What Should Be an Acceptable Employment Rate for India?

It's time to set our policy goals straight.

Note: This is the first in a two-part series on the need for a country-level employment policy.

In India, inflation and unemployment are related economic problems.

A theoretical construct, the Phillips curve, states that the two are inversely related in the short run. In India, we have legislated to keep inflation in control. But there is no policy that considers some level of unemployment or employment as a policy target.

This is odd because while India is not among the worst performing countries in terms of inflation, it has among the worst labour participation rates and also the worst employment rates in the world. It is odd even more because ultimately all economic policy making must boil down to improving livelihoods.

The Urjit Patel Report of the Expert Committee to Revise and Strengthen Monetary Policy Framework of January 2014 states in a footnote on page 7 that “The US, however, recently announced an explicit unemployment target – to keep interest rates low till unemployment falls below 6.5%. This is consistent with what monetary policy can do, i.e. to bring actual unemployment closer to the natural unemployment level or actual growth closer to the potential growth level.”

But, the committee does not recommend the use of any unemployment rate or growth rate targets in anchoring monetary policy.

Low and stable inflation is good but it is not good enough if it is not conducive to an acceptable employment rate.  India adopted inflation targeting five years ago. During this period, inflation has been reasonably stable around a legislatively acceptable 4%. But, during this period, the employment rate has fallen from 42.7% in 2016-17 to 39.4% in 2019-20.

What is India’s acceptable employment rate? According to ILO-modelled rates, world average employment rate is 57%. India is placed by the same source at 47%. Pakistan and Sri Lanka are at 50% and 51% respectively and Bangladesh is at 57%. India needs a fix for low employment more than for its inflation problems.

Let us consider the relative importance of inflation against unemployment as policy targets.

India’s often low unemployment rates mislead us as they mask the extremely low labour participation rate. What matters is the employment rate – the proportion of the working age population that is employed.

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The ambit of a monetary policy is limited. But, the objectives of economic policy making are more than just the remit of a Monetary Policy Committee or even the central bank. An acceptable employment rate should be a committed policy target. Currently, policy making is mostly bereft of any employment focus.

Fiscal policies are bound by the Fiscal Responsibility and Budget Management (FRBM) Act (2003). Constraints imposed by the FRBM limits the government’s ability to intervene to create jobs. But, there is also apparently, a lack of political will to intervene in the post-COVID economic crisis with a strong fiscal stimulus, for fear of such spending stoking rising inflation. Monetary policies are bound by the February 2015 legislation passed by Parliament that set an inflation target of 4% with a 2 point band on either side. But, there is a trade-off between inflation and growth as the Urjit Committee Report recognises. If growth is a proxy for employment then it is apparent that the inflation targeting policy is as inimical to employment generation as the FRBM is.

We must ask ourselves how long should we wait for conservative fiscal and monetary policies to play out and stem the fall in the employment rate. India needs an acceptable employment rate level.

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A contained fiscal deficit and a contained inflation rate are pointless if they cannot help stem the fall in the employment rate even over a five year term. To fix the employment problem India needs policies to engineer a migration of labour from low-productivity farm jobs to better jobs in factories and in offices.

We make five suggestions to help achieve this:

First, India must increase employment in the government. According to data attributed to ILO, India is the worst performing country in terms of share of public sector workers as a per cent of total workforce. Only 3.8% of India’s total workforce is employed in the public sector. No other country is worse than India in this respect. USA and UK are 15.8% and 21.5%; Germany and France are 12.9% and 24.9%; South Korea and Japan are 10.3% and 10.5%. Singapore and China are 32% and 50% and Bangladesh is 8%. The justification for raising the share of government jobs is not to match to international standards but to provide adequate services which are woefully short.

Second, the government must lead the way in building physical and social infrastructure. This is also an area where India suffers a substantial deficit. The immediate impact of this would be an increase in employment in the construction industry. This is the best first step in moving labour out of farms. During 2004-05 through 2011-12 absolute number of workers fell in agriculture for the first time in India’s history primarily for this reason. Further, investment into social infrastructure is  necessary to enable an increase in government jobs.

Third, infrastructure development should concentrate on development of industrial clusters for labour intensive industries. Food processing, leather and footwear, wood manufacture/furniture, textiles and garments are industries that qualify easily. But, the effort should extend to creating manufacturing clusters to exploit the local advantage in every district or set of neighbouring districts.

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Fourth, the Centre should correct the inverted duty structure (IDS) prevailing against Indian manufacturers. IDS constitutes negative protection  for India’s manufactures. A 2017 study showed IDS exists in paper and paper products, chemical and chemical products, pharmaceuticals, computers, electronic and optical products, machinery and transport equipment; another study showed IDS in electronic products like refrigerators, ACs, washing machines, microwave ovens. Performance-linked incentives (just awarded by GoI in 12 sectors in AtmaNirbhar Bharat 3.0) alone will not generate domestic manufacturing capacity.

Finally, it may be worth devising a mechanism to declare a project as a non-performing asset if it fails to provide the employment it promised to provide when it sought any benefit from the government. Promoters of such projects may be required to contribute to a jobs-creating fund in lieu of their default.

All the above is only a partial blue-print to generate growth, to create jobs. It is, however, an appeal to think radically on the problem of job creation by setting a measurable target and by making a few suggestions.

Santosh Mehrotra is editor, Reviving Jobs. An Agenda for Growth (Penguin, 2020). Mahesh Vyas is CMD, Centre for Monitoring of the Indian Economy.