Jobless and losing hope: The downturn of India's workforce

While India’s unemployment challenge has assumed a worrying proportion and is now being looked at as the most important headwind for the prospect of post-pandemic economic recovery, it was a long time in the making.

The triumvirate of structural, cyclical and policy implementation challenges all have a role to play in this undesirable outcome, especially for a populous country that is as young as India.

The problem began to manifest in 2006, by which time the agriculture sector had reached its peak employment level. Interest in farming dwindled as climate change rendered farm incomes vulnerable – suggestive of the structural challenge plaguing the economy.

By that time, India’s employment elasticity (the percentage change in employment associated with a 1% increase in GDP), which peaked at 0.31 by 2002, had already started to decline. It touched its lowest point of -0.04 in 2014 before recovering, albeit modestly. In fact, the average elasticity between 2006 and 2018 was a mere 0.01. Not surprisingly, as the agriculture sector started to release workers in large numbers, the absorptive capacity of the other sectors was put to test.

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Generally, the construction sector, which is India’s second-largest employer after agriculture, acts as a shock absorber for the economy as it can employ many unskilled and low-skilled workers moving out of agriculture. As long as the construction sector was doing fine, total employment in the economy was rising, albeit at a slower pace. As the less employment-intensive services emerged as the fastest-growing sector of the economy, employment elasticity continued to drop.

Post 2013, the construction sector went into a tailspin as the bubble burst once the Reserve Bank of India announced strict non-performing asset (NPA) recognition measures. The RBI announcement resulted in a large number of real estate companies going bust as the banks had to close the liquidity tap that, till date, had allowed many unviable businesses to continue to be recognised as performing, although they were, for all practical purposes, NPAs. The ensuing cyclical downturn of this sector further compromised the economy’s ability to create jobs.

Biggest hurdle

However, India’s employment generation capacity faced its biggest hurdle in the form of the policy-driven push towards economic formalisation. Not that economic formalisation is not desirable — every economy that aims to grow and develop goes through this process. However, a country of India’s stature faces a unique challenge — that of a vast number of unskilled workers.

A drive towards economic formalisation requires enabling factors that allow the working population to move up the skill set continuum to take advantage of the potentially higher-skilled jobs that would likely be available in large numbers. Unfortunately, the fast pace of formalisation has resulted in immense stress on the informal sector that provides jobs to a vast majority of India’s workforce.

Demonetisation proved to be the biggest challenge for India’s informal workers as many companies, unable to adapt to the fast-changing business environment, had to close, rendering a large number of workers jobless.

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Even a policy as desirable as GST has put many such companies out of business since the bigger companies to which these entities were providing ancillary support stopped doing business with them, as it directly impacted their ability to get input tax credit (ITC).

Then came the pandemic. The micro, small & medium enterprises (MSMEs), a large number of which operate in the informal sector, faced their biggest existential crisis.

In fact, the pandemic has spelt disaster even for the MSMEs operating in the formal sector. An analysis of RBI data on the performance of non-financial companies (NFCs) listed in the Indian stock markets shows that the expected ‘K’ shaped recovery in the immediate post-lockdown period continues unabated – the bigger companies continue to gain market share at the expense of the MSMEs.

By the first quarter of 2022, their share in total sales fell below 4% for the first time ever, and it dropped even further during the second quarter of 2022 — even two years after the lockdown. This has obvious implications for employment generation. As the Centre for Monitoring Indian Economy data on employment suggests, India has now seemingly entered a period of job-loss growth from an earlier period of jobless growth as total employment currently remains below the pre-pandemic level.

Out of the labour force

An attendant problem of this prolonged period of low to no employment generation is that currently, India has virtually the largest share of discouraged workers in the world. As the unskilled to relatively low-skilled workers fail to find jobs for a prolonged period, they become discouraged and eventually drop out of the labour force.

For the uninitiated, those who are in the working population age range (15 to 64 years) and are actively looking for jobs are considered to be part of the workforce. The proportion of this population (out of the total population in the working age group) forms the labour force participation rate (LFPR). Those who are not actively looking for jobs are considered discouraged workers and hence, are not part of the workforce.

There can be multiple reasons for a worker being in this category — wanting to study further, falling sick or societal mores (for instance, stigma about working women). However, not getting work is also an important reason for discouragement.

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The current LFPR, at around 42%, indicates that close to 60% of the population who can participate in the workforce, remain outside it.

Consistent inability to secure livelihood, therefore, remains an important factor accounting for low LFPR. And a high unemployment rate despite low LFPR has an ominous portend. We are worried that these would have serious repercussions for India’s ability to reap the demographic dividend that its population has to offer.

The most pertinent reason that can be ascribed to the average skill of the Indian workforce being skewed toward the lower end of the skill continuum is that public spending on health and education remains quite low. This limits India’s ability to move its workers up the continuum even as the economy formalises faster.

Policy measures

The immediate policy measure would be to increase both these spends by an additional 1% of GDP in the 2023 budget by reallocating expenses away from the populist spending plans. While the benefit of such spending would accrue only in the long term, there are a few other measures that help generate more employment in the short to medium term.

Infrastructure focus remains at the heart of these policies, given the high employment elasticity of this sector. Fortunately, the government, through focused public spending on infrastructure and putting in place multiple project pipelines is moving the needle somewhat. That said, a more practical solution would be to ensure that the stress on the MSMEs is reduced adequately enough to prevent more of them from throwing in the towel.

An important step in that direction would be to significantly raise the exemption threshold for MSMEs in GST compliance to encourage bigger companies to do business with them, without having to worry about not getting the ITC.

While that can lead to some erosion of tax revenues, such measures can not only help prevent further job losses, but can even aid job creation by encouraging MSMEs to set up businesses. This can trigger a virtuous cycle of reducing discouraged workers, raising the level of employment and improving consumer confidence.

With such measures, the benefits of improved consumption and robust economic activity through higher tax revenue would eventually outweigh the loss in revenue.

(Kunal Kumar Kundu is India Economist, Societe Generale Corporate & Investment Bank)