An employment crisis

Govt must focus on jobs-enhancing structural reform

Concern has consistently been expressed that the Narendra Modi-led central government has not done enough to ensure that employment is expanding. This is perhaps the crucial economic challenge before India, which has an army of unemployed young people; unless this demographic transition is taken advantage off, it will turn into a demographic catastrophe. What is worse, some have argued, is that several government policies – especially the sudden withdrawal in November last year of high-value currency notes – would have made the problem of unemployment and underemployment worse. 

There is now evidence that strongly indicates jobs have likely declined in the first quarter of calendar year 2017. Large-scale household surveys by the Centre for Monitoring the Indian Economy, or CMIE, have revealed that estimated total employment declined from 406.5 million during the four months between September and December 2016 to 405 million in the four months between January and April 2017. Of course, the last four months of any year are good months for employment due to kharif crops, but it is important to note that this evidence is in keeping with other indicators as well as anecdotal accounts suggesting that labour-intensive sectors suffered during the demonetisation period. While, according to the survey, those employed in the same quarter in the previous year numbered 401 million, the labour participation rate was 44.3 per cent in the period between January and April 2017 instead of the 46.9 per cent recorded in the equivalent months a year earlier. Thus this is more than just a seasonal effect. The fall in labour participation is particularly worrying in a country with a favourable demographic profile — it indicates young people are not finding jobs. 

The government must now cease being in denial about the effect of its policies on employment growth. While earlier estimates from industry bodies about job losses have been rubbished by the authorities, this more large-scale survey – based on a sample size of over half a million adults – should surely be taken seriously. Labour-intensive sectors that were in any case suffering from the private investment slowdown then had to contend with stuttering consumer demand, the fallout from demonetisation, and now the effects of the introduction of the goods and services tax, or GST, which might have a differential effect on smaller and larger companies. 

It is past time for the government to focus more specifically on jobs-enhancing structural reform. It may be tempting to respond to an employment crisis by populist measures, but that will only be harmful for sustainable job creation in the medium and long terms. The root cause of the problem is the shortage of skills, the stunting of the Indian manufacturing sector, and perverse incentives that do not allow companies to grow and take advantage of abundant cheap labour. These require structural reforms to labour, land and capital markets, as well as a sustained focus on improving access to skills and vocational training in cooperation with companies. Jobs are the first priority. It is not too late for the government to reverse course and get its priorities straight — but it soon might be.