Unemployed in a thriving economy

Print edition : March 24, 2006

India's trajectory of growth is not matched by employment generation. This will lead to social unrest unless the government rethinks its economic priorities.

For three years running, the rate of growth of the Indian economy has been extraordinary. The growth rate of the gross domestic product (GDP) is estimated at between 7.5 and 8.5 per cent in the years 2003-04, 2004-05, and 2005-06. While these figures conceal sectoral differences, such as the extremely poor performance of agriculture and the disproportionately high rate of growth of services, they are indeed remarkable. But new evidence suggests that this may not help resolve India's principal economic problem: its large and growing reserve of unemployed labour.

It is widely acknowledged now that since the 1980s India has been experiencing a trend rate of growth well above the much-maligned "Hindu rate" that it experienced during the first three post-Independence decades. Government spokespersons have repeatedly claimed that economic "reform" since the 1990s has helped consolidate this gain and prepare the ground for a transition to an even higher rate of growth. Differences, if any, relate to the level - 8, 9 or 10 per cent - of this expected rate.

A recent survey by the official National Sample Survey Organisation (NSSO) relating to January-June 2004 suggests that this obsession with GDP growth may be diverting attention from the more fundamental problem afflicting India's labour surplus economy. The results of the survey indicate that the jobless growth syndrome that has characterised the liberalisation years persists, resulting in a further increase in the unemployment rate.

It has been recognised for some time now that the pattern of economic growth in India recent times in has been such that employment growth does not keep pace with and falls far short of the rate of output growth. Past NSS rounds have pointed to a sharp, and even startling, decrease in the rate of growth of employment, defined to include those reporting themselves as having been employed in some principal or subsidiary activity for a relatively longer time during the year.

The problem has not been as severe in urban areas, where the annual rate of employment growth is estimated (using population figures from the Census) to have risen from 2.77 per cent to 3.39 per cent between the periods 1983 to 1987-88 and 1987-88 to1993-94, only to fall to 2.27 during 1993-94 to 1999-2000. But in the rural areas, the deceleration in employment growth had been dramatic during the 1990s, with the figures for the periods mentioned above being 1.26, 2.03 and a meagre 0.66 respectively.

The results of the 2004 survey are not fully comparable with these surveys since the data were collected over a six-month period rather than over a full year. But, overall this "moderately large" sample should yield reasonable estimates of the pattern and level of employment.

The figures indicate that between 1999-2000 and 2004, principal and subsidiary status employment grew at an annual rate of 0.5 and 1.2 per cent respectively among rural men and women and 0.9 and 1.8 per cent respectively among urban men and women. Since these increases were in most cases lower than the rate of population growth in the relevant category, an increase in the level of unemployment was inevitable.

One problem in countries such as India where the poor are at or below subsistence level consumption and there is virtually no social security whatsoever, usual status unemployment tends to be low.

Survival requires taking on some employment, however poorly paid. Hence, the unemployment figures are not so revealing. However, the closest we can get to a reasonable unemployment rate is to assess the daily status of those available for work, computed on the basis of data relating to the seven days preceding the date of survey. Going by that definition, the unemployment rate (or the number of person-days of unemployment per thousand person-days in the labour force) has risen quite significantly over the 1990s. As expected, the problem is particularly acute in the rural areas (see chart).

This combination of creditable output growth and dismally poor employment growth has four implications. First, the virtual collapse of agricultural growth during the 1990s, combined with a decline in the capacity of agriculture to absorb more workers, has resulted in near stagnation or decline in agricultural employment across the country.

Second, though manufacturing has performed reasonably well in some sub-periods during the years since the early 1990s, it is clearly incapable of absorbing much of the growing reserve of unemployed labour. This is partly because of the commodity composition and technological characteristics of manufacturing production in the organised sector, which permits it to produce more with less labour. It is also because in the new liberalised and unregulated economy, small and informal sector production that could have drawn in surplus labour is on the decline.

Finally, the rapid growth in services "output", which has taken the contribution of that sector to GDP beyond the 50 per cent mark, has not helped resolve the problem. This is surprising since services are conventionally seen as labour-intensive in nature and as characterised by lower productivity or higher employment per unit of output. These features, which characterise services in developed countries as well, should have meant that India's services-driven growth was accompanied by a higher pace of employment generation.

The fact it has not, could only mean that the higher output per employee in services must be accruing as surpluses to owners of services-producing entities and/or as higher incomes of workers in the services sector.

There is reason to believe that this is indeed true in the "modern" financial and IT services sectors, resulting in an increase in economy-wide income inequality. But this tendency, epitomised by India's service sector boom, must be characteristic of all sectors that are growing rapidly even when employment growth is sluggish.

The empirical increase in "productivity", or output per worker, must imply an increase in income inequality between surplus earners and the rest, on the one hand, and the employed and the unemployed or underemployed, on the other. Those inequalities would be even greater if only a few of the employed register significant income gains, as happens to be the case in India.

This is no happenstance, as Prabhat Patnaik has demonstrated recently in his Sumitra Chisti Memorial Lecture. It is an inevitable feature of growth in an underdeveloped economy adopting an open or "liberal" economic regime.

The issue then is this: for how long can a democratic polity tolerate such a trajectory of growth? If the answer is that it cannot for long without triggering social unrest and a political upheaval, then perhaps it is time the government dropped its obsessive concern with the pace of growth and turned its attention to the pattern of that growth. That, however may entail rethinking the new economic regime it has put in place.

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