Creating jobs: Remove roadblocks to investment and labour market efficiency

Conventional macro-economics tell us that if the government chooses to spur employment generation in the short-run, it needs an expansionary monetary policy and a profligate fiscal policy. Elevated inflation will have to be tolerated in such overindulgence. 

If the government abhors such a reckless policy, then it needs to wait for the business cycle to play out and let enterprise invest only when it finds it appropriate to do so. In the meanwhile, it may work towards removing impediments that deter private sector from investing aggressively and also remove those obstacles that do not allow labour markets to function efficiently. 

Ultimately, only aggressive investments by the larger corporate sector enterprises will create the jobs we need. These could be public or private sector companies -- Indian or foreign. Hope hinges essentially on the larger companies. 

It is important to shift the discussion on jobs away from the two opposing arguments touted in political debate today. The opposition holds the Prime Minister responsible for a comment in a pre-poll rally to the point of implying that it is the government who is responsible for providing jobs directly. At least that is the way a large part of the electorate is left to interpret the argument. Everyone in India loves a government job. But, everyone also agrees that we need less government in our lives. It is important that public debate to score political brownie points does not skew expectations to the point of making government job a right. We already see this in the several agitations for reservations. 

The Prime Minister and the ruling political dispensation at large has tried every trick to complicate the discussion -- from emphasising self-employment to discrediting available data to presenting data of doubtful credibility -- and failed to identify the importance of investments by large enterprises (preferably in labour intensive sectors) in generating desirable jobs. 

I find the ruling dispensation's poor taste for quality data to be misguided and this is a root cause for the disconnect in dialog. Equally, I find the absence of investments as an important factor in the debate on jobs to be a serious folly. 

Early last month, the CSO released results of the Annual Survey of Industries for 2015-16. It is a pity that these statistics are released with a lag of over two years. Nevertheless, the ASI does provide very useful information on employment trends in the organised industrial sector. 

According to ASI, 14.2 million persons were employed in organised industry in 2015-16. Employment grew by a tepid 3 per cent during this year. In the preceding year, employment growth was worse at just 2.5 per cent. 

Over 230 thousand factories added only 350-400 thousand jobs during each of these two years -- less than two additional persons per factory. This was the pre-demonetisation and pre-GST era. 

ASI data show a severe slowing down of investments in organised industry since 2012-13. In this year, employment actually shrunk by 3.5 per cent to 12.9 million compared from 13.3 million in 2011-12. Although employment did recover in 2013-14, the growth rates have remained very anemic since then. This was not the case earlier. 

Employment in organised industry grew handsomely during the three years 2004-05 through 2006-07. It grew by 7.4 per cent in 2004-05, then 7.8 per cent in 2005-06 and then sharply by 12.6 per cent. Nearly 2.4 million jobs were added by the organised industries sector during these three years. Growth in employment slowed down thereafter but still, it was much better than what we have seen in the past two years. 

Average growth in employment between 2007-08 and 2011-12 was a reasonable 5.6 per cent per annum. About 3.2 million jobs were added in the organised industrial sector during these years. 

The relation between growth in investment and growth in employment is apparent from the ASI data. Inflation-adjusted investments (growth in fixed capital) in organised industry grew handsomely at over 10 per cent per annum during the period 2004-05 through 2011-12. During this period employment grew at well over 7 per cent per annum. Inflation-adjusted gross value added grew at 9.5 per cent per annum. Evidently, as investments grew at a robust clip, industry grew well and its path was not of jobless growth. 

In the four years 2012-13 through 2015-16, growth in real investments dropped sharply to 1.5 per cent per annum. Correspondingly, growth in employment dropped to 1.7 per cent. Growth in gross value added was below 1 per cent. 

To address the issue of jobs and growth we need to shift the debate to investments. We can undertake reforms and wait endlessly for the business cycle to play out, but as political pressures to reserve jobs for sectarian groups keep rising we may recall what Keynes said, in the long run we are all dead.


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