No shortcuts to solving India’s growing jobs crisis

In the recent past, India’s jobs crisis has come to the fore. There is no specific reason for it, given that India has had a this crisis for a while now, with the media discovering it only recently.

As per the OECD Economic Survey of India released earlier this year, close to 30 per cent of India’s youth (individuals in the age group 15-29) are neither employed nor in education or training. Data from the Labour Bureau suggests that only three out of five Indians who are seeking jobs through the year, find one. In rural India, only half the individuals seeking a job through the year, are able to find one. Long story short — India has a jobs crisis.

Arvind Panagariya, while he was Vice-Chairman of Niti Aayog, was asked, on more than a few occasions, why India had a jobs problem. As late as August 25, 2017, around a week before his term at Niti Aayog came to an end, he remarked: “The major impediment in job creation is that our entrepreneurs simply do not invest in labour-intensive activities.”

It’s not fair to blame just the entrepreneurs. An entrepreneur will go to areas where he sees value, and in the process if he ends up creating jobs, then so be it. The bigger question is why have entrepreneurs stay away from labour-intensive activities.

Given India’s population, the country’s natural comparative advantage should have been in large-scale, labour-intensive manufacturing. But sectors like automobiles, engineering goods, pharmaceuticals and software, where we have done well, are both capital and skilled labour-intensive.

As far as labour-intensive sectors like apparels, food-processing and footwear, are concerned, these sectors haven’t really progressed in India. Let’s take the case of apparels. This is a hugely labour-intensive sector. As per an estimate made in the Economic Survey, the sector creates nearly 24 jobs for every lakh of investment. This is a sector which is 80-fold more labour intensive than automobiles and 240-fold more labour intensive than steel.

Apparel exports grew rapidly in East Asian economies and pulled them out of poverty. As the Economic Survey points out: “The average annual growth of apparel exports was over 20 per cent, with some close to 50 per cent.” In the Indian case, textiles and ready-made garments exports have more or less stayed flat between 2013-2014 and 2016-2017.

The question is why? Labour costs in India are similar to that of Bangladesh, but cheaper than that of Indonesia, Vietnam and China. But the logistic costs are the highest in India at $7 per kilometre of road transport (to be able to get the merchandise to the ports from where it can be exported).

The logistic costs in China are at $2.4-2.5 per kilometre. In Bangladesh, they are at $3.9 per kilometre. In Vietnam, the logistics costs are the same as India’s, but delivery to the east coast of the US takes 14 days. It takes anywhere between 21 to 28 days from India. The turnaround time is greater in India.

What does not help is the fact that most Indian apparel firms are very small. As per the Ease of Doing Business — An Enterprise Survey of Indian States, close to 85 per cent of firms employ less than eight workers. As the Survey points out: “At one extreme, enterprises with less than eight work­ers employ more than four-fifths of the apparel work­force in India, and less than 1 per cent in China. At the other extreme, nearly 57 per cent of Chinese workforce is in enterprises larger than 200 workers, but barely 5 per cent in India. The Chinese apparel industry is highly compet­itive with $187 billion in exports compared to just $18 billion for India in 2014.” Hence, the ability of Indian firms to execute large orders is limited.

The apparels sector, which has the potential to create a huge number of jobs, hasn’t been creating them. Most firms in this sector start small and continue to remain small. One reason for this lies is that historically, labour-intensive sectors in India came under small scale industries up until 2000. Clearly, the historical hangover persists.

As the Enterprise Survey of Indian States points out: “The largest enterpris­es — employing over 200 people — are mostly concentrated in industries like manufacturing of mo­tor vehicles, trailers, transport equipment, pharma­ceuticals, and textiles.”

The question is, why do firms in labour-intensive sectors start small, and stay that way. The answer lies in something that Jagdish Bhagwati and Arvind Panagariya wrote in India’s Tryst with Destiny: “The costs due to labour legislations rise progressively in discrete steps at seven, ten, twenty, fifty and 100 workers. As the firm size rises from six regular workers towards 100, at no point between the two thresholds is the saving in manufacturing costs sufficiently large to pay for the extra costs of satisfying these laws.” Pangariya knew why entrepreneurs stayed away from labour-intensive sectors. Hence, economists also tend to get rhetorical once they join the government.

To conclude, if the government wants to get labour-intensive sectors going, then major labour law reforms are necessary. Along with that, logistics costs need to fall. That can only happen with an improvement in physical infrastructure. There are no shortcuts.

The writer is the author of India’s Big Government — The Intrusive State and How It is Hurting Us