Budget needs to focus on local infrastructure to enable creation of jobs

There is a need to push harder on this agenda by re-orienting it towards small towns and local infrastructure.

This year’s Union Budget comes at a time where several indicators of employment and structural transformation have been showing worrying signs. Economic growth at the aggregate level bounced back strongly after the Covid-19 pandemic but recent growth numbers indicate a tempering of this momentum. It is too early to say if the dip in GDP growth forecasted for FY25 will be a one-off or a sustained reduction in growth in the medium term. However, it is clear that coordinated policy action is needed on the employment front, in any case. There are two interrelated aspects of this that I would like to draw attention to.

Structural retrogression

First, the most recent available data from KLEMS and periodic labour force survey (PLFS) show that the India economy retrogressed structurally during the pandemic, and as of 2023-24 had not yet recovered from this retrogression.

By structural retrogression I mean an increase in the share of employment in agriculture and an increase in the share of self-employment. During the pandemic, such a movement of workers from jobs elsewhere in the economy to fall back sectors like agriculture was to be expected. However, employment in agriculture has continued to increase post-pandemic with more workers estimated to be in this sector as of 2023-24 than at any time since the early 2000s. Value produced in agriculture has not grown commensurately, with the result that labour productivity in this sector stagnated post-pandemic.

Alongside agriculture, we also expect the share of self-employed workers (particularly own-account and unpaid family workers) to decrease with economic growth as more regular wage or salaried employment opportunities are created. But, the share of self-employed workers in the workforce has increased from around 52 percent pre-pandemic to 58 percent in 2023-24. The worrying thing is that the increase has continued post-pandemic.

Self-employment and stagnation in earnings

The phenomenon of crowding into the self-employment sector seems broader than just agriculture as indicated by the fact that other sectors where household enterprises are frequently found, such as food, beverages and tobacco, textiles, leather and footwear, trade, and domestic services, were also less productive in real terms as of 2022-23 than they were in 2017-18. That is, employment has grown faster than output in all these sectors, most likely due to a crowding in of workers from elsewhere in the economy where there is weak labour demand.

A consequence of this is a complete stagnation and even decline in real earnings at the aggregate level. Quarterly data on earnings from self-employment, casual wage work and regular salaried work are available from the PLFS, with the most recent data being for the April to June 2024 quarter. On average, since 2017-18 (the first year for which PLFS data are available), earnings from regular salaried work grew 5.3 percent per year in nominal terms or 0 percent in real terms. In fact, between the April-June 2022 and April-June 2024 quarters, earnings from regular wage work declined in real terms by 0.14 percent per year.

Earnings compression is pronounced for women

The compression in earnings is particularly severe for self-employed women, as one would expect if there is an increased supply of workers to this sector without a commensurate increase in demand for their goods and services. For women in urban and rural India, average real earnings from own-account work in 2023-24 were only 85 percent of what they were in 2017-18.

The divergence between earnings for the majority of workers versus the few at the top working in listed corporate firms has been highlighted in recent work by Nikhil Gupta at the Motilal Oswal Group. Relatedly the issue of rise in corporate profits along with stagnant wages has also been highlighted recently by the Chief Economic Advisor to the Government of India.

The weak growth in earnings together with stagnation or decline in labour productivity in certain sectors, are flip sides of the same phenomenon - continued weak labour demand that is resulting in a crowding into the surplus labour sectors such as agriculture, petty retail, domestic work and other small household-based work where it is relatively easier to enter and earn a basic livelihood.

A promising sign

One note of optimism is that in 2023-24, regular wage employment registered its strongest single year increase in recent years at 11 percent outpacing the rise in estimated self-employment at 8.6 percent. All attempts must be made to ensure that this process continues so that the share of regular wage workers expands steadily in the economy.

MSMEs are the key to job creation

The larger question is, why has regular wage employment not increased faster despite a healthy pick up in aggregate GDP growth. We should also keep in mind that most job creation, even for salaried work, happens not in large corporate firms, but rather in unlisted firms and in informal enterprises (broadly MSMEs). It is here that a fresh policy push is needed to enable firms to expand, save and invest.

What are the barriers to firm growth at the bottom end of the firm size distribution? Other than aggregate demand, which is a macro constraint faced by all firms, lack of physical infrastructure continues to be a strong constraint. An IDFC Institute survey of 2500 small firms across the country, conducted in 2019, reported that roads, electricity and water (the proverbial bijli, sadak, pani) are listed by firms as top constraints to expansion. The government’s emphasis on improving physical infrastructure is well known. There is a need to push harder on this agenda by re-orienting it towards small towns and local infrastructure. While India has done relatively well in terms of highways, airports and other large infrastructure, we are still far from where we need to be in quality and quantity of local roads, power supply, water and other basic services.

Though the impact of any one budget, and that too of only the Union government, is limited in a large and diverse economy such as India, the priorities outlined in the budget do provide an understanding of how the Union government is thinking about the economy at this juncture. It would be a welcome sign if the budget leans hard into easing constraints to small firm expansion in small towns. This is necessary if India is to create the necessary number of jobs needed to ensure both inclusive development and sustained economic growth.