Demonetisation and the goods and services tax have led to disruption in the informal sector and the performance of the industrial sector has been lacklustre.
It’s a trend that has happened in every developing economy. As the economy develops, the number of persons employed in agriculture drops, with people migrating to the towns to take up better jobs. Productivity improves, wages go up and the economy prospers. That’s the optimistic take on the trend. There’s also another side to it, when farm plots become smaller and unviable as they’re subdivided among a growing population. Industry is unable to absorb the surplus and destitute people crowd city slums searching for work. The “Lewisian Transformation”, the trend of underemployed labour moving out of agriculture into more productive jobs, named after economist Arthur Lewis, has in many Third World countries become the “Lewisian Trap”, with most workers stuck in precarious low-wage jobs. India is no exception.
The KLEMS database, available on the Reserve Bank of India website, enables us to put some numbers to the story. It tells us that employment in “agriculture, hunting, forestry and fishing” has been falling since 2004. In 2004, this category accounted for 56.7% of all employment in the Indian economy. A decade later, in 2014, the latest year for which figures are available, “agriculture, hunting, forestry and fishing” accounted for 43.6% of total employment. It’s a huge change. In absolute numbers, that’s 4.375 million workers moving out of agriculture. Agriculture isn’t the only industry that is seeing falling employment. The “textiles, textile products, leather and footwear” industry, a labour-intensive one, also saw a reduction in jobs. That’s another 220,000 jobs gone. Job losses on a smaller scale happened in several other industries—in paper, mining, public administration & defence, chemicals, post & telecom, wood products, perhaps the result of changing and more capital-intensive technology. Where did all these people go?
But before we come to that, what does the database tell us about the trend in overall employment growth? Between 1980 and 1991, before the Big Bang liberalization of 1991, employment in the economy had a compound annual growth rate (CAGR) of 2.04%. Between 1991 and 2014, the CAGR has been 1.43%. What is truly surprising is that during the years 2004-08, when the Indian economy’s growth rates were reaching for the sky, the CAGR of jobs was a mere 0.12%. This seems really odd, given that jobs for the middle classes were so easy to find those days. It suggests that India was shining for only a section of the population. It also shows that mere growth is not enough, the type of growth is equally important and different classes benefit unequally from different types of growth. More recently, between 2008 and 2014, the CAGR for job growth has been 1.22%.
But to get back to the question: where did all those people displaced from agriculture go? The construction sector absorbed almost all of them—between 2004 and 2014, the number of those employed in construction increased by as much as 4.11 million. During these years, the number of people working in construction increased at a CAGR of 10.08%. Other sectors that saw substantial growth in employment included trade, transport, education and “other services”.
Which sectors employ the most people? In 2014, construction accounted for 13.6% of total employment, trade 10%, transport 4.3%, “other services” 4.9% and education 3.1%. Together with agriculture, these sectors together account for almost four-fifths of the jobs. Trouble is, the KLEMS database shows that growth in total factor productivity in agriculture has been either negative or very low and the same is true for the construction and trade sectors. The bulk of employment is therefore in sectors that have very low productivity. So yes, it is necessary for people to move out of low-productivity agriculture, but it doesn’t help much if the only jobs available are in the low-productivity construction sector or other such sectors. These industries are not going to provide the good jobs that aspiring young India, about whom we hear so much, seeks.
It’s not all bad news. The proportion of regular workers has increased, while that of casual workers and the self-employed has fallen. Even so, regular workers in 2014 comprised only a fifth of the workforce. The bulk of casual workers eked out a precarious living in agriculture and construction and most of the self-employed were farmers and traders. Among regular workers, the largest employment was in education.
Within manufacturing, the unorganized sector was 62.3% of the organized sector at the beginning of the century, in 2000-01. By 2011-12, according to the KLEMS database, it had shrunk to 43.9% of the organized sector. The quality of jobs as well as productivity in manufacturing has probably improved as a result, although the number of jobs might have suffered, due to the more capital-intensive nature of organized manufacturing. While we have data only till 2014, it is very likely the job situation has gotten worse since then. The droughts of 2014 and 2015 must have led to more people moving out of agriculture. But with real estate in the doldrums, the construction sector no longer provides jobs for the masses. Demonetisation and the goods and services tax have led to disruption in the informal sector and the performance of the industrial sector has been lacklustre. The lack of good jobs has already fuelled disaffection and social unrest among a section of young people.
With the next general election around the corner, it is high time the government starts focusing on job creation.
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