India has been independent for more than 70 years and a republic for 68 years. Between 1950, the year, the country became a republic and 1991, the year, the government initiated economic reforms, the economic size of the country became five times.
By 2014, the economic size of the country was 4.2 times of what it was in 1991. I am forced to stop this comparison at 2014 because India adopted a new GDP series in January 2015 and the GDP data in that series is available only from 2011-2012 onwards. The differentiating point between pre and post 1991 eras, is that the economic growth has been faster post 1991. There is no denying that this economic growth has had huge benefits.
At the same time, it has created its own set of problems as well. In 1990, as per the World Inequality Report 2018, the top 10 % of India’s population earned around 34 % of the national income. By 2016, this had jumped to 55 %. This rise in inequality has happened because the upper echelons of the society have benefitted more from the economic reforms of 1991.
As can be seen from Figure 1, India along with Brazil, have the highest concentration of wealth in the world, after the Middle East. In purchasing power terms, the per capita income of Brazil is 2.3 times that of India.
Source: World Inequality Report 2018.
Inequality is not the only reason to worry about on the economic front. For years, the story of India’s demographic dividend has been sold to the world. Demographic dividend is a period of few decades in the lifecycle of a nation where it’s workforce increases at a faster pace than its overall population. As these individuals enter the workforce, find jobs, earn and spend money, the economy grows at a faster pace and pulls out many people out of poverty.
At least that is how things are supposed to work in theory. Around a million Indians are joining the workforce every month. This is expected to continue for the next decade and a half. The trouble is that there aren’t enough jobs going around. A recent estimate made by the Centre for Monitoring Indian Economy suggests that in 2017, two million jobs were created for 11.5 millions Indians who joined the labour force during the year.
There are other data points also which suggest a lack of jobs. The investment to gross domestic product ratio has been falling for a while now. The capacity utilisation rate of manufacturing firms has stagnated between 70 and 72%. If existing capacities are not being used, there is no reason for firms to expand and create jobs.
Labour intensive export sectors like apparels, gems and jewellery, leather, agriculture etc., have remained flat, over the last few years. Real estate and construction, two sectors which have tremendous potential to create jobs which cater to India’s cheap and largely unskilled labour, are down in the dumps.
For many, agriculture is no longer economically feasible. A discussion paper recently published by NITI Aayog suggests that agriculture contributes 39% of rural economic output, while employing 64 % of the workforce. For agriculture to be economically feasible nearly 8.4 crore individuals need to be moved out of it. This unfeasibility of agriculture has also resulted in landowning castes across the country, wanting reservation in government jobs.
The education scenario continues to be depressing. Children are going to school but aren’t really learning. The latest Annual Status of Education Report (ASER) states: “For the past twelve years, ASER findings have consistently pointed… that many children in elementary school need urgent support for acquiring foundational skills like reading and basic arithmetic.” Given this, even when firms have jobs, they cannot find people with the necessary skillset.
The trouble is that skilling is not happening at the scale that it needs to. The different ministries in the government had accepted a target of training 99,35,470 individuals in 2016-2017. Of this, only 19,58,723 or around less than one-fifth had been trained up to December 2016. It isn’t fair to blame the government for this, given the huge scale required. This needs a total overhauling of our education system with a huge focus on vocational studies.
Further, the Indian firms start small and continue to remain small. Labour laws remain the major culprit on this front. The state of Jammu and Kashmir has 260 labour laws. Other estimates suggest that India has around 200 labour laws in total. A very serious effort is needed at the government’s level to improve, the ease of doing business.
All in all, the scenario that prevails for India’s demographic dividend, is very bleak. And it is this demographic dividend which is expected to take us forward for the next seven decades.
So, India does not have a jobs problem. We are generating enough jobs and everybody is living happily ever after.
Or so seems to suggest a new study carried out by Soumya Kanti Ghosh, Chief Economic Adviser at the State Bank of India and Pulak Ghosh, a Professor at IIM Bangalore. The study uses data from Employees Provident Fund Organisation (EPFO).
