Media coverage of my Brookings report, India @75: Replete with Contradictions, Brimming with Opportunities, Saddled with Challenges, has mostly focused on India’s rising industrial concentration. I am glad a debate on this important issue has taken off. Here, I wish to put forward another set of issues that received less attention. These relate to educating our children better, skilling our youth for better-quality jobs, and restoring the female labour force participation rate.
Why are these issues central to India’s macroeconomic outlook? They affect our ability to achieve potential output without incurring inflationary pressures. Formally available statistics on listed-company wage growth appear in double digits, far in excess of the inflation rate. As some analysts observe, this wage spiral is puzzling, given the increasing slack in our overall employment.
Effectively, India’s ‘Phillips curve’—a relationship showing that when the level of unemployment is high, the rate of inflation is lower—seems to have moved up and/or steepened. This reflects a lack of adequate skilled labour for the formal sector, which is outperforming the informal sector, as well as a lack of adequate upgrading of labour skills to take advantage of prospects in the formal sector. Due to this mismatch, India is creating too few jobs relative to the size of its labour force.
One reason is that there are too many low-skilled labourers, especially in agriculture. The substantial subsidization of input factors—electricity, fertilizers, water, credit, among others—to this sector keeps it bloated. By World Bank data, India’s agricultural labour force share was at 45% in 2020, way too large given that the sector’s share in GDP is less than 20%. Further, the sector operates at low efficiency in terms of value addition per worker. Overall, this keeps the distribution of workers low-skilled and unfavourable for India being able to grow at full potential without inducing a wage spiral.
Labour persisting in low-skilled jobs is exacerbated by substantial education gaps for the development of high-skilled labour, in spite of a steady improvement in school enrolments in India since 2006 as per the Annual Status of Education Reports (ASER), and measures for educating the girl child. Some of the recent education gaps are undoubtedly due to extended school closures during covid lockdowns. However, the biggest impact of covid years has been on India’s female labour participation. As per survey data from the Centre for Monitoring Indian Economy, it has declined from 18% in 2016 to sub-11% in 2022, and shockingly to under 7% in urban areas. Even data from the Periodic Labour Force Survey (PLFS) shows that female labour force participation is low in an absolute sense and also relative to most peer countries.
These trends do not augur well for India’s productivity ahead. While the issues are too complex to fix overnight, I propose three steps.
First, the share of low-earning farm labour needs to be pulled lower and transformed in part into better-skilled higher-earning labour. One way is to (i) raise the sector’s presently subsidized costs of inputs to market prices over a period of time, (ii) allow foreign entry into the sector and lift its productivity by lowering tariffs from their currently extraordinary levels of around 35%, and (iii) lower the entry rate of agricultural labour by training the youth for vocational skills in manufacturing and services. The latter could be a flagship project of the Centre dedicated to skills development in partnership with private firms.
Second, the large primary education gaps created in children’s learning during the pandemic need to be decisively addressed. One option is to deliver a grade-by-grade national curriculum for a 30-day remedial summer programme and another enriched 30-day start-of-the-year boot camp for reinforcement. ASER-style surveys could be conducted at pre-summer, end-of-summer and exit-of-boot-camp stages to assess success and identify remaining gaps to help plan further remedial action. A parallel ambitious step could be to set up ‘charter’ or ‘magnet’ public schools in each state providing top-quality science, technology, engineering and mathematics (STEM) education at secondary schooling levels, with screening based on entrance tests. Such schools will help create an aspirational learning path for many less privileged children.
Finally, the call of the hour is to make it easier for women to join and remain in the labour force, especially in urban areas. Given that Indian companies are required to contribute a minimum of 2% of their net profits over the previous three years for Corporate Social Responsibility, the following could be made qualifying expenses: (i) Support for entities that provide education to the girl child and skilling to the young female population; (ii) maternity leaves and primary caregiver relief for spouses that are substitutable to increase the flexibility that mothers have in resuming work; and, (iii) setting up of quality childcare facilities in company premises or neighbourhoods to reduce the domestic burdens of working women.
India’s primary advantage in embracing the China-plus-one challenge is the country’s demographic profile. We must devote more attention to our children, youth and women to realize our demographic dividend fully.
Viral Acharya is professor of finance at New York University’s Stern School of Business and former deputy governor of the Reserve Bank of India.
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