The unfolding labour market situation in India is perhaps best described as a clash of aspirations.
India is today at an inflexion point. During the current century, the country has experienced a couple of decades of economic growth rates that have been significantly greater than the growth rates in the first four decades post-independence. This acceleration of growth, combined with rapidly changing geopolitical realities, has suddenly positioned India in the eyes of itself and parts of the Western world as an economic and political counterweight to China. This view hopes that India will become a key driver of the world economy in the coming three decades. Will it?
There are headwinds to India’s ambitions. The first and biggest issue facing the country is its employment situation. The typical Indian is very young, with the median age being around 28 years. Moreover, India has a very low dependency ratio, with 100 workers for every 40 dependents (those who are too young or too old to be working). India’s low dependency ratio, the young age of its workers, and the anticipated addition of around 10 million new workers annually for the next couple of decades is often described as India’s demographic dividend or boon.
India’s labour pool: A double-edged sword
India’s demographic dividend is, however, a double-edged sword. On the one hand, it presents the country with a short window during which it will have a huge supply of young workers and human capital. On the other hand, it presents the country with a severe challenge in matching these workers to productive jobs. The labour market matching process is a challenging exercise in any country, leave alone one adding massive numbers of workers to an enormous labour pool.
An additional complication to this labour market matching challenge is the ongoing transformation of India’s economy from primarily agrarian to more non-agrarian. This presents two challenges: First, people’s skills need to change in order to successfully transit from the agricultural sector to either manufacturing or services. Second, these transitions often require workers to also change location, since non-agricultural employment opportunities tend to be in urban centers far from rural India. Since migration is costly, both monetarily and socially, imperfections in the process can act like a massive handbrake for the economy.
What is holding up the labour market?
The signs suggest that the labour market is currently failing in its task. The indications of this failure can be found in many places. The overall unemployment rate of 8 per cent (according to the 30-day moving average figure from the CMIE) is just one of them. A recent ILO report is even more disconcerting. It reports searingly high unemployment rates of graduates (29 per cent), and of those with secondary or higher education (18 per cent). Indeed, CMIE estimates the overall unemployment rate of 20-24 years to be 44 per cent. These are terrible statistics at an absolute level, even without getting into questions regarding the quality of the jobs that are on offer for those lucky enough to find them. What is holding up the Indian labour market?
One problem is the smallness of firms in India, both in terms of employment and revenue. Indian firms tend to be smaller, grow more slowly, and are less productive than firms not just in the industrial West but also other emerging economies like China and Mexico. The lack of size and the associated low productivity of firms in India limit their demand for workers. A second problem is the skill deficit in India. Firms, especially in the white-collar service sector, often complaint about not finding workers with the requisite skills. This is a problem of the education system in India. The annual ASER reports have been indicating a general problem with student learning for a while. These issues are now beginning to have effects on the labour market. If firms can’t find workers with the required skills, they just do not hire. In the white-collar segment of the labour market this shows up as extremely high unemployment rates of workers with graduate and/or high-school degrees.
Aspiration vs opportunity
The unfolding labour market situation in India is perhaps best described as a clash of aspirations. On one side we have a plethora of entrepreneurs and firms with very limited aspirations to grow. There are some firms, like Shahi exports which employ around 1,20,000 people, that become large and start competing in export markets. But those are exceptions. The rest choose to remain small even though it restricts their ability to compete with larger and more nimble competitors from Vietnam, China and Bangladesh. Some of this is possibly due to the tax or regulatory policy environment. However, a possibly equally important contributor is a lack of ambition with small entrepreneurs seemingly satisfied with their current limited scale.
On the other side of the market is a big pool of workers whose numbers are swelling by 10 million a year. These young workers are typically more educated than their parents, have high school or college degrees, and have lofty aspirations from the labour market. Moreover, their aspirations are being fed by the relentless messaging of the macroeconomic success of India in terms of markers like its aggregate GDP. These unleashed aspirations are unlikely to be satisfied by gig-worker jobs with all their attendant insecurities. Any solution to the unfolding labour market crisis will require private manufacturing firms to scale up their ambitions. A self-sustaining way to achieve that would be to incentivise exports. Available evidence suggests that firms that export tend to be larger and more productive. On the other hand, firms that produce only for the domestic market tend to be smaller and unproductive. Clearly, domestic market protection only incentivises these small and unproductive firms with all the attendant negative effects on the labour market. An export reorientation is likely to change the entrepreneurial mindset.
The unfolding clash of aspirations of workers and entrepreneurs in India has the potential to convert India’s demographic dividend into a demographic curse if the country cannot find ways of employing its young workers in jobs that meet their aspirations. Dealing with the issue should be at the top of the agenda of the next government.
The writer is Royal Bank Research Professor of Economics, University of British Columbia
