Unemployment problem: India must strengthen the manufacturing sector

Radhicka Kapoor

The Labour Bureau’s last household survey (2015-16) reports India’s unemployment rate at 3.6% (by the Usual Principal Subsidiary Status definition), a figure lower than that of several advanced economies. So why are jobs such a hot button issue?
Dig a bit deeper and startling facts emerge. An examination of unemployment rates (UR) across different age groups shows that UR for the youth (age group 15-29 years) stood at 10.3%, considerably higher than that for the older job seekers (30-59 years) at 1%. Additionally, detailed analysis of the UR across different educational categories shows that the UR increases with educational qualifications. The UR for those with graduate and post graduate (and above) degrees was significantly high at 13.7% and 12.5% respectively. In contrast, the UR for those who are not literate and are literate below primary level was less than 1% in 2015-16.
A further disaggregated analysis of UR by age and educational qualification shows that UR for youth with graduate degrees and postgraduate and above degrees was close to 30%. These statistics reflect that India’s youth, and the educated ones in particular, face a serious employment crisis — a predicament that is only likely to exacerbate as the young population gets more educated. India’s educated aspirational youth are seeking well paying productive jobs commensurate with their educational qualifications. So where will these productive jobs come from?
India’s inability to create productive jobs for its rapidly rising young workforce stems largely from the failure of its manufacturing sector to become an engine of job creation. Unlike other countries at similar levels of development, India has achieved spectacular growth rates without witnessing growth of its manufacturing sector. The share of manufacturing in GDP and employment has remained virtually stagnant at 15% and 12% respectively over the past three decades. The rapid service-led growth experience over the last decade has lent credence to the belief that not only has India leapfrogged the phase of manufacturing-led development and set out its own idiosyncratic path of structural transformation, but also that the idea of manufacturing-led growth is obsolete . This could not be further from the truth.
Manufacturing generates the strongest forward and backward linkages across other sectors of the economy, which are important transmission links to growth and job creation. With a strong multiplier effect, manufacturing has the potential to generate faster growth of employment in the organised sector than the services sector. Apart from generating direct employment, rapid manufacturing growth drives rapid growth of employment in other sectors too, as the production processes in manufacturing increase the demand for raw materials, energy, construction and services from a broad array of supplying industries. Additionally, manufacturing activity raises growth of non traded services through the income effect.
The India Employment Report (2016) identifies another compelling reason for making a transition from service-led growth to manufacturing-led growth. Services-led growth has created a large imbalance between domestic absorption (requiring mainly goods) and domestic production (of mainly services) that has led to unsustainably large trade deficits. Services exports simply cannot finance the required goods imports. A country cannot trade services for most of its goods. Efforts to reduce the trade deficits must correct this imbalance between domestic absorption and domestic production; and manufacturing-led growth can ensure this. As India’s trade and current account deficit widens, this issue becomes more pertinent than ever before.
There are many who argue that India has missed the manufacturing bus and that automation and robotics will spell the end of manufacturing jobs. While it is true that workers are likely to be displaced by technological changes, it is also true that several new tasks and occupations will emerge, thereby creating a reinstatement effect. Importantly, in developing countries such as India, where labour costs are still relatively low and there are significant financial costs associated with adopting and implementing new technologies, the pace of automation is likely to be slower than in the advanced world. Therefore, even though it may be technically feasible to automate, it may not be economically feasible. This gives India a longer window of opportunity to adapt and prepare for technological changes and build a strong robust manufacturing sector. Ignoring the potential of this sector in addressing India’s employment and macroeconomic challenges would be a monumental mistake.