Improving India’s job creation ranking

Improving India’s job creation ranking
Structural reforms in factor markets are key for this labour-surplus economy to offer productive employment
This is the season of rankings. In the past few months, several reputed international organizations have assessed, compared and ranked the performance of countries on different indicators on issues like competitiveness, ease of doing business, hunger, youth development, gender gap, press freedom and consumer confidence. Alas, there is none specifically on job creation.

India has exceeded expectations on some, and has performed not so well on others. For instance, the World Economic Forum (WEF) ranked India at the 39th position on the Global Competitiveness Index, an impressive jump of 16 places in a year. Despite such a jump, WEF cautions that India’s performance is low by global standards, and huge challenges lie ahead on the path to prosperity. This is reflected in the high average tariff that India is maintaining on its imports, low level of factor accumulation, and relatively high incremental capital-output ratio.

Among other factors, this is also due to a less than optimal domestic regulatory environment and near absence of regulatory harmonization. This is one of the reasons why India moved up by only one notch on the World Bank’s recent ease of doing business ranking. However, the bank has recognized the government’s efforts towards a better business growth environment.

Also, India’s performance on social, education and health-related indices has been abysmal. The WEF report on global gender gap reveals that on the indicator of women’s health, India is third last. Similarly, on the global hunger index, India lies among the bottom group of countries, even below neighbours like Nepal, Myanmar and Bangladesh.

Let us now view India’s performance on different indicators in the context of one of the most critical challenges it is facing: job creation. The number of jobs created in 2015 is much less than what it was a few years ago. As mechanization of agriculture and manufacturing is moving at a faster pace and the services sector is becoming more skill-oriented, fewer jobs are being created which can match the existing skill level of the vast majority.

Consequently, it is not difficult to surmise that while India’s gross domestic product (GDP) is growing, such growth is increasingly becoming exclusionary. Enough jobs are not being created for the poor, for whom affording one square meal a day is becoming challenging. Much of India’s growth is emanating from services, and taking place in sectors which require middle- to high-level skills.

India’s poor have traditionally been dependent on agriculture and manufacturing, which have ceased to offer large-scale employment opportunities. Lack of quality and affordable healthcare and education robs the poor of opportunity to compete with their well-off counterparts in the job market. As a result, the poor get stuck in unproductive agricultural activities and are under-employed in the informal sector.

All these challenges have resulted in India remaining a low middle-income country over the last couple of decades. In order to improve its status to first become a high middle-income and then a high-income country, it has to overcome the challenges of the middle-income trap.

The two most important components on which the Indian economy should focus to create jobs over the next few years are productive agriculture and mass manufacturing. The latter will help India get embedded into global production networks and the former will provide a continuous push towards the growth of domestic aggregate demand accompanied by socio-political stability.

This can be done through an emphasis on micro, small and medium enterprises, by reforming factor markets such as land, labour, capital, and attracting investment in those labour-intensive sectors which are expected to be vacated by East and South-East Asian countries as they move up the production value chain.

For a labour-surplus economy like India to become more competitive and offer productive employment to its population, the key is structural reforms in its factor markets, rather than short-term cyclical reforms. As a flanking measure, we need continuous regulatory harmonization.

Moreover, given the sluggishness in international trade negotiations, time is on India’s side for undertaking such reforms. This will not only make the Indian economy more competitive and create productive employment opportunities, but there will also be opportunities for India to become a major actor on the global economic proscenium.

For this, a dynamic factor- and sector-specific reform agenda illustrating the kind of reforms needed to reduce the cost of factors of production (land, labour, capital, logistics, etc.) and harmonize regulations to make India more competitive in specific sectors for creation of large-scale manufacturing jobs is needed. Clear demarcation between the agenda items which are to be pursued by the Centre and states, through executive orders and those which will require legislative changes, is crucial.

The agenda must include a phased implementation strategy setting out short-, medium- and long-term targets. Continuous stakeholder engagement and awareness generation on benefits will enable seamless implementation. This will go a long way in improving India’s rank on job creation.