Economy Insights. Employment in India. Uneven and Weak. Vidya Mahambare Ramola Nadkarni

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1 Economy Insights Employment in India Uneven and Weak Vidya Mahambare Ramola Nadkarni August 2011

2 Employment in India: Uneven and Weak A study by CRISIL Centre for Economic Research Vidya Mahambare Analytical contacts vmahambare@crisil.com

3 Employment in India: Uneven and weak Key points India needs at least 55 million additional jobs by 2015 twice the job addition between 2005 and 2010 to maintain the current ratio of employed people to total population of 39 per cent. The estimate assumes that the number of self-employed persons will decline by nearly 25.5 million, as it had happened during With millions of people employed today either retiring or losing their jobs, new job hiring will have to exceed 55 million by For growth to be inclusive, employment intensity of production will have to increase. Employment intensity the number of employed persons per lakh of real GDP declined to 1.05 in 2010 from 1.71 in Appropriate policies are needed to complement high growth for facilitating the required job creation. Easing demand constraints in manufacturing through labour reforms and supply constraints in services through fasttrack reforms in higher education will be the key for future job growth. Between 2005 and 2010 the addition in jobs was 27.7 million but the number of self-employed people decreased by 25.5 million. This restricted the increase in number of employed people to 2.2 million. The pattern of employment generation was lopsided during In manufacturing - a crucial source of jobs for relatively low-skilled labour - employment declined by nearly 7 per cent, despite a faster growth in manufacturing output. In services, employment growth slowed in financial intermediation and business services a key source of salaried jobs. In contrast, employment grew by almost 70 per cent in the construction sector, but it was mainly in casual jobs. 1

4 Employment in India: Uneven and weak Creating job opportunities for those who choose to work is central to inclusive economic growth. An increase in job opportunities, in turn, encourages more working-age people to seek employment. This expands the pool of potential workers, a key input to faster economic growth. The NSSO (National Sample Survey Organisation) report on employment in India published in June 2011 provides the base data to assess the extent of job creation between 2005 and CRISIL Research has used data from the NSSO report and data on population projection for India to assess employment growth in the decade of 2000s, its characteristics and to estimate the addition to jobs required by Employment data available for India specifies only the net addition to employment the difference between employment (self-employed + jobs) added and lost over a specified period. It does not provide data on new job hiring and jobs losses separately and same is true for self-employed. The estimates for job additions presented here, thus, reflect the net impact of new job hiring minus jobs lost. Figure 1: Labour market dynamics Population Labour force Participation rate Employed Unemployed Self employed Jobs Regular Causal Source: CRISIL Research 1 The estimates presented here are based on data from principal activity status (ps) and subsidiary activity status (ss) of employment. As per the NSSO definition, the usual principal status (ps) includes persons who have worked for a relatively long part of the 365 days preceding the date of survey. The subsidiary status (ss) includes those persons from among the remaining population who had worked at least for 30 days during the reference period of 365 days preceding the date of survey. 2

5 Employment = jobs (salaried plus casual) + self-employment : Net addition to jobs = 27.7 million : Net addition to jobs = 27.2 million Employment can be broadly divided into two categories - jobs (salaried and casual) and self employed. The estimates based on a recent NSSO report released in June 2011 indicate that overall employment in India increased by 2.2 million between 2005 and 2010 as against 92.7 million between 2000 and These aggregate numbers, however, mask important aspects of labour market dynamics such as the break-up between self-employment and jobs, salaried and casual jobs, rural and urban employment, and also, state and industry-wise labour market movements. For example, a change in the aggregate employment is often misinterpreted as a change in job creation. The much-discussed 2-million employment gain between 2005 and 2010, for example, does not indicate the extent of new job hiring, but reflects net changes in both selfemployment and jobs. Between 2005 and 2010, an increase of 27.7 million in jobs was largely offset by a decline of 25.5 million people in the self employed category; this restricted the total employment gain to 2.2 million (Figure 2). Between 2000 and 2005, while jobs had increased by 27.2 million, the self-employed segment had expanded by 65.5 million. This had resulted in total employment gain of over 92.7 million. Figure 2:Net addition to employment, in million to to Jobs Self-employed Total Source: CRISIL Research estimates using NSSO reports The fall in self employment between 2005 and 2010 can majorly be attributed to fall in self employment in agriculture. Some of those who were self-employed in agriculture could avail of the limited employment opportunity in other sectors (mainly in construction) moved out of agriculture. This movement of labour out of agriculture into other jobs in rural areas lends support to the belief that availability of jobs in other sectors encourages excess labour to move out of agriculture. Despite the fall in agriculture employment between 2005 and 2010, there continues to be excess dependence on agriculture for employment given its diminishing share in India s GDP. The trend of a shift of labour out of agriculture into nonagriculture needs to accelerate. 3

