The economy is healthy – but India’s not working
An OECD report says India’s economic growth is a success story blighted by the one-third of young Indians that are underemployed or poorly trained. Significant structural reform is needed
India is now a test case for whether a high rate of economic growth is enough to alleviate poverty. With the fastest rate of growth among the world’s biggest economies, India has an opportunity to overcome its historic difficulty in distributing equitably the benefits of its growth.
In presenting the Organization for Economic Cooperation and Development 2017 Economic Survey of India report in New Delhi, the OECD secretary-general, Angel Gurría, underlined the importance of inclusive growth that benefits the community at large. He urged Indian policymakers to invest more in education and vocational training.
Gurría’s comments were based on the finding that about 30% of Indians aged 15 to 29 were not in employment, education or training because the incentives were insufficient or the deterrents too great. The rate is twice the OECD average and almost three times the proportion in China.
Prodipto Ghosh, formerly an economic adviser to the Indian prime minister, questions the finding. “The data do not correctly reflect informal-sector employment, which is sporadic and seasonal and usually does not pay the notified minimum wages for the skill category,” Ghosh says.
Other authorities point to systemic flaws that prevent the creation of enough jobs of good quality. Economist and econometrician Sher Mehta, who founded the Macroeconomics School in London and New Delhi, says: “These numbers are not an anomalous trend and reflective of a deep-seated structural malaise confronting the Indian economy.”
The government’s figures indicate that services contributed 58% of growth in gross domestic product in India last year. Mehta says more than 50% of the Indian labor force works in agriculture, where productivity is low – the sector contributes about 15% of the country’s annual growth in GDP. He says that, ideally, the bulk of new jobs created should be in manufacturing, where productivity has grown a little over the years, and which now employs only 12% or 13% of people that have jobs.
“Broadening the base of economic expansion entails vigorous focus on infrastructure development and financing – particularly deepening the corporate bond market, enhancing the role of investment bankers et al – apart from raising FDI and private-sector investment and, most importantly, finding new export markets”
Knowledge-intensive services have been the main driver of growth in India over the past decade. But they employ only a small proportion of people that have jobs. Mehta believes this is the cause of job creation lagging behind economic growth.
The latest survey of employment conducted by the government found that in 77% of Indian households nobody earns a regular wage. Policymakers clearly have their work cut out. A report on the economy conducted before the government presented its budget acknowledged the need to create millions of good, safe, productive and well-paid jobs to exploit the demographic dividend in India.
Ghosh blames the failure to create enough of the right sort of jobs on factors such as the use of imported technology designed to replace jobs, complex labor laws, poor literacy and numeracy, and the computerization of routine managerial functions. Ghosh and Mehta both advocate a coordinated policy to generate jobs. They say attention must be given to automation that does away with jobs, to labor market reform, to social safety nets, to retraining and to institutionalized training in skills that enhance productivity.
Ghosh argues for changes in corporate tax rates to reflect the ratio of capital to labor in each company and so reward companies that are labor-intensive. Mehta envisages the creation of more jobs of the right sort by broadening the basis of economic expansion so that growth depends proportionately less on services and more on manufacturing.
“This entails vigorous focus on infrastructure development and financing – particularly deepening the corporate bond market, enhancing the role of investment bankers et al – apart from raising FDI and private-sector investment and, most importantly, finding new export markets,” Mehta says.
He adds that giving industries such as alternative energy, real estate and healthcare leading roles in creating jobs, and taking steps to boost domestic consumption would work wonders. Government schemes such as Make in India, Skill India and Start-up India, and those like them, are capable of creating swift growth in employment, he says.