Do it yourself

The successive governments in India have been consistently ignoring the fact that the global community has always valued resource rich nations and expected them to behave in a responsible manner to preserve the global order.

·         The capital rich western world is expected to help the poor and starved of the world. The world looks forward to funding technological advancement, preservation of cultural heritage, assisting global growth and development. Even after taking full cognizance of the blemished legacy of imperialism and suppression, I believe that financially rich communities have worked for the betterment of human life by funding technological innovation, life science research & development, productivity enhancement, and development assistance to the economically underprivileged world.

·         Similarly, nations rich in natural resources like minerals etc. have been expected to prospect and exploit these resources in optimum manner to assist the sustenance and growth of the global economy. For example, in spite of frequent allegations of cartelization and supply manipulation, OPEC has been mostly successful in maintaining petroleum market equilibrium.

The point is that since India now possesses the largest pool of prospective workers for the world, it is our responsibility to prospect, grow, and develop this resource for the benefit of the global community! This becomes even more pertinent in the context of the current global financial conditions. In places like Europe and Japan the root cause of the crisis could be traced to the aging demographic profile. China is also likely to join the club soon. Under the circumstances it is the responsibility of India to provide educated, skilled and trained workforce to the global economy.

A number of research papers and surveys have shown that (a) Child and mother nutrition level in India is sub-standard consequently child mortality rates are poor; (b) higher and professional education standards are extremely poor consequently a large number of Indian graduates are unemployable even in routine jobs; (c) There is acute shortage of competent scientists to scale up research and development (R&T) activities to make Indian businesses competitive at global stage.

The consequences are low proportion of labor force and even lower labor force participation; especially in case of female workers. As I highlighted last week (see here), for urban females in India, labor force participation rate is a dismal 18%. Even for young females (15-29yrs of age) it remains materially lower at19.3% (vs 57.6% for males). Youth unemployment in urban areas is very high at 17.3% (22.9% for young females). In some states like Assam (41.7%). Himachal (49%), Kerala (42.8%), Rajasthan (43%), and J&K (59.3%) urban unemployment rate amongst young female workers is running at over 40%.

It is cause of grave concern that the unemployment remains materially higher amongst the young workers (17.3%) as compared to overall unemployment level in urban areas (6.8%). The reasons for this may include unemployability (skill mismatch and/or sub-standard education), reducing employment intensity of GDP, and poor employment growth in manufacturing sector. Besides, persistently, high ratio of self-employed and casual labor, inter alia, indicates (i) lower employment elasticity in the organized sector and (ii) skill mismatch.

Unfortunately, the results of the latest (7^th) Economic census launched in 2019 are not yet released, so we will have to rely on the outcome of 6^th economic census (2013-14) for the sake of argument sake. Anecdotally, I can vouch that the trend has not reversed in the past one decade. In fact, the conditions are more likely to have deteriorated, if we consider the latest Annual Survey of Industries (2019-20).

As per the 6^th Economic Census, there were 58.5mn business establishments (excluding public administration, crop production & plantation, defense and compulsory social service activities) operating in the country. Of these ~96% establishments were privately owned while just ~4% were government owned. These establishments employ 131.29mn people (52% in rural areas and 48% in urban areas).

·         Out of total ~58mn establishments about ~72% were Own Account establishments (meaning with no hired worker). These Self Owned Establishments (SOEs) grew 56% during 2005-2013. About 63mn people (48% of total employed people) are employed in these SOEs.

·         The government or public sector employs only 7% people. 79% of people work in proprietary establishments. Organized private and cooperative sector employs 14% people.

·         About 36% of business establishments were operated from the home of the Self Owner, while another ~18% operated from outside the home without any fixed structure.

·         Retail trade (~35%) and Manufacturing (~23%) were dominant non-agricultural activities.

A June 2014 working paper released by RBI, concluded that aggregate employment elasticity (change in employment due to economic growth) of Indian growth has fallen considerably in the post 1991 period. In this period for every 10 per cent change in real GDP, there had been about 1.8-2 per cent change in employment. The current statistics are even poor.

Moreover, elasticity varies considerably across sectors. While agriculture has witnessed negative elasticity, services including construction have generally been employment intensive. Manufacturing employment elasticity has hovered in the range 0.29-0.33.

Within manufacturing, the employment elasticity for organized manufacturing sector based on various estimates seems to be higher, in the range 0.42-0.57 for 2000s and it has risen over the previous two decades. Given the huge productivity and wage differentials between organized and unorganized sectors, greater employment generation in organized manufacturing is crucial as it has larger multiplier effects.

The working paper suggests that going forward, it is the relative cost of capital vis-à-vis labour and the nature of investment demand that will determine to what extent growth would be job-creating. Increased capital to labour ratio in the organized sector for a labour abundant country like India is a concern that has been well-highlighted. If India has to meet the demographic dividend challenge, focus should be on industries where employment elasticity is higher. Roughly, in India over 10 million people would need a job every year for the next 15 years. Finding productive jobs for such huge numbers is a big challenge, and clearly the answer lies in stepping up growth, and importantly, stepping up the employment intensity of growth.

In this context, the findings of the latest Annual Survey of Industries (ASI-2020) are noteworthy.

As per the ASI-2020, the addition of net new manufacturing units in India has been very low. Moreover, the factories have become more relatively capital intensive. The average fixed capital per factory increased 43% from Rs12.78cr in ASI-2013 to Rs18.33cr in ASI-2020 (a part of higher amount could be attributable to cost inflation); but the number of employees per factory increased only 17% from 56 to 66. Net value-add per factory in operation increased ~27% in this period from Rs4.82cr to Rs6.11cr. This barely covers the inflation. 

The worst part is that only ~6.6% operational factories were located in the most populous state (Uttar Pradesh); while Tamil Nadu accounted for ~16% of total operational factories.

Three trends could be reasonably deciphered from this Survey:

1.    In the past 10yrs the capital-intensive large industries have grown at the expense of labor intensive MSME and household sector industries.

2.    The employment intensity of the Indian manufacturing sector continues to decline. The employment intensity of the agriculture sector is already negative. These are the areas where over 70% of the workforce is employed or seeking employment.

3.    The government incentive schemes to promote industrial growth (e.g., PLI) are yet to show any meaningful impact. Some recent reports indicate that against a total budget outlay of Rs 1.97 trillion, so far only Rs29bn have been disbursed under 14 PLI schemes.

In conclusion, the solution for the unemployment problem in India lies in promotion of cottage and MSME units and not fancy large manufacturing plants. The government’s focus should be on skilling youth and enabling the setup of high-quality cottage and MSME sector that could become ancillary to large OEMs in India and abroad. The development of the Auto industry during the 1990s and 2000 is the classic template that should have been adopted for overall industrial growth. Unfortunately, it does not seem to be the case so far.