India has been hit hard by the COVID-19 pandemic, particularly during the second wave of infections in the spring of 2021. The overall rate of contraction in India was (in real terms) 7.3% for the whole 2020-21 financial year. The sharp drop in GDP is the largest in the country’s history, but this may still underestimate the social, psychological, and economic damage experienced by the poorest households.
Comparing national unemployment rates in 2020, India’s rate of 7.1% indicates that it has performed relatively poorly, both in terms of the world average and compared with a set of reference group lower-middle and upper-middle economies with similar per capita incomes. Unemployment rates were more muted within the reference group economies and were also kept low by generous labour market policies to keep people at work.
After two years of lost economic growth, it is imperative for the Indian economy to “revitalise, reboot and re-engineer” its employment structure and undergo a complete transformation in terms of the degree of formality, industrial concentration, and skill intensity of the labour force.
India & Nepal Top the List in South Asia
The degree of informality in the employment structure of the Indian economy continues to be a key impediment to ensuring inclusive and sustainable growth. An informal worker is defined as a worker with no written contract, paid leave, health benefits or social security. Close to 81% of all employed persons in India make a living by working in the informal sector. Out of those engaged, the labour force in rural areas is significantly more than in urban areas, as many informal workers are engaged in farm or agricultural activities.
Among the five South Asian countries, the informalisation of labour is disappointingly the highest in India and Nepal (90.7%). Bangladesh (48.9%), Sri Lanka (60.6%) and Pakistan (77.6%) doing much better on this front.
Additionally, many small firms belong to the informal sector, ie, the unregistered/unincorporated sector, and operate at scales where they are unable to adopt productivity-enhancing managerial and production technologies. They thus remain weakly connected to dynamic markets and modern value chains.
The former may be seen by the contrasting ratios of gross value added (GVA) per worker across the informal and formal manufacturing sectors; this works out to 6.7% if the informal sector numbers include own-account manufacturing, and 11% if they do not.
The informal sector also grapples with issues like child labour, exploitation of workers, bonded labour, and human trafficking, where women end up being more vulnerable to such informality.
'Labour Productivity' Is Markedly Low in Agriculture
Secondly, India’s employment structure has in the past remained stuck in low productivity-low wage sectors, and has moved insufficiently to higher ones. A large share of India’s workforce is employed in agricultural work, where labour productivity is around 37% of the national average, while wages are 40%. While there has been a growing exit from agriculture, much has been to construction, especially, and services subsectors, with low productivity and low wages.
The fact that labour productivity (at constant 2015 $ per worker) in manufacturing and financial and transport services is 3.5 to seven times the labour productivity in the agriculture sector highlights the overreliance on farm- and non-farm employment in the agriculture sector.
India thus needs to shift its focus to high-productivity sectors like financial and professional services, infotech and manufacturing. For example, Mumbai is a leading centre for professional services that were shown to be important inputs into manufacturing, and it also is a major chemical and pharmaceutical hub. The synergies across these sectors would be reflected in people working side by side, creating innovation and spillovers, but also generating jobs for lower-skilled urban workers. In other words, one channel through which high-skilled services workers can improve opportunities for other workers is through demand for services within urban areas.
How the Private Sector Can Help
A mix of a few policy recommendations from both the demand- and supply-side measures is key to kickstarting this structural transformation in employment in the Indian economy post-COVID-19. On the supply side, changes in the skill profile of the Indian workforce are crucially needed – the National Education Policy 2020 (NEP) is hopefully a step in the right direction. It will help nurture students who have a global perspective, promoting intellectual curiosity, value addition, and, most importantly, skill development, thus helping the labour force move beyond low-productivity, menial jobs.
Additionally, private entities (especially big firms) need to be encouraged to take up a more serious role in vocational training and skilling activities. Evidence from the US suggests that around 20% to 60% of skills are developed at firms and on the job, which explains the high returns to experience.
Madhya Pradesh has launched a programme, for instance, where private-sector agencies have been entrusted with zonal assessment and placement assistance for students passing out of its ITIs. The incentives for such larger firms must be carefully structured and should be linked to assessment and employment outcomes with sound monitoring and evaluation mechanisms.
Targeted Job Creation Is the Way to Go
The supply-side policies can be effective only if sufficient high-value jobs are created in the economy in the long run. Considering the same information, on the demand front, employment opportunities need to expand in areas where labour is deployed to deliver higher productivity for enterprise and higher returns to labour. The National Employment Policy, with its goal to enable productive and sufficient job creation, must focus on metrics such as the employment-to-population ratio and the regional employment profile of young adults to foster the formulation of a forward-looking policy that absorbs people in high-value financial, tourism, transport, and professional services, among other sectors.
Additionally, infrastructural creation initiatives, such as the National Monetization Pipeline, can also play a crucial role in creating employment opportunities, thereby enabling high economic growth.
In conclusion, targeted job creation in high-productivity and/or formal sectors of the economy along with upskilling of the labour force will be key in pushing India towards its $5-trillion economy goal. Indeed, it is not the time to sit back and mourn over what is lost. In fact, it is time for the Indian economy to reboot in its present to ensure a bright future ahead.
(Himanshi Goel is an Independent Economics Consultant who advises multilateral institutions and private entities, including the Asian Development Bank (ADB), on socio-economic issues. Previously, she has worked with analytics consulting organisations like Experian, advising banks, NBFCs, and FinTechs on credit risk solutions. Views expressed are personal and do not represent any organisation. This is an opinion article and the views expressed are the author's own. The Quint neither endorses nor is responsible for them.)
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