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Rajiv Lall: Job creation - A counter-intuitive model

The rural non-farm sector has emerged as India's largest job creator since 2000 and needs to play a pivotal role in our structural transformation

Rajiv Lall 

Rajiv Lall

Job creation has to be a pressing priority for any new government. But it is worthwhile trying to understand the nature of our employment challenge.

The unemployment rate, as understood in the Organisation for Economic Co-operation and Development (OECD) world, is not a very useful indicator of the health of our labour markets. This rate has remained more or less stable at three per cent over the past decade. Indicators of changes in the structure of our labour markets provide more valuable insight about employment conditions. Our workforce, which is 482 million strong, up from 402 million in 2001, is largely self-employed or employed in low-paying casual jobs with no social protection. However, the share of regular wage-earning or salaried employees rose from 14.7 per cent in 2000 to 16.3 per cent of the labour force in 2010. In other words, we created close to 17 million regular wage-paying jobs over that period, which indicates overall improvement in our employment structure and, therefore, in employment conditions.

The good news is that the 30 per cent growth in the number of formal/regular wage earners was double the growth in casual jobs during this period. Even so, the formal sector accounted for only one in four new jobs created over this period. Our unemployment rate remained low because 43 million people of working age got on with their lives by either relying on casual employment or finding some way of being self-employed.

The empirical evidence is that countries that are successful in transforming themselves into higher-income economies first see rapid growth in the output and employment share of manufacturing, which is characterised by much higher rates of productivity growth than those in agriculture. As surplus labour from agriculture is absorbed increasingly in manufacturing, agricultural productivity begins to rise in such a way that the share of agriculture in employment falls faster than its share in output. By the time these countries reach middle-income status, the contribution of manufacturing to gross domestic product (GDP) and employment peaks and then declines in an "inverted-U" pattern. This gives way to the construction and services sectors, which eventually become the dominant contributors to employment and output. The share of manufacturing in employment in the United States, for example, peaked at 25 per cent in the 1950s and was down to under 10 per cent in 2010.

A distinctive feature of the Indian experience has been the stunted development of the country's manufacturing sector. Over the 2000-2010 period, the share of manufacturing in Indian GDP stagnated at 15 to 16 per cent, while the sector's share of the labour force has been stable at 11 per cent. On the other hand, the share of agriculture in India's GDP has seen a steady decline from 23 to 14 per cent over the same period, but its share in the labour force has fallen at a slower pace, from 60 to 52 per cent. This fall indicates a decline in labour productivity in the agricultural sector that has accompanied the fragmentation of landholdings and the decline in the average size of farms.

So where have eight per cent of the labour force gone? They have largely been absorbed by the construction industry and the service sector, and that too in rural, not in urban, India. Over 2000-2010 the share of the urban labour force grew from 24 to 27 per cent of the total workforce, which means almost two-thirds of workers displaced from agriculture found jobs in the rural non-farm sector over the period. So, in fact, it is the rural non-farm, non-manufacturing sector that has emerged as the largest job creator in India - it has added as many as 35 million jobs since 2000.

As far as structural transformations go, this is quite atypical. In fact, most observers view this as unacceptable. They point to China, where the contribution of manufacturing to GDP peaked at 40 per cent in the 1980s and has since stabilised at around 30 per cent, generating higher-quality formal sector jobs for millions. The commonly held view, therefore, is that something is seriously wrong with the Indian pattern of structural change - that we must grow our manufacturing sector much faster than we have in the past. The 12th Plan, for example, sets a goal of generating 100 million additional regular jobs in manufacturing over the next 15 years, which would double the share of manufacturing employment to more than 22 per cent of the labour force.

This is a tall order. Even in China, which is the world's manufacturing engine, regular employment in this sector peaked at about 15 per cent of the workforce in the 1980s, and is now down to about 12 per cent or the equivalent of 90-odd million jobs. Though there is no doubt that much can, and should, be done to improve the performance and growth of Indian manufacturing, there are powerful global trends that will make it much harder for this sector to absorb a disproportionate share of new job seekers in the coming years.

Manufacturing is not a homogeneous sector. It comprises various segments (five, according to McKinsey) with distinct drivers of cost, innovation and cross-border tradability. Low-cost manufacturing, which includes industries such as textiles, apparel, leather and toys, relies on low labour costs for its competitive advantage. This manufacturing segment has been the foundation for the structural transformations of our East and Southeast Asian neighbours over the past six-odd decades.

However, technological developments in the field of digitisation, robotics and 3-D printing are going to have profound implications for the future of low-cost manufacturing around the world. Such technologies are replacing low-skill labour and making it possible, to cite just one example, for toy makers in California to profitably relocate their manufacturing operations from Asia back to the US. The same is likely to happen to consumer electronics. So if we are imagining that we will be able to replicate the experience of the Asian Tigers in generating jobs and raising incomes by focusing on low-cost manufacturing, we need to think again.

As latecomers, we will have to find our own model of structural transformation. In my view, the rural non-farm sector will need to play a pivotal role. Though it may seem counter-intuitive, the future of Indian manufacturing probably lies in those segments that are not necessarily low-cost but rely on a more sustainable competitive advantage, such as engineering capability and proximity to large markets. Such a manufacturing sector will boost urban incomes and productivity gains, but it will not create employment on the scale that we need.

Similarly, our agricultural sector will continue shedding excess labour and diversify into higher value-added activities, such as dairy and horticulture. Employment opportunities are, therefore, likely to grow fastest in the rural non-farm sector, which has undoubtedly contributed to the impressive fall in rural poverty that we have seen over the past decade. This poorly understood segment of our economy needs to be empowered to allow millions of self-employed and casual workers to take advantage of the spillover effects of rising urban and farm incomes in order to find more stable and gainful employment opportunities in the future.

The author is executive chairman, IDFC

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First Published: Tue, March 11 2014. 21:46 IST