In a column in The Times of India, the authors write: “Based on all estimates, we believe that 7 million formal jobs are being added to payroll on a yearly basis.”
This new study has caught the imagination of the media and the politicians in power and is being flagged all around. If seven million jobs are being created in the formal sector every year, India does not have a jobs problem. The informal sector does not have to register with the EPFO. Informal sector is that part of the economy which is not really monitored by the government and hence, it is not taxed.
The informal sector in India, up until now, has been creating a bulk of the jobs. There are various estimates available on this. Ritika Mankar Mukherjee and Sumit Shekhar of Ambit Capital wrote in a recent research note: “India’s informal sector is large and labour-intensive. The informal sector accounts for ~40% of India’s GDP and employs close to ~75% of the Indian labour force.”
The Institute for Human Development, India Labour and Employment Report, 2014, points out: “An overwhelmingly large percentage of workers (about 92 per cent) are engaged in informal employment and a large majority of them have low earnings with limited or no social protection.”
As the Economic Survey of 2015-2016 points out: “The informal sector should… be credited with creating jobs and keeping If unemployment low.” If seven million jobs are being created just in the formal sector, imagine what must be happening in the informal sector. Firms and individuals operating in the informal sector, must be falling over one another to recruit people for jobs they have on offer. But is that really happening?
As I have mentioned in the past, 12 to 15 million Indians are entering the workforce every year. And given that seven million jobs are being created just in the formal sector, the individuals currently entering the workforce must be having a ball of a time, with so much to choose from.
Of course, all this goes against what I have been writing all along about India having a huge jobs problem and the fact that India’s so called demographic dividend is being destroyed. But it also goes against a lot of other data that is on offer.
Jobs are created when companies invest and expand. Let’s first look at the investment to gross domestic product (GDP at constant prices) ratio of the Indian economy. This ratio as I have written in the past has been falling for a while now. Take a look at Figure 1:
As is clear from Figure 1, investment as a part of the overall economy (represented by the GDP) has been falling over the years. How are seven million jobs being created in this scenario? In fact, let’s take a look at the incremental investment to incremental GDP ratio, over the years, in Figure 2. This basically plots the ratio of the increase in investment during the course of a year, against the increase in GDP during that year.
The incremental investment to incremental GDP Ratio between 2013-2014 and the current financial year (2017-2018) has varied between 8-25 per cent. India seems to have discovered a new economic model of creating jobs without a pickup in investment, i.e., if seven million jobs are indeed being created every year.
Companies tend to expand when they are unable to meet the demand from their current production capacity. The Reserve Bank of India carries out capacity utilisation surveys of manufacturing firms every three months. The latest survey for the period April to June 2017, found that capacity utilisation stood at 71.2 per cent. In fact, capacity utilisation has varied between 70 and 72 per cent for a while now.
As economist Madan Sabnanvis writes in his new book Economics of India-How to Fool all People for all Times: “The capacity utilisation rate has gotten stuck in the region of 70-72 per cent which means two things: first demand is absent, and second, even if it does increase, production can be scaled up without going in for fresh investment.”
The question is how are jobs being created without expansion?
In fact, the data from Centre for Monitoring Indian Economy suggests that new projects announcement in the period of three months ending December 2017, came in at a 13-year low. Take a look at Figure 3.
The new investment projects announced during the period of three months up to December 2017, were the lowest since the period of three months ending June 2004. This is a clear indication of the fact that the industry is not betting much on India’s economic future because if they were they would be expanding at a much faster rate and announcing more investment projects than they currently are.
The industrialists may say good things about India in the public domain and in the media, but they are clearly not betting much of their money on the country. And this brings us back to the question, if the industry is not investing, how are jobs being created?
Let’s take a look at the money lent by banks to industry, in Figure 4.
The bank lending to industry has been falling over the years. In fact, lately, it has been in negative territory, which means that the overall bank lending to industry has contracted.
This means that on the whole, banks haven’t lent a single new rupee to industry, lately. And that is another good example of industries not expanding. This brings us back to the question: how are seven million formal jobs being created then?
