INDIA’S GROWTH-EMPLOYMENT PARADOX

Syllabus:

GS 3:

  • Employment and Economic Growth
  • Indian Economy and Issues.

Focus:

India’s jobs growth conundrum has attracted focus for the incredible rate of Gross Domestic Product (GDP) growth and the slow rate of employment generation. Talking of economic performance, it remains strong but unemployment increases as well, leading to debates on ways to encourage employment intensive growth and flexibility of the labour market.

Source: Bloomberg

The Glooming Study: Global employment growth

  • Slow Employment Growth: Even though India has recently emerged as the fastest-growing major economy, employment generation too has been rather slow with an increase of just 1.9% per annum between 2011-12 and 2022-23.
  • Unemployment Surge: The unemployment rose from nearly 10 million in 2011-12 to more than 19 million in 2022-23 with the unemployment rate rising at more than6 % PA..
  • Labour Supply vs. Employment: Total employment rose from 466 million to 577 million, while total labour supply rose from 477 million to approximately 595 million in similar period.
  • Productivity vs. Employment: While there has been steady rise in the GDP, employment did not increase in the same proportion mainly because of a rise in productivity per employee.
  • Broad Employment Definition: Official employment statistics are also rather liberal as any person, who had at least one hour of work within 30 days, is classified as employed.
About Jobless Growth:

  • The term ‘jobless growth’ actually signifies a peculiar state of economic growth whereby a country grows economically, measured by gross domestic product but does not create jobs.
  • This decay has been manifested in symptoms in recent trends relevant to the Indian economy.
  • Despite these high growth rates, employment generation continues to be a worry, which even casts doubt over the social and reproductive nature of this growth path.

Addressing the Wage-Rental Ratio

  • Labour-Intensive Growth: In order to experience labour-intensive development, the wage-rental ratio (the indicator that compares the cost of labour force to the cost of capital) should be decreased, thus increasing the rates of efficiency in sectors where the labour force is utilized.
  • Sectors for Focus: In the industrial sector there is, for example construction, trade, transport, education and textiles which have had the estimated strength of 240 million employee and employment opportunities if there is capital mobility.
  • Challenges in Lowering Wages: Currently there is pressure to lower wages which are already really low with regular employees earning ₹10,000 on average monthly wages per person and casual labourers earning ₹4,500 the emphasis should be on increase in wages through increase in productivity.
  • Cost of Capital: India’s capital costs are quasi-administered, because government securities give approximately 7 – 7.5% and the corporate bonds that fund these projects move closely with these rates; maintaining the real interest cost of capital at about 2%.
  • Scarcity Value of Capital: The current theories of the low real cost of capital do not resonate with scarcity value of capital in the case of India, which is a capital scarce developing country and hence there should be policies which can increase the real cost of capital.

Ways of Implementing Policies that Will Increase the Real Cost of Capital

  • Exchange Rate Depreciation: Devaluating the exchange rate could increase exports level and increase foreign capital cost, however it leads to a charge of currency manipulation to the trading partners.
  • Gradual Interest Rate Increases: An increase in real interest rates at home seems to promote more labour intensity in production but this has to be done slowly so as not to interfere with the recovery of private investment.
  • Employment-Linked Incentives (ELI): When coming to the jobs front the recently introduced ELI scheme is an incentive for generation of employment but the amount needs to be incorporate to a huge number to make a huge difference.
  • Potential of ELI: The future model of ELI grant scheme, linked to additional employment as like Production-Linked Incentive (PLI) can create employment and make growth more inclusionary.
  • Comprehensive Policy Approach: Increasing the cost of capital while taking advantage of the exchange rates must equally form part of the policy approach to promoting labour intensity.

Structural rigidities in Labour Market:

  • Beyond Cost Factors: It is instead legal concerns, which include labour laws and compliance costs, that are major requirements that negatively influence employment growth and structural rigidities that are a hindrance to employment growth.
  • Labour Market Rigidities: The higher employment is prevented by complicated labour-related Acts and a dense “inspector raj” and thus makes labour markets less flexible.
  • State-Level Variations: There are fairly large differences in employment protection across states in India; these differences can be used to compare the effect of manoeuvrability unexpected in productive employment across the country.
  • Need for Reform: Attempting to tackle these structural rigidities by means of further liberalisation in the labour market might also serve as useful in efforts to restore demand-side adjustments in relation to the wage-rental ratio to support hiring of new employees by the firms.
  • Role of Labour Economists: Systematic of the rigidities by labour economists therefore is required to find ways of creating employment for the various groups in the market.

Way Forward:

  • Expand Employment Incentives: Extend the Employment-Linked Incentive (ELI) programme so as to increase jobs in jobs-intensive industries.
  • Labour Market Reforms: This means that there is a need to streamline and modernize the labour laws so as reduce the amount of legal hurdles as well as the rigidity of labour market.
  • Increase Real Capital Costs: Gradually increase real rate of interest so as to reflect scarcity of capital properly leading to the making of labour intensive investments.
  • Exchange Rate Adjustments: Suggestive exchange rate devaluation should be controlled so that export lines can be given a boost, thus increasing the cost of foreign capital.
  • Boost Productivity: On this regard, emphasis should be made on productivity with an aim of lifting real wages but not through shedding off employment.
  • State-Level Initiatives: Explain to states to practice good comparisons of labour regulations in order to enhance employment.

Conclusion

To break India’s growth-employment paradox it will be necessary to pursue several interrelated set of policies such as altering the W-R ratio, increasing the cost of capital, broadening incentives linked to employment, and liberalising labour market. An effective mix of policies in these areas can assist in guaranteeing that the economic growth results in good employment opportunities, especially in the labour demanding businesses, to reduce the increasing problem of unemployment in the country.

Source: Mint

Mains Practice Question:

Explain the causes of disparity between India’s GDP growth and employment generation. What policy provisions should be made to encourage labour-intensive growth and how can the structural flaws in the labour market be solved?

Associated Article:

https://universalinstitutions.com/unemployment/