India's biggest policy challenge

Lower labour force participation needs attention

Recovery in economic activity with the ebbing of the second wave of Covid-19 helped create jobs in the last quarter of 2021. According to the Periodic Labour Force Survey’s latest quarterly bulletin, released last week, the unemployment rate for workers of 15 years or above in urban areas came down to 8.7 per cent in October-December 2021, compared to 10.3 per cent during the same quarter of 2020. On a sequential basis, the unemployment rate declined from the level of 9.8 per cent. The labour force participation rate also increased marginally during the quarter to 47.3 per cent compared to 46.9 in the July–September 2021 quarter. While the unemployment rate declined during the quarter under review, it is still fairly high.

Since the impact of the third wave was relatively limited and economic activity recovered sharply, it may not have affected employment the way the previous two waves of the pandemic did. The actual situation would be known once the data for January-March 2022 is out. As most restrictions have now been lifted, including in the contact-intensive sectors, the employment situation should improve in the coming quarters, assuming Covid cases remain contained. However, the overall employment situation is likely to remain challenging over the medium term. It will remain the most pressing policy challenge in the foreseeable future. Employment creation depends significantly on the level of growth and expansion in economic activity.
 

According to the Reserve Bank of India’s (RBI’s) April estimates, after a strong headline number in the first half of the current fiscal year because of the base effect, economic growth is projected to be only around 4 per cent in the second half. Besides, downside risks to growth are increasing. The RBI has started increasing the policy rate to contain inflationary pressures, which could affect economic activity. Slower economic growth is likely to yield fewer employment opportunities. The global economic outlook has also worsened in recent months. Higher inflation is forcing large central banks to increase interest rates. The tightening of global financial conditions and slower growth will have a bearing on the Indian economy. Aside from these near-term evident risks, India also needs to deal with a structural problem, which could actually worsen with slower growth.

India’s labour force participation is significantly low compared to other countries. It was at 47.3 per cent in the December 2021 quarter. According to the data featured by the World Bank, the labour force participation rate in the US in 2021 was at 61 per cent, while in China it was at 68 per cent. This means a large number of people in India are not joining the labour market because of lack of opportunities. The female labour force participation rate — at about 20 per cent — is even more worrying. The basic reason for lower workforce participation in India, however, is well known. India has not been able to take advantage of its surplus labour to develop a large manufacturing base. The current policy of incentivising a small number of large firms would help to some extent but is unlikely to create employment at the scale required. India needs a more comprehensive policy approach, which addresses issues ranging from labour laws to tariffs. Without creating a large manufacturing base, India will not be able to address the employment challenge.