One argument that can be offered against Figure 5 is that over the years many corporates haven’t been borrowing from banks to meet their funding needs. This is true. But this is largely limited to large corporates. Global experience suggests that jobs are actually created when micro, small and medium enterprises expand, and become bigger. In order to do that, they need to borrow.
How does the scene look when we leave out large corporates? Let’s take a look at Figure 5.
Bank lending to micro, small and medium enterprises, has been in negative territory for a while now. This basically means that the overall lending to these enterprises has contracted and not a single new rupee has been lent by banks to these firms. How are these firms investing and expanding and creating jobs?
Of course, manufacturing is not the only sector creating jobs. The services sector creates a huge number of jobs of India. One of the biggest job creators in the services sector are real estate companies, which are currently down in the dumps. The construction sector is also a heavy job creator, but with real estate being the way it is, construction is not doing too well either. The information technology sector is looking to shed jobs at the lower end, with robots taking over. Tourism was never a heavy employer of people, in the formal sector, which is what we are talking about here.
Arvind Panagariya, who was the vice chairman of the NITI Aayog, until August 2017, maintained during his tenure, that India was not creating jobs, because India’s entrepreneurs were not investing in labour intensive activities.
In fact, on August 25, 2017, a few days before his tenure ended, Panagariya said: “The major impediment in job creation is that our entrepreneurs simply do not invest in labour intensive activities.”
This becomes clear from India’s exports. If one looks at labour intensive exports like textiles, electronic goods, gems & jewellery, leather and agriculture, exports have more or less remained flattish over the last few years. (For a detailed exposition on this, you can click here). So, how are jobs being created with exports remaining flat in labour intensive sectors? Further, if we do believe that seven million jobs are being created every year, then was one of the main economic advisers to the prime minister, wrong all along?
Also, if so many jobs are being created, why does India have so much underemployment. Take a look at Table 1.
Table 1: Percentage distribution of persons available for 12 months based on UPSS approach
What does Table 1 tell us? It tells us that in rural India, only 52.7 per cent of the workforce which was looking for work all through the year, actually found it. 42.1 per cent of the workforce found work for six to 11 months. If there are so many jobs being created, why are these people finding it difficult to find work all through the year, is a question worth asking. Further, if so many people are finding jobs, why has economic growth slowed down over the years. Are these people earning and not spending money? Also, if there are so many jobs going around, why have the land-owning castes across the country been protesting and demanding reservations in government jobs. Is there an explanation for that?
In the end, there is way too much evidence against not enough jobs being created. Trying to brush that aside, on the basis of a shaky study, will do the nation way too much harm. As I keep saying, the first step towards solving a problem is acknowledging that it exists, otherwise there are enough people selling pakodas, bondas, sandwiches, timepass and what not, outside our offices. But that doesn’t really solve the problem.
Postscript: In order to understand the basic methodological flaws in the study carried out by Ghosh and Ghosh, I suggest you read this.
In order to understand the basic problems in using EPFO data to estimate jobs, I suggest you read this.
Late last week, the central statistics office of the government of India declared its forecasts for the gross domestic product (GDP) growth for 2017-2018. The GDP is a measure of economic size and the GDP growth is a measure of economic growth.
The GDP growth for 2017-2018 is expected to be at 6.5 per cent. It is the slowest economic growth that the country will see after Narendra Modi took over as the prime minister. Take a look at Figure 1, which plots GDP growth.
This slowdown is a clear impact of the negative impacts of demonetisation continuing into 2017-2018, which was followed by the terribly botched up implementation of the Goods and Services Tax (GST).
Take a look at Figure 2, which basically plots the growth of various sectors.
Figure 2 tells us that agriculture and industry in 2017-2018, will slow down considerably in comparison to 2016-2017. Within industry, manufacturing will slow down considerably as well. The growth of the services sector continues to remain robust. Within the services sector, the public administration, defence and other services, which is basically a representation for the government, grew the fastest at 9.4 per cent (though it slowed down in comparison to last year).
