The Challenge of the Disconnect Between Employment and Economic Growth in India

India, since 2014, has been the lone star on the economic firmament, growing consistently above 7% per year as the rest of the world struggled with economic recovery. One would expect that such a relatively stellar growth rate would create jobs but disappointingly this is not happening. The disconnect between growth and employment has only become worse. About 12 million enter the labor force every year and for India to reap the demographic dividend - of having more people of working age than those dependent on them - over at least the next four decades requires creating highly productive, well-paying jobs.

Employment elasticity, defined as the percentage change in employment resulting from a 1% change in gross domestic product (GDP), has been falling for India since the late 1990s, dropping steeply from 0.3% to 0.15%. This clearly signals that India needs significantly more growth if it is to provide quality employment to its vast, young workforce to be able to create a large consumer class which feeds back into the GDP.

What is causing this disconnect between employment and GDP? The low employment elasticity shows that growth is not being labor intensive enough. In the short run, such growth which results from structural changes in the global market in industries such as telecommunications, information technology and financial services and automation in manufacturing could result in higher output per worker, but in the long run it depresses consumption and hence GDP because unemployment and underemployment will weigh on the economy.

In India, the telecom industry has been consolidating thereby shedding workers. Information technology has been subject to the impact of technological change that is happening which requires complex job skills, thus displacing workers without them. The upskilling of workers is now a major challenge. Financial services is automating many business processes such as trading and portfolio management requiring far fewer workers than before and this is a trend that is only in its beginning.

The manufacturing sector has not been immune to technological change that has been happening around the world. Even as shifting manufacturing jobs to low-wage countries in the world has played its part in the loss of jobs in developed countries, by some estimates 1 robot is displacing 7 workers in manufacturing including in developing, lower middle income countries like India.

By liberal estimates an unemployment rate of 2-3% and by most conservative estimates a rate of 5-8% could statistically respond to the critics of India’s unemployment, but dependence on the strategy of attracting manufacturing from China to India because of relatively lower wages in India does not solve the underemployment problem nor does it help in creating the high-quality, high-wage jobs the government is aspiring to especially in a global environment where outsourcing has become a bad word. Exports are necessary but not critical for the development of India.

There is a way for India to be competitive in the world market without continuing to buy into the neo-liberal paradigm which worked for China but may not work for India given the political-economic milieu the world is now in that is legitimately critical of unbridled free trade. It is important for India to be open to foreign multinational corporations (MNCs) on the condition that they “Make in India”, across all industries including national defense, for the Indian market employing Indians and reinvest their profits in India. This will help formalize and organize the large informal sector and produce Indian corporations that are globally competitive. Liberalizing the large government sector is crucial to creating Indian MNCs of the future that can compete on an even keel with the foreign MNCs from developed countries.

After all the United States is a USD 18 trillion economy for a country of 315 million people. With 1.2 billion people India can likewise do much better. The development of the vast domestic market must be the vision that India ought to pursue.