Jobless growth: Wrong questions beget wrong answers

Illusions & Delusions

A popular narrative, often heard, is that the Indian post-liberalisation growth story has been flawed due to jobless growth. Most media columnists blame this on a lack of adequate policy reform or policy focus for promoting manufacturing, and in particular labour-intensive manufacturing, thereby creating an impression amongst policymakers that it is only a lack of ‘policies’ that is keeping manufacturing/labour-intensive manufacturing away from our shores.

This advisory chorus is, however, somewhat silent on the precise types of such labour-intensive manufacturing or its probable numbers or the specific potential benefit to a country of our size or even the specific nature of reform that is necessary. This dexterous ambiguity results in even more intricate policymaking attempts of the authorities which, in turn, ends up further confusing our entrepreneurs. As a result, Indian private sector capital formation is not picking up despite several governmental exhortations. I submit that this advisory chorus is not only misconceived but also, by simplistically equating manufacturing with employment, has also been damaging India’s growth prospects.

The logic underlying this chorus is allegedly based on the Chinese model of growth witnessed following Deng Xiaoping’s reforms of the 1980s and 90s. It was undoubtedly successful. By 2005, China had become a $2 trillion economy and the manufacturing centre of the world, with a manufacturing sector employment base of 146 million people. India, in the backdrop of this and pushed by the near-unanimous advisory chorus, has ever since been trying to catch up.

What has been forgotten by all concerned is that rapid growth of computing power, driven by Moore’s law (computing power doubles every 18 months) and associated technological change, has been making manual interventions redundant in a large number of manufacturing sectors. The logistics revolution, which eliminated historical correlation between distance and cost and further incentivised scale, has also happened. As a consequence, Chinese manufacturing employment, post-2005, virtually stagnated though the economy quintupled itself to $11 trillion-plus. It is currently reported at $14.9 trillion. There was nothing unusual happening — most developed countries witnessed an absolute decline in employment in the period. The global manufacturing employment count itself went up by only 41 million in this 15-year period, as per UN (ILO) databases.

Looked at from this limited employment perspective, the Indian manufacturing story, despite what the analysts say, does not look dismal. Our GDP had crossed $1 trillion in 2005 and had almost tripled to about $2.9 trillion on the eve of the Covid-19 outbreak. Manufacturing employment went up by seven million, post-2005, to 57 million. In a sense, Indian manufacturing employment growth has exceeded that shown by China. Expecting it to further accelerate its rate of growth, when world over the sector is experiencing job erosion due to continued automation, is somewhat unrealistic. How then, it may be asked, can we ameliorate the sense of angst amongst youngsters about jobs?

The challenge is that youngsters are not usually asked about their views. When they are asked, it is usually expressed in terms of dissatisfaction regarding campus placements or the lack of adequate government jobs or inadequate opportunities in health/education but rarely about the non-availability of labour-intensive manufacturing jobs. Such issues and the macroeconomic implications of the low volume availability of the type of jobs valued by youngsters are never discussed in the Indian context.

The ILO database indicates that the global average for the shares of Manufacturing versus Education, Health and ‘Public administration, defence and compulsory social security’ (EHP) jobs, are roughly equal at about 13.5%. China reports them at 19.5% and 12.8% respectively. The developed economies report a lower share of 12-18% for manufacturing but a higher 25-30% share for EHP. In India, the figures are 12% for manufacturing but only 6.8% for EHP. We are at half the world average. This low share of EHP jobs in the employment basket is the real cause of the Indian angst, but no one is addressing this issue.

Also forgotten are the policy handicaps placed on the manufacturing sector in the misplaced drive to promote labour-intensive manufacturing. While the apparent size of the sector looks large — over half a million factories are in operation, a policy squeeze operates on mid-sized corporates. More than 90% of all factories are MSME, and the major bulk of the MSME factories are so tiny that they are counted in the unorganised sector by the authorities. The share of value-added is thus low, and wage rates are much lower and work more demanding, being labour-intensive, but undoubtedly employment per unit of output is much higher. The challenge is that no one likes to work at lower wages. The societal benefits associated with manufacturing elsewhere in the world also are therefore not getting generated in India. Competitive efficiency is not there. Quality focus and environmental concern are inconsistent. Severe financial stress is rampant. The growth impact is thus unsatisfactory. What should be the way out?

The simplest answer is that policy focus should shift. Mis-signals cause accidents even outside of rail and road tracks. Manufacturing should be valued for itself and not by its jobs numbers, and judged solely by yardsticks of quality and competitive efficiency. Job creation should be attempted by promoting the labour-intensive sectors of education/health/urban development, etc., through a suitable mix of incentives and State effort.