A looming demographic disaster

A looming demographic disaster

Increasing inequality and growing unemployment are a sure-fire recipe for social strife

In the two decades between 1991-92 when the brave new world of liberalization dawned on us and 2011-12, total employment in the country grew at a compound annual growth rate (CAGR) of a piffling 1.43%. That little nugget of information, along with lots of other data, has been recently published in a report on Measuring Productivity at the Industry Level—the India KLEMS database, available on the Reserve Bank of India website.

In the decade 2001-02 to 2011-12, according to the database, total employment increased at an even lower CAGR of 1.22%. And this is the period when we had a huge boom in the economy. Value added in the economy at constant prices over this period had a CAGR of 7.8%. The question is: if employment during this global boom was so low, what are the prospects of employment growth now?

Indeed, if the government’s plans to ensure greater tax compliance and if its push to digital payments are successful it is very likely that the informal sector will be hard hit, which will mean lower employment in the sector which accounts by far the most jobs. Since the expansion of the formal sector will take time and in any case its record of absorbing labour has so far been underwhelming, rising unemployment and underemployment will be the number one headache for the government. This is all the more likely given the backlash against globalisation in the advanced economies and the increase in protectionism. And that is not taking into account the continuous push towards more labour-saving technologies, including robotics.

Has there been a change in the structure of employment in the country since liberalisation? Well, in 1991-92 13.8% of workers were in regular employment, 31% were casual workers, while 55.2% were self-employed. Twenty years later, in 2011-12, the percentage of workers in regular employment went up to 18.5%, the percentage of casual workers was 29.8% and the rest 51.7% were self-employed.

So there has been some improvement in regular employment, but it is painfully slow. That more than half of the working population is self-employed is not because of the great entrepreneurial energies of the masses, but simply because they are forced to eke out a precarious existence by taking in one another’s washing, in Mark Twain’s memorable phrase. Very clearly, even after two decades of liberalisation, not only do we have jobless growth, but the quality of the jobs on offer is also abysmal for the mass of the population.

As economies develop the number of workers in agriculture diminishes as they find employment in manufacturing and in services, sectors with higher productivity. How has that played out in India? It’s true there has been a substantial movement out of agriculture. In 1991-92, jobs in agriculture and allied activities were 64.6% of total employment, trade accounted for 7.5% and construction employed a mere 3.3%.

Two decades later, agriculture and allied activities accounted for 48.1% of total employment, construction 10.4%, trade 9.7% and transport & storage another 4.1%—these sectors were the biggest employers. The construction sector has seen the most increase in share of jobs for the masses. Note that the clampdown on black money is likely to result in the sector being depressed for some time, with dire implications for job growth.

The database also shows that the share of labour income in value added has been coming down steadily. Out of the 27 industry groups, labour’s share of value added was lower in 17 sectors in 2011-12, compared to 1991-92. This is particularly true for the industrial sector. Conversely, the capital income share in gross value added has gone up. Capital has reaped far more gains from liberalisation than labour, a fact also seen in the steady rise in the wealth of the richest 1% of the population, detailed in the Credit Suisse wealth reports.

What about productivity? Except for a few sectors, there has been substantial improvement in labour productivity. Unfortunately though, the index of labour productivity for the construction sector, which was 100 in 1980-81, fell to 87.44 in 2011-12, as Gaurav Kapur, independent economist, points out. Note that a big chunk of the rise in employment has been in construction, which means the new jobs for the masses have been in a sector with declining labour productivity. If we take total factor productivity, which depends on technological change and innovation and the intensity with which inputs are utilised then we see that, apart from a few sectors like telecom, TFP growth has been relatively slow. One reason for this is undoubtedly the large informal sector.

In short, the last two decades have proved that while growth is necessary, it is not enough. Unless many more jobs are created for the masses, India’s much-touted demographic dividend is likely to turn into a demographic disaster, with mass migration from villages to city slums, adding to a vast lumpenproletariat with little stake in a stable society. Increasing inequality and growing unemployment is a sure-fire recipe for social strife.