Jobs, competitiveness and happiness

India's rankings on global competitiveness indicators and the World Bank's ease of doing business have improved due to reforms like GST & IBC, but yet exports have been tepid and imports have surged

The legendary Indian entrepreneur, J R D Tata said: “I don’t want India to be an economic superpower. I want it to be a happy country.”  

GDP growth at 7 per cent, if the numbers are correct, over the last decade places India among the fastest growing economies in the world. Christine Lagarde, the IMF chief, calls it India’s “sweet spot”. Life expectancy has risen and poverty — both relative and absolute — has declined.  Much faster poverty reduction has taken place in more backward regions and amongst lower castes and the Muslims — all groupings with higher poverty.

But this rapid growth is not creating sufficient jobs to meet the needs of India’s young and rapidly growing population. As a result, India is seeing rising inequality, social tensions and divisive politics — not a happy country. 

Inadequate spending on education, health, water and sanitation, and weakened financial system and institutions threaten the future. India’s past rapid growth built on services, not labour intensive manufacturing which propelled much of East Asia, has prevented it from pulling enough people out of agriculture. Agitations by the Jats, the Patidars and the Marathas — relatively better-off rural groups, farm strife and growing lawlessness are a reflection of lack of opportunities. 

India’s rankings on global competitiveness indicators and the World Bank’s ease of doing business have improved due to reforms like the Goods and Services Tax and the Insolvency and Bankruptcy Code, but yet exports have been tepid and imports have surged. Rising oil prices have hit India badly and the rupee has fallen sharply. The current account deficit (CAD) could reach 3 per cent of GDP this year and the fiscal numbers look shaky. India has reacted by increasing import tariffs on a range of commodities to contain the deficit, but this may produce short-term gains at the cost of long-term competitiveness.

If India reverses further on its reforms, several experts have warned of growth slowing down. A drop back to the so-called “Hindu growth rate” of 4 per cent will take India’s GDP only up to $4.3 trillion by 2030 — behind Japan. On the other hand, bold reforms in land, labour and capital markets could accelerate growth to 9 per cent per annum, which will make India a $9-trillion economy by 2030 (the largest after the US and China), a 6 or 7 per cent “muddle through” will take India’s GDP to $6-7 trillion. The stakes are high. 

The World Economic Forum’s (WEF’s) Global Competitiveness Index for 2018 ranks India 58th out of 140 countries. Impressive at the first glance but India’s rank is lifted up hugely by its market size. If India was an average-sized country, its rank would drop closer to 70th. The recent International Institute for Management Development (IMD) competitiveness index, which does not include market size as a factor in its rankings, places India at the 44th position, out of 63 countries.

Employment and competitiveness are inter-related. A competitive India should be able to “make in India” for both the domestic market (import less) and the global market (export more). Growth based on competitiveness should also lead to more employment creation.

With China seeking alternative manufacturing bases due to rising labour costs and huge tariffs increases, India could become an attractive destination and not miss the bus yet again to participate in global value chains. But it faces stiff competition from Bangladesh, Indonesia, Vietnam and parts of Africa, eager to attract Chinese investment. 

To be competitive, India will need huge improvements in logistics, information and communication technology (ICT) adoption, better skilling — especially for women and deep labour, land market and financial sector reforms. The correction in the overvaluation of the rupee will help.  A new strategic trade and industrial policy is badly needed to meet the challenges of a changing world order and a more difficult international economic environment — with India championing fair and freer trade with like-minded countries.

How much employment is actually being generated in India remains an area of acrimonious dispute without adequate facts. Leaving these aside and until better labour numbers are available, using the World Bank’s estimate that India creates about 750,000 jobs for every 1 per cent of GDP growth, we can surmise that India is annually creating about 5-5.5 million employment.  

India’s working-age population will increase by around 12 million per year until 2030. India has a high labour force participation rate (LFPR) for men, around 0.8, but surprisingly low for women, under 0.27 and falling. With an average LFPR of 0.5-0.55, India will need to create 6-6.5 million employment until 2030. This means every year 1 million new entrants cannot find productive work. 

Another 1 million per year of employment is needed to absorb the stock of approximately 10 million unemployed over the last decade. And if India must give more opportunity to women, their LFPR must rise to at least 0.5. Adding it all up will mean India must increase employment by 8.5-9.0 million people per year until 2030. If growth is not more employment-intensive, to create 8.5-9.0 million of employment would require GDP growth rate of 12 per cent, a tall order for India to achieve.

If India could create a million jobs for every GDP of growth, 8.5-9.0 per cent GDP growth would be enough to realise India’s demographic dividend. With major reforms, this is an achievable goal over the next 10-15 years even with a more difficult global environment, making India both an economic superpower and a happier country by 2030.

Which road India takes will determine the future of a sixth of humanity?

The writer is visiting scholar, Institute of International Economic Policy, George Washington University