of the labour force at that point in time.
It has since fallen to 19.2% in 2021. In fact, data from the Centre for Monitoring Indian Economy puts the female labour participation rate in December 2022 at 9.6%, meaning that less than one in 10 women over 15 are a part of the labour force.
So, India had a low female labour participation rate to start with, and even that has fallen over the years. (The World Bank data for 2022 should not be as low as that of CMIE, but both show a falling trend).
The question is why. One explanation offered has been that in recent years Indian women have been getting increased education opportunities. The other common explanation is that with men making more money, women don’t have to step out of their homes to work. (The other version of this for the well-to-do English-speaking readers of this newsletter might be that with the breakdown of joint families, one parent needs to stay at home to take care of the kids. And that, of course, can’t be the man of the house).
Further, as Ashoka Mody writes in India is Broken—And Why It’s Hard to Fix: “However, the majority of Indian women who stopped looking for work [and hence dropped out of the labour force] were older than twenty-five years... They were typically from low-income families… Mechanization of agriculture had displaced them, and they had few work options once their husbands migrated to the cities to work on construction sites, in restaurants, or as street vendors.”
In fact, countries which have done well on the female labour participation rate front have had thriving labour-intensive export sectors. As Mody writes: “East Asian female labour force participation rates have been high, as… women have been the majority of the workers in industries such as electronics assembly, textiles, garments and footwear.”
Now let’s look at the charts which plot India’s export performance of when it comes to labour-intensive export sectors, starting with the exports of textiles and readymade garments over the years.
Exports of readymade garments in 2021-22 were similar to exports in 2014-15. Textile exports took off in 2021-22 but had moved within a narrow range in the decade before that. Both these sectors can be major job creators.
As the former chief economic adviser Arvind Subramanian wrote along with Rashmi Verma in a June 2016 column in The Indian Express: “Every unit of investment in clothing generates 12 times as many jobs as that in autos and nearly 30 times that in steel.”
Now let’s take a look at leather footwear exports.
Footwear exports had been flattish even before covid hurt exports.
I couldn’t find separate data for electronics assembly. Nonetheless, exports of electronic goods have been growing and have doubled over the last decade.
So, clearly, the formula that has worked for other countries as they have gone from being developing countries to becoming developed countries hasn’t really worked for India. In fact, this is why Bangladesh has a higher female labour participation rate than India. Look at the following chart, which plots the exports of readymade garments carried out by India and Bangladesh.
Bangladesh exports more readymade garments than India and has been doing so for a while now. As Mody writes: “If jobs suited to their abilities had existed, jobs like the ones offered by Bangladesh’s garment factories, as many as fifty million Indian women sitting on the sidelines might have taken up such work to supplement their meagre and unstable family incomes.”
Of course, it needs to be said here that readymade garments export forms more than 80% of Bangladesh’s exports. In that sense, the country is a one-trick pony on the exports front.
So, what's the way out of this? Over the last few years, several economists have repeatedly pointed out that businesses have to get out of China due to rising labour costs. The argument made is that India can capture the export-oriented industries that China is vacating because of a labour cost disadvantage. But as Mody writes: “As China ceded ground, Vietnam… has filed that space.”
The trouble is that Indian politicians and bureaucrats have always been more interested in heavy capital-driven industry, which throws up more ribbon-cutting opportunities. This includes the recent Production Linked Incentive (PLI) scheme. While, the scheme is well-intentioned, it’s ability to create mass-employment remains limited. This extreme focus on heavy-capital driven industry needs to change.
Despite all this, a new opportunity might present itself. As things stand, in the post-covid world, American politicians might encourage (and perhaps force) American companies to gradually get out of China.
As The Economist put it recently: “Economic conflict with China looks increasingly inevitable.” Over the decades, as China became the factory of the world, the hope among the rich Western countries was that as China got more integrated with the global economy, it would become more democratic as well. But that hasn’t really happened, and from the looks of it, it seems like Xi Jinping will stay at the top for a few more years.
This is a topic that requires a more detailed discussion, and I will probably try and do that in the coming months. Nonetheless, the point is that an opportunity may present itself again on the exports front, and India needs to be ready to cash in on it. This can be a major way of driving up labour-intensive exports, and hence, jobs in general and female labour participation rate in particular. Only when more jobs are created will more women step out of their homes and take on paid work.
Further, there is a general reluctance among many companies to employ young women. Incentives need to be set in place to set this right.
In a recent conversation I had with, Viral Acharya, a former deputy governor of the Reserve Bank of India and currently a Professor of Economics at New York University, he made several suggestions.
First, he suggested that companies should be allowed to consider the salary paid during pregnancy leave as a part of their corporate social responsibility expenditure.
Second, more women must be encouraged to study technical and management subjects in college. Third, with a massive UPI infrastructure in place, more women entrepreneurs who hire other women need to be encouraged.
Fourth, the expenditure of firms on setting up day/child care centres for employees should also be made qualifiable under corporate social responsibility. In fact, companies can be encouraged to finance the growth of day-care centres, and this expenditure should be eligible under corporate social responsibility.
Finally, like all socio-economic-political issues, this is a complicated issue. Hence, just one 2,000-word piece on the issue with a few graphs cannot deal with all the problems stemming from it and put forward the solutions as well.
As Maggie Nelson stated in The Argonauts, we live in a world that is ‘frantic for resolution’ to every problem that is presented. The trouble is everything that needs to be sorted cannot always be sorted.
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