The outstanding issue facing the economy for last several decades has been slack growth in formal sector employment with reasonable remuneration. Although according to the Periodic Labour Force Survey (PLFS) labour force participation rates have improved over the past five years, it was only 50.6 percent in 2022-23 with the female labour force participation rates at only 31.6 percent. There is sufficient evidence that unemployment rate in the younger population has remained unacceptably high. According to the PLFS data, estimated unemployment rate for youth aged between 15 to 29 years was 12.9 percent in 2022-23, having risen over the past three years. This represents a dissipation of our much quoted demographic dividend. The latest news from the prestigious IITs is quite worrying with IIT Mumbai reporting a 33 percent rate of unplaced students in 2024 while it was only 18 percent in 2023. Similarly, Delhi IIT has reported 22 percent of their graduating students being unable to find a satisfactory placement in the current year.
Of those employed a very large share are engaged in self-employment. The number of self-employed has been increasing over the past few years. It was 55.6 percent in 2020-21 and now has risen to 57 percent in 2022-23, according to the latest data available from the NSO. This in itself is not a good sign because the great majority of self-employed represent disguised unemployment. Moreover, nearly a fifth (18 percent) of self-employed are ‘unpaid helpers in household enterprises. It is important to recognize the prevalence of this category of self-employed to get a true sense of the unemployment situation in India. Worryingly, the increase in the number of self-employed over the last few years seems to be a result of distress in the formal workplace. This is also corroborated by the rise in agriculture workforce over the past five years. This reflects the lack of job opportunities in the urban based manufacturing sector. Attempts to deny that there is an unemployment problem in the country does dis-service to the aspirations of our young population but more importantly, it deflects the policy attention from the principle issue on which it should be focused going forward.
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Let me emphasize that cash hand-outs and free grain allocations do not substitute for having a secure job and regular income. Handouts are seen to be temporary, which they should be, and also denigrating the self-esteem of the recipients. Grain allocation meets the subsistence imperative but surely does not suffice for other necessary expenditures including those on clothing, health and education. The lack of adequate employment generation is perhaps best reflected in the unacceptably low rate of growth in private consumption over the past five years when it registered a growth of mere 4.2 percent, which is well below the average GDP growth rate of about 7 percent.
In the K-shaped post-Covid economic recovery over the past few years, those in the lower income segments have not seen incomes rise as a result of weak growth in formal employment. Therefore, the next government must focus laser like on this one critical constraint for maintaining a relatively high economic growth rate.
Over the past 75 years, countries which have been successful in generating sufficient employment for their workforce have relied significantly on ramping up their exports and grabbing a larger share in world markets. In the early post second world war decades it was the four Asian tiger economies of Singapore, Korea, Taiwan and Japan which pursued export-promotion policies and achieved full employment over the years. It was then argued by our perennial export pessimists that their example was not relevant for India as these were small economies with insufficient domestic demand unlike India with its large population. They forgot that large populations, with low per capita incomes do not represent adequate demand for domestic firms to achieve global scales and competitiveness.
Then came China’s remarkable growth story. In the 1970s both India and China had 0.7 percent of world trade. By 2022, India had increased its share to 3.5 percent including a higher share of nearly 5 percent for services, primarily IT enabled services. Its share in merchandise trade has stagnated at less than 2 percent for past three decades. In contrast, China, pursuing an aggressive export promotion and no-holds barred policy for attracting export oriented FDI, increased its share in world trade to 13 percent. It has now emerged as the largest exporter of manufactured goods in the world. As a result, the Chinese have been successful in eradicating poverty and achieving near full employment levels with significantly higher levels of female labour participation rates.
Therefore, there is no case any longer for India to claim to be different from all others and try and follow an exclusively domestic demand led policy for job generation. In a low income economy, which India still is at a per capita income of about US $ 3000, there is simply no substitute for using external demand to substantiate domestic demand for domestic investors to ramp up their investment in capacity expansion and achieving globally comparable scales and competitiveness. For generating the required number of ‘good quality jobs’ which excludes self-employment, India must focus on expanding its share in global merchandise trade. It is the expansion in manufacturing sector exports, with their numerous backward linkages and significantly higher demand for skilled and semi-skilled labour that will generate the required jobs and draw out labour from the agriculture sector.
Yes, growth in service exports, including expanding revenues from tourism will surely help. But there is no merit in the argument, recently put out by Raghuram Rajan and Lamba, that service exports can replace strong growth in manufactured goods exports for India to accelerate its economic growth and also generate the required number of jobs. Yes, it is true that robotization and AI and re-shoring are possible hurdles in achieving an export-led employment generation strategy. But given that there is no alternative to it, we must find the way forward as other countries have done facing not the same but other set of constraints when they embarked on their export-led strategy.
The way forward would be to design state-specific export promotion policies. In an economy as large and diverse as India, a pan-India export promotion policy is surely sub-optimal. State specific export promotion polices will address specific constraints and take in to account the states comparative and competitive advantage. This is a project worth undertaking.
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