India has a distinct possibility of transitioning to an upper middle-income country in another decade. Key reforms in areas such as regulatory environment, foreign investment and financial sector are unclogging the wheels of growth, making India’s growth story look resolutely positive. But notwithstanding this positive outlook, as the economic pie increases, labour cost advantages will eventually erode and manufacturing would steadily tread towards more capital-intensive processes. Developments in the ICT space with the advent of AI and ML are reducing the human interface in hi-tech manufacturing. In such a scenario, the challenge will be in ensuring that higher capital intensity does not worsen labour market conditions, and inequality doesn’t become economically inevitable.
India’s human capital is touted as her biggest advantage. While the demographic dividend has started tapering in China, India still has a huge window of opportunity. According to estimates, the proportion of working population in the total population of India is expected to remain high until 2055-56. However, this advantage could easily become an Achilles’ heel in the absence of an action plan to increase the employment and employability of the population.
India needs 5-9 million jobs every year, making it imperative for the country to look beyond the traditional model of domestic demand-led growth. The slipping of unemployment rate from 5.14% in May 2018 to 7.6% in April 2019, as per the CMIE database on employment statistics, highlights the urgency of identifying new nodes of employment growth, such as export manufacturing.
The quantum of jobs is not the only difficulty. According to International Labour Organisation estimates, the share of informal employment in the total employment is 88.2% in India, far higher than the world average of 60%. Workers in the informal economy face higher risk of poverty than those in the formal economy, and informal economic units face lower productivity and income. There is also a stark disparity in wages across formal and informal sectors, as also across other regional and demographic groups. Therefore, there is an urgent need for reducing informality, improving the quality of jobs, and correcting the relatively unequal income distribution of jobs and earnings across various groups.
As India looks at meeting the enormous demand for employment while also improving labour conditions, the role of exports in employment will be crucial. Recent research bolsters the case that exports can drive both quantum and quality of employment growth.
In case of India, Exim Bank’s research indicates $1 million worth of exports supported 138 jobs during 2012-13, far higher than 5.2 jobs supported in the US during 2014. In fact, exports accounted for 14.5% of the total employment in India during 2012-13. A recent study by the World Bank-ILO corroborates the positive impact of exports on employment, in terms of wages and reduction in informality. According to the study, an increase of $1,500 in India’s exports per worker increases wages per worker by Rs 8,000, and reduces informality by around 12.4 million workers.
These estimates highlight that export-led growth strategies can help improve labour market conditions. But export growth is not a panacea for employment growth, and there is a need for complementary policies to resolve the development conundrum of increasing capital intensity of growth process and concomitant labour market improvements.
The focus should be on eliminating distortions in production by reform in labour market regulations, increasing participation of women in workforce, and increasing worker mobility. We need to prepare the workforce to handle the complexities of globalised production systems. Recognising the need for skill development and training, the government started Skill India in 2015. Such training and skill development efforts should not be a prelude, but a permanent motif of inclusive growth strategies. As the economy grows and its driving forces change, training should also be suitably adapted. This will be important to ensure that wage gaps do not widen, and threaten the objectives of inclusive growth.