6 Table 1: Changes in employment, in million Self employed to to Jobs Regular Casual Total Self employed Jobs Regular Casual Total Rural Urban Total Source: CRISIL Research estimates using NSSO reports Net addition to jobs between 2005 and 2010 was marginally higher as compared to the previous 5 years (Table 1). The job additions should have been significantly higher, given that the Indian economy had expanded at the average rate of 8.6 per cent between 2005 and 2010 compared to an average growth of 6.0 per cent between 2000 and The lower-than-hoped for addition to jobs during 2005 to 2010 could partially reflect the impact of the economic slowdown on private sector jobs during the last 2 years of the NSSO survey, following the global economic crisis. But it also reflects the exiting constraints to accelerating employment generation in India. With regard to pattern of job creation, the trend clearly shifted in favour of casual jobs during the second half of the 2000s as compared to the first half, with nearly 22 million out of 27.7 million addition to jobs coming from casual jobs (Table 1). Rural-Urban job mix Rural India accounted for lion s share of job additions from 2005 to 2010 In contrast to the first half of the decade, majority of the job additions from 2005 to 2010 took place in rural India. Of the 27.7 million job additions, rural areas accounted for nearly 17.8 million, which were largely in the form of casual jobs (Table 1). Further, nearly 80 per cent of increment in rural jobs came from six states Uttar Pradesh, West Bengal, Andhra Pradesh, Rajasthan, Madhya Pradesh and Bihar. Barring Bihar and Andhra Pradesh, the economic growth of the remaining four states had been considerably lower than the India-average. But in all these states, the construction sector grew by an average of nearly 9 per cent during this period and most job additions in the rural areas of these states have been driven by the construction sector. Some of the people who have moved from agriculture to construction could have secured employment through social schemes like MNREGA, and have been counted under the subsidiary activity status (ss) status. 4

7 Sectoral-pattern of employment Decline in employment intensity, especially in manufacturing, is a concern Figure 3: % share in employment Agriculture Industry Services Source: CRISIL Research estimates using NSSO reports Table 2 Level of employment Employment in million Agriculture Industry Manufacturing Construction Services Total Source: CRISIL Research estimates using NSSO reports In services, addition to employment stood at a mere 8.6 million in the second half of the 2000s as compared to over 30 million in the first half though all service sectors grew faster in the second half of the decade(table 2 & 3). In industry, too, addition to employment dropped to 14.7 million in the second half of the decade from 28.1 million in the first half. Within industry, manufacturing employment increased sharply from 39 million to 56 million in the first half of 2000s, but it dropped by nearly 4 million thereafter. As a result, the share of manufacturing in total employment declined to 11.4 per cent in 2010 from 12.2 per cent in 2005 (Figure 4) Construction was the only sector in which net addition to employment was higher in the second of the decade (18.2 million) as compared to the first half (10.2 million). The construction sector, which accounted for 8 per cent of India s GDP in , therefore raised its share in employment to 9.6 per cent in 2010 from 5.5 per cent in 2005 (Figure 4). It appears that in rural areas social sector schemes such as MNREGA and rural road programmes have substantially increased construction jobs. 5

