Forget the poverty line debate, the real issue is creating manufacturing jobs, and that requires flexible labour policies
There has been much debate in recent months about who is poor in India and who is not, following the release of the Planning Commission?s new poverty line definition. While measuring poverty is important, it is equally critical to focus on the ways to reduce poverty in its true sense. Productive job creation is the only sustainable way out of poverty, the task which Indian economy has consistently failed at.
During the last four decades, the share of agriculture in the Indian economy fell while that of services rose significantly. In contrast, the share of manufacturing in GDP stagnated around 15% since 1980s (see Figure). India?s unconventional growth pattern, wherein it skipped the phase of manufacturing-led growth, has contributed to the lack of sufficient job creation. Against this backdrop, the National Manufacturing Policy was announced on November 4, 2011. The policy aims to raise manufacturing growth to 14% per year until 2021-22 and, in the process, create 100 million additional jobs. This will ensure more inclusive growth in the country. However, will raising the share of manufacturing be sufficient to ensure large-scale job creation that is needed? Unfortunately not.
In 2009-10, there were 54 million people employed in manufacturing. Creating additional jobs in the sector would be a function of manufacturing growth and changes in employment intensity?people required to produce manufacturing output of R1 lakh.
Manufacturing growth increased to 8.1% between 2002-03 and 2011-12 compared to 5.8% per year in the 1990s. At the same time, employment intensity of manufacturing fell sharply to 7.0 in 2009-10 from 11.5 a decade earlier. If fewer people are required for producing the same amount of output, then there is limited scope of additional job creation. The net outcome was additional job creation of only about 15 million in the manufacturing sector in the 2000s.
Assume that both the trends?an increase in manufacturing growth rate and a decline in employment intensity?continue in this decade. Suppose manufacturing growth increases to about 10.5% per year between 2012-13 and 2021-22 from 8.1% in the previous decade, and employment intensity continues to decline at the decadal rate. While the NMP hopes to achieve manufacturing growth of 14% per year, sustaining manufacturing growth of above 10% per year would be an overwhelming challenge as the global environment will remain less favourable over the next few years. With these assumptions about manufacturing growth and employment intensity, manufacturing will create additional employment of only around 19 million vis-?-vis the target.
So how do we then get closer to the target of achieving 100 million additional employment in manufacturing? It depends on what happens to employment intensity of manufacturing. If the trend of declining employment intensity continues, the employment intensity would fall to 4.5 by 2021-22. Crisil Research?s recent study?India?s National Manufacturing Policy: Achievable Goals?*?estimates that NMP can create another 50 million jobs by 2021-22 by limiting the fall in employment intensity to 5.6. This can be done by halving the current rate of decline of manufacturing intensity. Another 19 million can be added due to higher manufacturing growth. In all, it can create nearly 69 million jobs in manufacturing by 2021-22. This would itself be a significant achievement even if it falls short of the 100 million target.
Thus, over 70% of addition to employment by 2021-22 is expected to come from arresting the decline in employment intensity of production. This would need policy measures that focus on raising the attractiveness of labour vis-?-vis capital. These would include emphasis on appropriate skill development programmes and implementation of flexible labour laws. India?s experience with its services and construction sector shows how a flexible labour market can create job opportunities for millions of people otherwise trapped in agriculture or dependent on government for minimum wages.
It is critical to note that flexible labour market does not mean laws unfair to workers. The labour market, like other markets, needs a framework of rules that are fair to all parties involved?employers, current employees and potential employees. The current labour laws in manufacturing are highly biased towards the existing employees. Rigid labour laws make it unattractive to hire workers with employees preferring to use more technology to minimise the use of labour. This limits the creation of additional job opportunities. NMP aims to provide flexible labour laws in National Investment and Manufacturing Zones. Implementing them successfully, along with appropriate skill development programmes that raise attractiveness of labour relative to capital, would play a crucial role in creating job opportunities.
Creating an environment conducive to job creation is imperative for India?s poor to participate in and reap the benefits of India?s growth story. Unless this takes place, poverty alleviation in India would be a distant goal.
India?s National Manufacturing Policy: Achievable Goals? CRISIL Insight, Vidya Mahambare and Aindrila Roy Chowdhury, April 2012
Vidya Mahambare is senior economist and Aindrila Roy Chowdhury is economist at Crisil. Views are personal