Jobless growth? Even if labour data is wrong, it cannot hide the fact that Indian economy is now more capital intensive

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New Delhi | Published: July 18, 2017 4:30:20 AM

Even if the labour hours data is wrong and is corrected upwards, it cannot hide the fact that India’s economy has become significantly more capital-intensive.

 labour data , Indian economy The establishment survey by the Labour Bureau has been faulted as it is limited to entities which employ greater than 10 employees, which account for less than 10% of the workforce.

In recent weeks, there have been several news reports on efforts by NITI Aayog to de-bunk the generally accepted narrative that in recent years, India has seen’jobless growth’. The logic for questioning the jobs data is that such a high growth rate could not be achieved on the back of productivity improvements alone and, hence, there must be a significant net increase in the labour force.

To bolster this argument, the credibility of official employment data has been called into question. The establishment survey by the Labour Bureau has been faulted as it is limited to entities which employ greater than 10 employees, which account for less than 10% of the workforce. The NSSO data is hailed as more reliable, however, not frequent enough, and misleading in its definitions across metrics. Plans are being put into place to revamp the methodology of data collection to get more reliable estimates of’true’ job creation, including in the informal sectors.
I don’t want to make the case that NSSO or Labour Bureau data on job creation is correct and that the effort to measure more accurately is misplaced. Having a more scientific and robust base-line of employment data is critical for any economic planning, especially in a demographically young country like India. However, simply blaming the data and not’de-averaging’ it beyond the headline numbers can not only make us complacent, it can lead to misinterpreting the underlying structural challenges and shifts, both local and global, impacting job creation and making wrong policy choices.

I have three submissions to make. First on the data itself if we look beyond the head-line numbers. Second, what it tells us on the structural challenge to accelerate creation of well paid jobs. And finally, it should not lead us to forget the global trends shaping job creation and their implications for India.

Let us start with data. If we decompose the growth data for India from the 1970s into its three components—labour hours, capital stock and the balance explained by total factor productivity (TFP), we see that from the early 1990s (using the same data series) the capital usage started increasing dramatically compared to increase in net labour hours. The significant capital infusion resulted in a phenomenon called’capital deepening’ or more capital per worker, making the existing labour force more productive and resulting in greater output per worker. Even if the labour hours data is wrong and is corrected upwards, it cannot hide the fact that India’s economy has become significantly more capital-intensive. If we decompose it further and see which sectors have added more’value’ (as new jobs created are a function of both size and growth) for the years dis-aggregated sector-wise data is available, we find that labour-intensive sectors like textile/apparel, food, leather have lagged behind less labour-intensive sectors like chemicals/rubber, metals, metal products and machinery. Even in services, the less labour-intensive financial services sector has added the most value followed by’medium’ labour-intensive sectors like construction and logistics/transportation and the highest labour-intensive sectors like tourism, health, and education have lagged behind. This de-averaged data suggests that even if the official jobs data is inaccurate, it may be directionally correct in suggesting that the Indian economy has a lower employment elasticity of growth than other developing countries, and that this employment elasticity has been declining in recent years.

My second point is about the claim that most of the jobs are being created in the’informal sector’ which is over 93% of the economy and consists of micro-enterprises and self-employed sectors which are not covered under the official job surveys. This claim is supported by anecdotal evidence of jobs created by cab-aggregator firms like Uber and Ola as examples of having created a large number of’self-employed’ entrepreneurs (drivers who own their cars). Here, my submission is that firstly, having these tiny firms constitute such a large share of the total number of enterprises makes the industrial structure of our economy inherently uncompetitive due to their low skills, productivity and quality. A healthy industrial structure needs scale where firms can invest in improving skills to improve quality and productivity. Secondly, given the nature of these micro-enterprises, the wages are low, and often at subsistence level (a worker often ends up replacing his farm work with factory work but at similar subsistence wage level). So, while they may be creating jobs, they are creating poorly-skilled, poorly-paid ones. India has to develop strategies to scale up and formalise this sector. My final point is on the’uberisation’ of workforce. Some estimates suggest that globally these are among the fastest-growing jobs and it may well be also true in India. The challenge, which is getting increasingly recognised, is that the majority of these jobs are very poorly paying (of course, there are exceptions like highly-skilled coders), do not have any social protection or worker rights and are often exploitative in nature with the balance of power loaded against these’entrepreneurs’, unlike in a formal organisation. Most countries, including India, are yet to even recognise this job segment, let alone enact laws to support its equitable growth.

My final point is on the trends that are impacting jobs all over the world. All large developing countries have pursued the twin strategies of manufacturing growth and merchandise exports to create millions of new jobs, with China being the latest example. However, this development strategy is being disrupted. Merchandise exports growth has slowed down post the financial crisis and likely to remain subdued given the growing’economic nationalism’ which has seen more anti-trade measures being taken than pro-trade measures. Manufacturing jobs and global value chains are being disrupted by digital technologies, collectively called Industry 4.0 which is eroding advantage of low labour costs and flattening manufacturing scale curves. This means that smaller, automated plants closer to markets are becoming equally or, in some cases, more competitive than large labour-intensive plants in low-cost countries. While these trends are at an early stage, the fact is that total global manufacturing jobs have been declining and will continue to do so as these trends accelerate over the next decades. While manufacturing growth driven largely by domestic demand will certainly create net new jobs in India, and in the short-term, some of manufacturing capacity moving out from China in sectors like textiles can be’captured’, it is unlikely that the massive boost in jobs that China saw from the development of global supply chains will be replicated at the same scale in India. To sustain jobs growth in the medium- to long-term, India will have to start thinking of other job creation strategies more aligned with the digital 21st century.

While there is no denying that we need more accurate and real-time jobs data, we should be careful that the efforts to discredit the ‘messenger’ should not end up discrediting the message itself.

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