8 Figure 4: % Share in total employment Manufacturing Construction Source: CRISIL Research estimates using NSSO and CSO reports Table 3 Sector-wise real GDP and net employment growth to to Sectoral Sectoral GDP Employment Employment GDP growth % growth,% growth % growth % Agriculture Mining Manufacturing Electricity & gas Construction Trade & hotel Transport & storage Financial Intermediation & business services Public admin, social services Total Total ex agriculture Source: CRISIL Research estimates using NSSO and CSO reports As a result of weak employment growth, employment intensity - measured as the number of employed persons per lakh of real GDP declined to 1.05 during from 1.7 in the preceding five years (Figure 5). This remains a serious concern for a country that has the second largest working age population in the world, most of which continues to be low-skilled. For the much-desired inclusive economic growth, it needs to translate into a significant increase in jobs, especially in the manufacturing sector. 6

9 Figure 5: Employment Intensity = Number of persons employed per 1,00,000 Rs real output Agriculture Industry M anufacturing Construction Services GDP Source: CRISIL Research estimates using NSSO reports Self-employment in manufacturing and services declines In addition to lower-than-hoped-for job creation, another area of concern emerging from our analysis is the apparent decline in entrepreneurship in the second half of 2000s. An analysis of data from the NSSO surveys reveals that, in the first half of 2000s, self-employment had surged by 65.5 million, while agriculture employment had increased by only 34.2 million (Table 4). This suggests that self-employment, or entrepreneurship, in other sectors had also increased substantially over this period. A study of industry-wise data indicates that the increase could have been driven by trade and hotels, and manufacturing sector. These two sectors had witnessed significant net additions to employment during this period. In the second half of 2000s, however, self-employment in sectors other than agriculture also appears to have declined. Table 4: Changes in employment in million to to Self employed Agriculture Soruce: CRISIL Research estimates using NSSO reports Projected addition to jobs required by economy Job additions of at least 55 million required by 2015 Despite higher economic growth in the second half of 2000s, India has not been able to generate sufficient number of jobs in manufacturing and services. The GDP growth increased to 8.6 per cent during from 6 per cent during , but the net addition to jobs remained almost flat at around 27 million during the two time period. While net additions to jobs during the second half of the 2000s decade have been higher than the much-discussed 2 million number, this is clearly not enough to ensure inclusive growth. For example, even to maintain the current employed-to-population ratio, net additions to employment of nearly 30 million would be required between 2010 and 2015 vis-à-vis the 2.2 million increase between 2005 and And if we wish to move another 25 million move out of self-employment, which is largely restricted to agriculture in India, the country would require net job additions of nearly 55 million. This is twice the number of job addition of 27.6 million between and Further, if the economy is to go back to the high employed-population ratio of 2005, net addition to jobs 7

10 would have to be to the tune of 88 million. Achieving this will pose an overwhelming challenge without appropriate policy support. Our analysis boils down to two questions - What policies would persuade existing firms to hire more? And what policies would create more number of firms across India and across sectors? The answers to these questions are well documented from the experiences of other countries including China. Large scale labour-intensive manufacturing units are a rarity in India, since the real cost of employing labour is high in manufacturing. For example, it is virtually impossible for a manufacturing company with more than 100 employees to fire any employee even if it is facing bankruptcy. Hence, demand for labour has not increased fast enough in manufacturing. In contrast, in the service sector, especially high-skilled services such as financial intermediation and business services, it is shortage of skilled labour that is constraining job creation. This is evident from the fact that wage growth in recent years in skill-intensive sectors has been strong. Understanding and alleviating constraints in labour demand in manufacturing and skilled labour supply in services would be the key for job growth. India s economic policy urgently needs to address these issues to make the growth inclusive. 8

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