What this basically means is that a fast growth in government expenditure in 2016-2017 and 2017-2018, pushed up economic growth, otherwise the economic growth would have been lower than what it finally turned out to be.
Now let’s take a look at investment to GDP ratio in Figure 3.
For the year 2017-2018, the investment to GDP ratio is expected to be at around 29 per cent of the GDP. This ratio has been falling since 2011-2012 and there have been no signs of improvement since then. I have taken data from 2011-2012 onwards because the new GDP series data being used since January 2015, has a back series starting from 2011-2012 only.
In fact, the data from Centre for Monitoring Indian Economy suggests that new projects announcement in the period of three months ending December 2017, came in at a 13-year low. Take a look at Figure 4.
The new investment projects announced during the period of three months up to December 2017, were the lowest since the period of three months ending June 2004. This is a clear indication of the fact that the industry is not betting much on India’s economic future because if they were they would be expanding at a much faster rate and announcing more investment projects than they currently are. The industrialists may say good things about India in the public domain and in the media, but they are clearly not betting much of their money on the country.
Unless, investment picks up, jobs can’t be created. And without jobs the one million youth entering the workforce every month or India’s so called demographic dividend, is likely to turn into a demographic disaster. Indeed, that is a very worrying point.
To conclude, the GDP data for 2017-2018, brings us back to that basic question: Where are the jobs?
Public rallies against imported Chinese goods are held quite regularly these days, across different parts of the country. India’s dependence on Chinese goods has only grown over the years. This can be made out from Figure 1, which plots India’s imports from China every quarter, for the last few years.
Figure 1 tells us very clearly that India’s imports from China have grown over the years. Having said that, it doesn’t make sense to look at imports in isolation given that India exports stuff to China as well. Hence, Figure 2 plots India’s trade deficit with China (i.e. the difference between our total imports from China and our total exports to it).
Figure 1: Figure 2 clearly shows that India’s trade deficit with China has grown over the years. This means that we import much more from China than we export to it. A major reason for this lies in the fact that most of the Indian firms are small in size. Take a look at Figure 3.
Figure 2: What does Figure 3 tell us? It tells us very clearly that close to 85 per cent of Indian manufacturing firms are small. They employ less than 50 workers. In case of China, only around 25 per cent of the manufacturing firms are small. Also, in case of China, more than 50 per cent of manufacturing firms are large i.e. they employ more than 200 workers. In the Indian case, around 10 per cent of the manufacturing firms are large. And India has very few middle-sized firms which employ anywhere between 50 to 200 workers.
Figure 3: Distribution of manufacturing workforce among small, medium and large firms in India and China Given this small size, Indian firms lack economy of scale, which is basically a proportionate fall in costs gained with increased production. Hence, Indian products are costlier than Chinese products. In a recent newsreport, Blooomberg quotes a small shopkeeper as saying: “India-made lights cost twice as much… Customers aren’t willing to pay that.”
The other factor that helps make Chinese imports cheaper is the huge fall in international shipping costs over the years. This is a point that Tim Harford makes in his new book 50 Things That Made the Modern Economy: “Goods can now be shipped reliably, swiftly and cheaply: rather than the $420 that a customer would have paid… to ship a tonne of goods across the Atlantic in 1954, you might now pay less than $50 a tonne.”
This has had a major impact on the way goods are manufactured and business in general is carried out. As Harford writes: “Manufacturers are less and less interested in positioning their factories close to their customers – or even their suppliers. What matters instead is finding a location where the workforce, the regulations, the tax regime and the going wage all help make production as efficient as possible. Workers in China enjoy new opportunities; in developed countries [and developing countries] they experience new threats to their jobs; and governments anywhere feel that they’re competing with governments everywhere to attract business investment. On top of it all, in a sense, is the consumer, who enjoys the greatest possible range of the cheapest possible products – toys, phones, clothes, anything [emphasis added].”
The point is that the Chinese factories operate on a very large scale and that makes their products cheaper than the ones being made in India. The fact that transportation costs are low, helps as well.
