How policymakers can transform rural India as a new driver for job creation

One of the biggest challenges that India faces is job creation. Unlike an ageing population in China, Europe and the US, India has a young population, with nearly 500 million people below the age of 30. Twelve million more people will join the labour force every year for the next decade. India’s labour force will soon overtake China as the world’s largest workforce. Changing demographics have increased the importance of faster economic and job creation. 

A young labour force can be a powerful contributor to economic growth. It can divert resources from spending on children to investing in physical infrastructure that can accelerate economic growth. Working age also happens to be the prime years for savings. However, the benefits of demographic dividend are not automatic. Demographic dividend could transform into a demographic disaster if jobs are not created. 

Who creates jobs? Given the size of India’s young population, it is unlikely that public sector programmes will be enough to meet the jobs challenge. The private sector must play a bigger role in job creation. This is already taking place. Indian entrepreneurship is on the rise. The pace of establishment of new firms and job creation has seen an upward trend. But the number of new firms being created is still too low to absorb an expanding young labour force. There is a missing link that has constrained entrepreneurship and job creation.

Firm creation is job creation 

Entrepreneurship promotes economic growth and job creation by allocating resources more efficiently. It increases investment, innovation, and competition. We examined the role of entrepreneurship in job creation in detail in some 600 districts in India, and compared it with the US (see Ejaz Ghani, William R. Kerr, and Stephen O’Connell, Promoting Entrepreneurship, Growth and Job Creation, World Bank). Empirical evidence shows that there is a strong link between the initial rate of new start-ups and subsequent job growth both in India and the US.

However, contrary to the popular belief, India produces too few entrepreneurs. The spatial distribution of start-ups in India is more fluid than in the United States. Indian entrepreneurship is concentrated in a few mega cities, with India’s huge potential still untapped. There are many policy levers that can be used to accelerate entrepreneurship and job creation. Instead of being preoccupied with firm chasing — attracting a few large firms from other locations — policymakers should shift their focus to encouraging entrepreneurship at the district level.

The history of job creation in the US has shown that big firms are not sufficient. This is evident in the current struggles of Detroit, Michigan, and its car manufacturers in the US. Manchester, England, and its giant textile mills in the 1800s were a model of short-term efficiency, but also ultimately insufficient for long-term job growth. But other regions in the United States, like Silicon Valley, are prolifically entrepreneurial, with a new start-up on every street corner. In declining Rust Belt cities, such as Detroit and Pittsburg, such start-ups are few and far between.

Promoting entrepreneurship

What promotes entrepreneurship? Is it differential returns to entrepreneurship? Or do entrepreneurs respond to improvements in physical and human infrastructure? Evidence shows that differences in the spatial location of entrepreneurship across districts are not a result of differences in entrepreneurial returns. The two most important factors that attract new entrepreneurs in any district in India are its local education levels and the quality of local physical infrastructure. This linkage between location of new firms and job growth is strong in both manufacturing and services industry. But there are some differences between manufacturing and services. Physical infrastructure is far more important for entrepreneurs to enter in manufacturing industry. Human capital matters more for services. There are well-understood limits to the pace with which India can accumulate physical capital. But the limitations on the speed with which the gap in knowledge can be closed are less clear. 

Is manufacturing or services creating more jobs? India has experienced a premature de-industrialisation, just like the rest of the developing world. Services are now creating more jobs than manufacturing. Productivity growth and output growth have also accelerated much more in services. Global trade in services are increasing at a much faster rate compared to goods trade. The promise of the New Industrial Revolution is that latecomers to development, like India, can shape their own growth and jobs path. They do not need to wait for China to become uncompetitive. 

Small entrepreneurs will play the biggest role in job creation. In the manufacturing sector, informal enterprises account for over 95 per cent of establishments and over 80 per cent of jobs. These are not bad enterprises or bad jobs. They are now well integrated with global supply chains, and formation of new enterprises has exploded in the tradable sector and contracted in the non-tradable sector. But the growth of small entrepreneurs is constrained by poor infrastructure.

A smart jobs strategy goes hand in hand with smart urbanisation. While the focus on mega cities have served India well in the past, with manufacturing largely located near the three big cities (Mumbai, Delhi and Calcutta), new drivers of growth and job creation are dispersing spatially. Manufacturing is de-urbanising and shifting to rural areas in search of lower land costs. Services are spatially more dispersed than manufacturing.

India’s demographic dividend, rising tide of entrepreneurial spirit, breakthrough innovations across sectors, and fast pace of structural reforms have boosted India’s economic outlook. However, the route to faster economic growth and job growth lies where one might least expect. It is in rural India, which is home to 70 per cent of the country’s population. It hosts tremendous untapped potential. Policymakers can transform rural India, build the missing links between urban and rural India, and promote secondary cities as new drivers of growth and job creation, by scaling up investments in physical infrastructure and human infrastructure. Entrepreneurs, particularly small and women-headed entrepreneurs, are much more dependent on a good physical and human infrastructure.

The writer is lead economist at World Bank