Unlike in the past when economic growth did not translate into increased employment, the current investment boom is likely to have caused a spurt in jobs growth, argues Mahesh Vyas
It has often been argued that the acceleration in real gross domestic product (GDP) growth in the 1990s took place without a corresponding acceleration in employment growth. One of the reasons for this was that the fall in employment in agriculture during this period was not adequately compensated by a corresponding increase in employment in industry and services. Growth had slowed down in the late 1990s and remained subdued till 2004-05. Though it picked up thereafter, the question remains, whether the acceleration in growth over the past five years has been with or without the corresponding growth in employment.
The debate on growth and employment draws upon surveys of the National Sample Survey Organisation (NSSO) — since the latest NSSO survey was carried out in 2004-05, it cannot explain whether the acceleration in real GDP growth over the past five years has also brought in an acceleration in employment. However, I will attempt to answer the question using Centre for Monitoring Indian Economy’s (CMIE’s) CapEx database and some structural data drawn from the Annual Survey of Industries (ASI) and CMIE’s Prowess database. Though the ASI data is also old like that of the NSSO, we can safely assume that structural ratios do not undergo serious changes over relatively small time periods. The ASI data is invaluable since it has information on employment.
A meaningful time-series of CapEx is available only from the April-June quarter in 1995, around the time the capex boom of the mid-1990s was at its peak. During this period, 41 per cent of the total outstanding investments were in manufacturing industries. Power accounted for another 39 per cent. However, the investment boom peaked soon and the outstanding investments started declining from the July-September quarter in 1996. A very large proportion of the investment projects of the mid-1990s never got commissioned. These projects later turned up as non-performing assets in the banking system.
The investment boom following the liberalisation in 1991 was rather short-lived — less than four years. This reduced the employment generating capacity of the growth cycle. Growth during the 1990s had emanated essentially from efficiency gains, mostly in the form of raising output with lesser labour. The asset utilisation ratio (sales revenue-to-assets) of manufacturing companies improved from 1.91 times in 1994-95 to 2.01 in 1995-96. This gain was small and could not be sustained as the asset build-up failed to fuel growth.
Wage utilisation (sales revenue-to-wage bills), on the other hand, increased from 13.3 times in 1990-91 to 17 times in 2000-01. The wage bill of companies shrunk during this period as companies reduced excess human resources. Wages as a percentage of total expenses fell from 7.5 per cent in 1990-91 to 6.5 per cent in 1995-96. By 2004-05, this fell to 5.5 per cent. In recent years, it has fallen further as the share of raw materials increased due to a hike in commodity prices. In 2007-08, the share of wages was down to 4.3 per cent, although wages have been growing handsomely in recent years.
Thus, during the 1990s, the asset creation boom did not last long enough and did not generate business in proportion to its growth (the asset utilisation ratio fell rapidly) and it, therefore, could not contribute sufficiently to employment growth. Is the story any different this time?
First, the investment boom is playing out over a longer period now. It lasted five years before the global liquidity crisis erupted and, after a pause, investments have continued to roll on. New investments worth more than Rs 400,000 crore were being announced every quarter before the liquidity crisis hit. The June 2009 quarter saw new investment announcements drop to Rs 180,000 crore. The September 2009 quarter then saw a strong recovery with new investment projects worth Rs 320,000 crore being announced.
| INDIA INC'S INVESTMENT Financials of manufacturing companies (Data for financial year ending March) | |||||
| Asset utilization (times) | Wage utilization (times) | Growth in GFA (%) | Growth in Wages (%) | Share of wages in total expenses (%) | |
| 1996 | 2.00 | 15.36 | 21.09 | 23.21 | 6.49 |
| 1997 | 1.87 | 15.99 | 17.40 | 7.94 | 6.24 |
| 1998 | 1.67 | 15.18 | 13.99 | 10.67 | 6.50 |
| 1999 | 1.58 | 14.99 | 10.85 | 9.00 | 6.51 |
| 2000 | 1.64 | 15.89 | 7.16 | 10.65 | 6.16 |
| 2001 | 1.72 | 16.93 | 5.63 | 10.68 | 5.99 |
| 2002 | 1.58 | 16.44 | 6.83 | 3.16 | 5.93 |
| 2003 | 1.61 | 17.44 | 4.11 | 4.07 | 5.64 |
| 2004 | 1.73 | 18.28 | 6.24 | 8.39 | 5.50 |
| 2005 | 1.95 | 21.43 | 8.84 | 2.75 | 4.70 |
| 2006 | 2.08 | 23.34 | 16.20 | 10.11 | 4.31 |
| 2007 | 2.22 | 24.46 | 15.42 | 19.44 | 4.16 |
| 2008 | 2.29 | 23.34 | 16.08 | 20.47 | 4.27 |
Second, during this investment boom, asset utilisation has been rising. It has risen from a low of 1.58 times in 2001-02 to a peak of 2.29 times in 2007-08. Wage utilisation is also rising. Part of this increase in efficiency is due to the rise in commodity prices. Yet, this does not undermine the fact that growth in assets and their utilisation have both risen significantly during the current investment boom.
What is also important from the employment point of view is the composition of investments in the 1990s and its comparison with the composition in the recent boom since 2004-05. Broadly, the composition of investments this time is a lot more balanced than it was in the mid-1990s. This ensures a greater sustainability of the current investment boom. The composition of investments this time is also more employment-intensive than it was in the mid-1990s. For example, chemical industries (essentially large refineries and petrochemical complexes) dominated the investments in the manufacturing sectors in the earlier period. They accounted for 18-20 per cent of the total outstanding investments in the second half of the 1990s. Since then, their share has fallen to 6-7 per cent. Petroleum refineries and other downstream capacities are capital-intensive and poor on employment generation. According to the ASI data, it takes about Rs 70-75 lakh of fixed assets to employ a single person in the coke and refined petroleum products industries.
In contrast, the metals industry requires an investment of Rs 17-18 lakh in fixed assets to create employment for a single person. According to CapEx, while the share of chemicals is down to about 6 per cent, that of basic metals is up to 11-12 per cent. Also, the share of construction and real-estate is up to 11-12 per cent.
Thus, besides the fact that the current investment boom is sustaining itself for longer and is more productive with higher asset utilisation ratios, the higher proportion of metals and construction in the overall composition of investments in the current boom period provides great comfort that the current growth phase is more employment-generating.
The author is Managing Director and CEO, CMIE; mahesh@cmie.com