Those against Chinese products want this dominance of Chinese products on India to end. As Arun Ojha, national convener of Swadeshi Jagran Manch recently told Bloomberg: “Our youth are losing jobs and we are becoming traders of Chinese products.”
It is important to dissect Ojha’s statement. What he is essentially saying is that because Indians are buying Chinese products, Indian industry is shutting down and the Indian youth are losing jobs. So, what is the way out? The way out is that we stop buying Chinese products and start buying Indian ones. Will this help?
This is where things are no longer as straightforward as they seem. The straightforward interpretation here is that, as Indians stop buying Chinese goods and start buying Indian goods, Indian industry will flourish, and Indian youth will find jobs. Now only if it was as simple as that.
Henry Hazlitt discusses a similar situation in his brilliant book Economics in One Lesson, in the context of United Kingdom of Great Britain and United States of America. As he writes: “An American manufacturer of woollen sweaters… sells his sweaters for $30 each, but English manufacturers could sell their sweaters of the same quality for $25. A duty of $5, therefore, is needed to keep him in business. He is not thinking of himself, of course, but of the thousand men and women he employs, and of the people to whom their spending in turn gives employment. Throw them out of work, and you create unemployment and a fall in purchasing power, which would spread in ever-widening circle.”
An American manufacturer of sweaters can sell his sweaters for $ 30 per piece. At the same time, an English manufacturer can sell the same sweater for $25 per piece. Hence, the American manufacturer charges $5 or20 per cent more for the same product than the British one. Of course, if both the products are allowed into the American market, the consumer will buy the cheaper one. This would mean that the British manufacturer would flourish. In the process, the American manufacturer might have to shutdown and this would mean a loss of a huge number of jobs.
The American government would obviously be bothered about the American manufacturer and the American jobs. Given this, to ensure that the American manufacturer can compete, the American government needs to impose a duty of $5 on the British manufacturer. This will mean the British manufacturer will also sell sweaters for $30. In the process, the American manufacturer would be able to compete, and jobs would be saved.
This trouble with this argument, as convincing as it sounds, is that it does not take the point of view of the consumer buying the sweater into account. As Hazlitt puts it: “The fallacy comes from looking merely at this manufacturer and his employees, or merely at the American sweater industry. It comes from noticing only the results that are immediately seen, and neglecting the results that are not seen because they are prevented from coming into existence.”
If the consumer ends up paying $30 per sweater, he would be paying $5 more. This basically means that he would have $5 less to spend on other things. As Hazlitt writes: “Because the American consumer had to pay $5 more for the same quality of sweater he would have just that much less left over to buy anything else. He would have to reduce his expenditures by $5 somewhere else. In order that one industry might grow or come into existence, a hundred other industries would have to shrink. In order that 50,000 persons might be employed in a woollen sweater industry, 50,000 fewer persons would be employed elsewhere.”
If the British manufacturer was allowed a level playing field and sweaters continued to sell at $25 per piece, the American manufacturer would soon have to shutdown. The loss of these 50,000 jobs would be noticed. This would be the seen effect of letting the British sell in the American market.
If these jobs are to be protected, then even the British sweaters would have to sell at $30 per piece. This would leave the consumer with $5 less, which he could have spent on something else, otherwise. This lack of spending would impact other industries and jobs would be lost there. It’s just that the loss of these jobs would not be so visible as was the case with the American sweater industry. This is the unseen effect.
Now replace the United States with India and the United Kingdom with China in the above example, the entire logic remains the same. If Indians move towards buying more Indian goods than Chinese, they will end up paying more for those goods. This will leave them with less money to spend elsewhere. This would impact other industries, where jobs would be lost. It’s just that these job losses won’t be so obvious.
This is a rather obvious point that most people miss out on while analysing this issue. There is a certain opportunity cost of money. As Dan Ariely and Jeff Kreisler write in Dollars and Sense-Money Mishaps and How to Avoid Them: “The opportunity cost of money is that when we spend money on one thing, it’s money that we cannot spend on something else, neither right now nor anytime later.”
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.