India: Growth and Jobs in the New Globalization

This blog summarises the recently released report titled ‘India: Growth and Jobs in the New Globalization’ by the Confederation of Indian Industry (CII) and The Boston Consulting Group (BCG).The report highlights the emerging trends in employment generation and offers suggestions on how the country can prepare itself for creating new jobs in the paradigm of ‘new’ globalization.

India is one of the fastest growing economies in the world. Over the last five years, it has posted an average annual GDP growth of approximately 6.7 per cent against the global average of 2.7 per cent. Between 2004 and 2012, the period for which conclusive employment data is available, average annual GDP growth was 8.1 per cent but job growth averaged only 2 per cent. India’s employment problem is further complicated by its demographic situation; it is at the cusp of realizing its demographic dividend. Approximately half of India’s 1.2 billion people are under the age of 26; by 2020, India is forecasted to be the youngest country in the world with a median age of 29. United Nations Development Program (UNDP) estimates that by 2040 India will have the maximum share of working-age population; and in 2050 it will have the maximum number of working-age people. This significant growth in the working-age population further underscores the need to create jobs.

The magnitude of the problem can be explained as follows.

Every year, 5-7 million young people join the workforce in India. In addition, 5 million people leave agriculture to join the non-agriculture sectors and 2-3 million educated, unemployed people look for jobs in the industry and services sectors. This is assuming that it takes 5 years for the presently 10 million unemployed people to find employment. Hence, we estimate a total annual demand of 12-15 million non-agriculture jobs per annum. Against this, only about 8 million jobs have been added in these sectors every year from 2004-2005 to 2011-2012. Hence, there is a gap of 4-7 million jobs that needs to be filled. This gap is likely to widen in the future due to the growing number of young people entering the labor force each year. Following are two reasons for high growth with low job creation in India:

First, growth over the last two decades has been driven by capital investment rather than labor addition. This has resulted in an increase in the amount of capital available per worker, or ‘capital deepening’, leading to an increase in labor productivity rather than in the number of jobs.

Second, and related reason for low job creation is that the highest growth in gross value added (GVA) has been in industries that are less labor-intensive, across both manufacturing and services.

Given that employment generation per unit of economic growth in India is two-thirds that of the global average, and recognizing the historic decline in the elasticity of job creation in the country, estimates suggest that we will need a growth rate of well above the 8 per cent target in order to generate these jobs under the current growth and job creation paradigm.

In recent years, however, very few countries other than China, have achieved a sustained period of high growth and job creation. And with the emergence of a ‘new growth paradigm’ driven by the ‘new globalisation’ wherein many countries are prioritising the ‘inward look’ in their national policies, the task of achieving employment–oriented growth becomes even more diffficult. India faces the following two challenges in achieving high growth with job creation.

• The first challenge is to adopt a set of strategies that will enable India to sustain a growth rate of 8 percent or higher in the ‘new’ global economic environment, which is characterized by low to medium global growth and the absence of the ‘trade multiplier’. India has hitherto been following a model of development which encouraged a transition from agriculture to light manufacturing. This was subsequently followed by the development of heavy industry and then services. The model encouraged rapid growth of exports as well. This model, which was also sought to be emulated by countries like Vietnam, is being fundamentally disrupted today by the twin forces of growth in digital technologies, including manufacturing technologies collectively called Industry 4.0 and growing economic nationalism that puts a country’s perceived national interest above globally agreed rules and norms.

These twin forces are leading to a new and radically different model of globalization where large-scale manufacturing and global merchandise exports are losing their primacy as drivers of growth and job creation in the medium to longer term (although they will continue to be relevant). Therefore, a strategy of growth and job creation, driven largely by growth of manufacturing and exports while leveraging labor cost competitiveness is unlikely to deliver the desired results. In such a scenario, a new economic development paradigm, where in services trade accelerates and replaces the decline in merchandise trade should be considered to achieve growth with job creation.

The second, and perhaps a more serious challenge faced by India is to ensure that the high growth rate is accompanied by high job creation. As has been elucidated earlier as well, India is currently witnessing high growth but low job creation. Instead of growth being driven by an increase in ‘labor stock’ (i.e. more jobs being created) it has been driven by ‘capital deepening’ which has resulted in growth in high capital-intensive sectors as opposed to labor-intensive sectors, thereby creating fewer jobs. Going forward, high growth alone, even if achieved, cannot be relied on to create jobs; and a targeted strategy of growth together with job creation needs to be devised.

While the traditional model of globalization—and consequently the economic model of manufacturing and export-led growth—are being disrupted, a set of new opportunities are emerging from the growth of digital technologies.

The first opportunity arises from the trend of growing ‘servitization’ of business. We are increasingly witnessing changing business models with growth of services consumption and trade, driven by a consumer need towards ‘solutions’ rather than simple product-related transactions. These value-added services or solutions also command higher margins for business. This growth in services can be seen, for example, in the rise of forward services in manufacturing, like asset performance improvement and predictive maintenance services that leverage large scale data generated by connected devices. This growing servitization is already being reflected in the changing consumption patterns of countries like India & China and in global trade. In India, the services sector has shown immense promise with a compound annual growth rate (CAGR) of 8.6 per cent (2010-2014), out performing others such as China (8.4 per cent) and the US (1.8 per cent).

• The second and related, opportunity comes from the growth in platform players which is driving the growth and viability of new start-ups, individual entrepreneurs, micro-entrepreneurs employing a few workers, self-contracted workers etc. These platforms provide the necessary ecosystem for micro entrepreneurs to operate in and they also eliminate the traditional need for small businesses to invest in full-scale supply chains to become competitive. Hence, they support an entire ecosystem of self-employment of ‘job creators’, rather than only ‘job seekers’.

The global and local challenges to growth and jobs on one hand, and the new opportunities presented by servitization and the growth in platform players enabled by newer digital technologies on the other, strongly point to the need for a new economic development paradigm for India around three pillars:

• Domestic demand will have to be the primary driver of growth (although exports, especially in services, will continue to contribute to GDP growth).

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• Services will provide a strong opportunity for both domestic and export growth; even more so for job creation as manufacturing will become increasingly capital or automation intensive.

• Micro entrepreneurs will play a bigger role in driving growth and job creation, alongside larger enterprises.

The Indian Government has already launched major policy initiatives, such as Ease of Doing Business, Digital India, and Startup India, to lay a strong foundation for this new economic development paradigm. What is needed is a concerted, focused implementation of these policies as well as a special focus on ‘activating’ four key leverage points, described below, which are critical to the success of the new paradigm of growth and jobs.

  1. Risk and growth capital for micro entrepreneurs has to be scaled up rapidly, along with the rules and mechanisms for easy access to them.
  2. The learning and skilling ecosystem has to move towards a ‘life-long learning system’ as new kinds of jobs emerge with very different skill profiles. This will ensure that the appropriate skills are provided to enable employment in the new development paradigm and there is a continuous mechanism in place to update these skills as required.
  3. Finally, labor norms need to be revisited to ensure that they also cater to and support the new types of workers and their employers who will drive growth in this new paradigm.

 

 

 

Source: CII Economy Matters – April 2017

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