In the recent past, India’s jobs crisis has come to the fore. There is no specific reason for it, given that India has had a jobs crisis for a while now, with the media discovering it only recently.
As per the OECD Economic Survey on India released earlier this year, close to 30 per cent of India’s youth (individuals in the age group 15-29) are neither employed nor in education or training. Data from the Labour Bureau suggests that only three out of five Indians who are looking for job all through the year, find one. In rural India, only half of the individuals looking for a job all through the year, are able to find one.
Long story short—India has a jobs crisis. And it has been there for a while, despite the media discovering it only recently.
Arvind Panagariya, while he was the Vice-Chairman of the Niti Aayog, was asked on more than a few occasions, on why India had a jobs problem. As late as August 25, 2017, around a week before his term at the Niti Aayog came to an end, he remarked: “The major impediment in job creation is that our entrepreneurs simply do not invest in labour intensive activities.”
It’s not fair to blame just the entrepreneurs. An entrepreneur will go in areas where he sees value and in the process if he ends up creating jobs, then so be it. The bigger question is why have entrepreneurs stayed away from labour intensive activities.
Given India’s population, the country’s natural comparative advantage should have been in large-scale, labour intensive manufacturing. But the sectors like automobiles, engineering goods, pharmaceuticals and software, where we have done well, are both capital and skilled labour intensive.
As far as labour intensive sectors like apparels, food-processing and footwear, are concerned, these sectors haven’t really progressed in India. Let’s take the case of apparels. This is a hugely labour-intensive sector. As per an estimate made in the Economic Survey, the sector creates nearly 24 jobs for every lakh of investment. This is a sector which is 80-fold more labour intensive than automobiles and 240-fold more labour intensive than steel.
Apparel exports grew rapidly in the East Asian economies and pulled them out of poverty. As the Economic Survey points out: “The average annual growth of apparel exports was over 20 per cent, with some close to 50 per cent.” In the Indian case textiles and readymade garments exports have more or less stayed flat between 2013-2014 and 2016-2017.
The question is why? The labour costs in India are similar to that of Bangladesh, but cheaper than that of Indonesia, Vietnam and China. But the logistic costs are the highest in India at $7 per kilometre of road transport (to be able to get the merchandise to the ports from where it can be exported).
The logistic costs in China are at $2.4-2.5 per kilometre. In Bangladesh they are at $3.9 per kilometre. In Vietnam, the logistics costs are the same that as of India, but delivery to the east cost of the United States takes 14 days. It takes anywhere between 21 to 28 days from India. The turnaround time is greater in case of India.
What does not help is the fact that most Indian apparel firms are very small. As per the Ease of Doing Business—An Enterprise Survey of Indian States close to 85 per cent of the firms employ less than eight workers.
As the Survey points out: “At one extreme, enterprises with less than eight workers employ more than four-fifths of the apparel workforce in India and less than 1% in China. At the other extreme, nearly 57% of the workforce in China is in enterprises larger than 200 workers but barely 5% in India. The Chinese apparel industry is highly competitive with $187 billion in exports compared with just $18 billion for India in 2014.” Hence, the ability of Indian firms to execute large orders is limited.
The apparels sector, which has the potential to create a huge number of jobs, hasn’t been creating them. Most firms in this sector, start small and continue to remain small. One reason for this lies in the fact that historically, labour intensive sectors in India came under small scale industries up until 2000. Clearly, the historical hangover persists.
As the Enterprise Survey of Indian States points out: “The largest enterprises—employing more than 200 people—are mostly concentrated in industries like manufacturing of motor vehicles, trailers, transport equipment, pharmaceuticals and textiles.”
The question is why do firms in labour intensive sectors start small and continue to remain small. The answer to this question lies in something that Jagdish Bhagwati and Arvind Panagariya wrote in India’s Tryst with Destiny: “The costs due to labour legislations rise progressively in discrete steps at seven, ten, twenty, fifty and 100 workers. As the firm size rises from six regular workers towards 100, at no point between the two thresholds is the saving in manufacturing costs sufficiently large to pay for the extra costs of satisfying these laws.”
The point here is that Pangariya knew why entrepreneurs stayed away from labour intensive sectors. Hence, economists also tend to get rhetorical once they are a part of the government.
To conclude, if the government wants to get labour intensive sectors going, then major labour law reforms are necessary. Along with that the logistics costs need to fall. And that can only happen with an improvement in physical infrastructure. There are no short cuts here, really.
The column originally appeared in DNA on Oct 26th, 2017.