India's dilemma: A growing economy and growing unemployment

India is on its way to becoming the third-largest economy in the world, yet unemployment among young people with graduate degrees is at an all-time high.

India’s glass is half-full – and half-empty.

The good news is India is the fastest-growing major economy in the world, on course to overtake Germany and Japan in the next five years in aggregate GDP. It will become the third-largest global economy after the US and China.

Rise in unemployment despite fall in poverty

However, there is a concern that the benefits of fast GDP growth are being undermined by low job growth and an accompanying pro-rich bias.

Unemployment among young people with graduate degrees is at an all-time high of 29 per cent, and overall youth unemployment is hovering around 10 per cent. This has prompted some young Indians to travel to war zones in search of employment and higher income opportunities.

Rapid economic growth in the past two decades has contributed to an unprecedented fall in poverty. The poverty headcount ratio, which indicates the proportion of the population living below the poverty line, fell from 37 per cent in 2004-05 to 22 per cent in 2011-12.

This pulled 140 million people out of poverty.

Recent estimates by India’s Knowledge Commission or NITI Aayog show that multidimensional poverty in India declined from 29.17 per cent in 2013-14 to 11.28 per cent in 2022-23, with about 250 million people moving out of deprivation.

Skewed wealth distribution

At the same time, the share of the national income going to the top 10 per cent of the population has almost doubled in the four decades between 1982 and 2022, to about 60 per cent. The bottom 50 per cent of people had 15 per cent of the national income in 2022. The top 1 per cent’s share was estimated to be 22.6 per cent.

The wealth distribution is even more skewed.

Several factors, including the lack of quality broad-based education and all-purpose skills, are responsible for these disparities.

An underlying feature of India’s unique structural transformation is also often cited as a reason.

The stage of industrialisation in which a country experiences employment-intensive growth driven by manufacturing has been bypassed here in favour of services-led growth. The services-led economic growth since at least 1991 has had the side-effect of increasing inequality.

Lack of productive employment for India’s poor

National Sample Survey Organisation data shows that 45.5 per cent of the workforce is employed in agriculture, 12.4 per cent in construction, and only 11.6 per cent in manufacturing, with the rest in services.

India’s inability to pull more of its workforce away from agriculture towards more productive and better-paying employment remains a pressing challenge. While the services sector has contributed to growth, its share in employment (approximately 29 per cent) is a little more than half of its share in GDP.

The shortcoming of India’s sectoral composition of growth has, therefore, been that it has generated relatively fewer opportunities for productive employment for India’s poor.

With more than seven per cent real GDP growth in the last three financial years, India is now the fifth-largest economy in the world.

Growth projections remain optimistic.

Positive growth projections

In April, the International Monetary Fund (IMF) raised India’s growth projection for the fiscal year 2024-25 (FY25) by 30 basis points to 6.8 per cent on the back of strong domestic demand, rising public infrastructure spending, and a growing working-age population. The World Bank forecasts 6.6 per cent growth.

While there is no doubt that growth is necessary for the fight against poverty, it is hardly sufficient.

The same is true for productive job creation, which has been high on the political agenda since at least the early 2000s. The ambition of "Targeting Ten Million Employment Opportunities Per Year" in 2002, or close to one million jobs per month, has now doubled to 20 million jobs yearly.

Rural youth unwilling to work in the place of their birth are increasingly seeking non-farm employment elsewhere. This includes foreign countries.

In May 2023, India signed an agreement with Israel to send workers for 42,000 jobs in construction and nursing. The government also started a scheme called Agnipath in 2022 to recruit soldiers, sailors and air force personnel.

Marking a departure from past recruitment policy, the Agnipath recruits have a four-year tenure with no gratuity or pension benefits for three-quarters of each batch who will be discharged after the period. The scheme's announcement was met with protests in different parts of the country.

The slow transition away from agriculture and into the non-farm sectors is a bleak characteristic of the Indian labour market. The share of manufacturing employment, despite firm policies, has been stagnant, at around 12 per cent.

Need to boost growth in manufacturing sector

Construction and services have absorbed excess labour but on the whole, most people are self-employed or in casual jobs. Nearly 90 per cent of jobs are informal. The share of wages in the net value added by industries has declined while the share of profits has climbed, reflecting a capital-intensive production process, exactly the opposite of what a labour-abundant country like India needs.

India thus needs to boost manufacturing growth to absorb more workers and realise the principal intent underlying the "Make in India" initiative.

That would also reverse the "jobless" growth stigma which has typified the otherwise flattering Indian growth story.

(Written by Rajat Kathuria, Shiv Nadar University. Originally published under Creative Commons by 360info.)