Economy

Job Growth Data Shows Even 5,000 Years Not Enough to Structurally Transform Indian Economy

These numbers convey the simple fact that without radical changes in policy orientation and the institutional setup, economic problems relating to the vast majority of the working population in India is here to stay for a long, long time.

A long-run perspective can often produce insights that remain obscured in short-run analyses. Take the problem of employment generation in India. It is accepted by many academics and analysts that India has not been able to address the problem of employment in recent years. In fact, the problem is far worse than even such well-informed, pessimistic analyses would suggest. And given that policy discussions about the Indian economy are bound to pick up around the coming budget, this long-run perspective might be of some use.

To get at the enormity of the problem, let us adopt a long-run perspective like the pioneers of development economists. Following the seminal work of one such pioneer, W. Arthur Lewis, let us conceptualise the Indian economy as consisting of two segments. The first segment comprises what we can call the ‘subsistence economy’, while the second segment forms the ‘modern, capitalist economy’.

Productivity and incomes are far higher in the modern segment than in the subsistence segment. Hence, addressing the problem of underdevelopment means transferring the labour force from the subsistence to the modern segment of the economy. Development economists refer to this process as a ‘structural transformation’ of the economy. The problem of employment will only begin to be meaningfully addressed when the Indian economy has completed its structural transformation.  

Indian employment trends

According to the World Development Indicators Database of the World Bank, in 1990, India’s labour force was 317.68 million; by 2019, it had grown to 517.49 million in 2019. Thus, over these three decades, India’s labour force grew at 1.69% per year.

What fraction of India’s labour force is in what we have called the subsistence segment? To a first approximation, we can identify the subsistence segment with those who are informally employed. These are the workers who are employed in low-productivity, low-paying, precarious work – without job security, without social security and with minimal rights.

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There is a lot of uncertainty about the exact distribution of the labour force into formal and informal employment. Estimates of informal employment range from 93% to 85% of total employment. To get as optimistic picture as possible, let us use an estimate that is lower than all existing ones – so let us assume that the subsistence segment in India employs 80% of the labour force.

Before developing the argument further, an important issue needs to be addressed. Even in advanced capitalist economies like the United States, a small fraction of the labour force is informally employed – these are the precariously employed, low-wage workers. In fact, the growing use of temporary, in the the place of permanent, employees has been a characteristic of the neoliberal era since the early 1980s. Thus, advanced capitalist economies have been witnessing a rise of precarious employment.

This troubling phenomenon possibly signals a reversal of the structural transformation that advanced capitalist countries had completed in the 2.5 decades after the Second World War – a trend that has led some economists to even characterise the US economy as a dual economy, a term that is typically reserved for underdeveloped countries.

Taking this fact into consideration, let us conceive of the completion of structural transformation not as the complete disappearance of the subsistence segment, but rather its continued existence as a small portion of the total economy. Therefore, let us assume that 10% of employment will remain informal even in an economy that has completed structural transformation.

Structural transformation in the Indian economy

Let us now pose the main question. How fast must employment grow in the modern, capitalist segment for structural transformation to be completed in a reasonable period of time?

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In Table 1, I compute the annual growth rate of employment in the modern capitalist segment that would be required to complete structural transformation of the Indian economy (when only 10% of employment will be in the subsistence segment) in 50, 100, 250, 500, 1,000, 2,000 and 5,000 years. I compute the ‘required’ growth rate under two alternative scenarios: in the first scenario, the labour force grows at the rate that we have observed it to be growing over the last three decades; in the second, decidedly unrealistic, scenario, the labour force does not grow.

What do the numbers in Table 1 say? If the labour force continues to grow at the same rate at which it is currently growing, employment in the modern capitalist segment must grow at 4.8% per annum to complete structural transformation of the Indian economy in 50 years. If the structural transformation is to be completed in 100 years, employment in the modern capitalist segment must grow at 3.23% per annum. If, as is extremely unlikely, the labour force stops growing from this year onwards, employment in the modern capitalist segment must grow at 1.52% per annum to complete the structural transformation in 100 years. 

To put these ‘required’ growth rates into perspective, we only need to ask: how fast has employment in the modern capitalist segment been growing in India over the past few decades? According to the Economic Survey of India, total employment in the private and public organised sectors of the Indian economy was 7.68 million and 19.06 million, respectively, in 1991; in 2011, the corresponding numbers were 11.42 million and 17.55 million, respectively. Thus, over the last two decades, employment in the modern segment (private + public) has grown at 0.48% per year and in the private sector of the modern segment at 2.13% per year.

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Returning, once again, to Table 1, we can now see the full meaning of the numbers: if the labour force and employment in the modern capitalist segment in India continues to grow at the currently observed long run rates of 1.69% and 0.48%, respectively, then the Indian economy will be unable to complete its structural transformation even in 5,000 years. If the labour force grows at the observed rate of 1.69% per year, and the modern capitalist segment generates jobs at the rate observed for the private capitalist sector, i.e. 2.13% per year, then the Indian economy will complete its structural transformation in 357 years.

If the labour force stops growing altogether while the aggregate modern capitalist segment generates jobs at the rate observed for only the private capitalist sector, i.e. at 2.13% per year, both of which are extremely unlikely for the foreseeable future, even then Indian structural transformation will be completed in 72 years.

These absurdly large numbers should go some way in opening the eyes of those who have been all fired up by India’s economic performance in the past three decades. In substantive terms, these numbers convey the simple fact that without radical changes in policy orientation and the institutional setup, economic problems relating to the vast majority of the working population in India is here to stay for a long, long time.

Deepankar Basu is Associate Professor of Economics, University of Massachusetts Amherst. He would like to thank Debarshi Das for comments.

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