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OPINION: Ila Patnaik

The dark side of the moon
Business Standard, September 12, 2001

A massive crisis of unemployment is looming but the government is clueless

Economics has for long been known as the “dismal science”. This is odd because economists can be a pretty optimistic bunch. One recent example of their sunniness was the GDP growth forecasts they made for the Indian economy — 6.5 per cent, 5.8 per cent, 5 per cent.

Hard on the heels of that comes the report of the Task Force on Employment that was set up by the Planning Commission. The facts are sombre but the Task Force has nonetheless soldiered on.

The fact is that on the basis of current daily status, unemployment rose from 6.03 per cent in 1993-94 to 7.32 per cent in 1999-2000. This was because of the decline in employment growth from about 2 per cent during 1983-1993 to less than 1 per cent during 1993-2000.

What’s disturbing is the fact that it dipped in spite of two contra-indicators — high output growth and a slower growth in labour force in the last decade.

In the coming years also, the slower trend in labour force growth is expected to continue, and it is projected to be between 1.5-1.8 per cent per annum. The Report duly notes that a 6.5 per cent GDP growth will not be adequate to absorb even this growth.

The reason: the employment elasticity of output is declining as a result of increases in productivity. This means that output needs to grow by at least 8 every year for the unemployment rate not to rise any further. So the Task Force has made projections for a baseline scenario of 6.5 per cent GDP growth, as well as higher growth scenarios of 8 and 9 per cent.

Now, agriculture has a share of about 60 per cent in employment. It also has a huge amount of underemployment. So, as far as future growth in employment is concerned, only a very small increase is likely to come from it.

Indeed, in the baseline projection, its share is expected to fall over the next 10 years to about 53 per cent in 2011-12. Meanwhile, the government is faced with a resource crunch. So there is likely to be a fall in government employment as well.

Employment growth, therefore, is projected to come mainly from manufacturing and services. The former will retain its share at 12 per cent and services’ share will increase from 27 to 34 per cent.

In services, public administration and defence are expected to see negative growth but the share of health and education services as well as trade, transport and communication is expected to go up.

The underemployment in agriculture, expected negative growth of government employment and the limited capacity of trade and communication to employ labour on a very large scale are likely to lead to very little rise in the demand for labour.

Thus, if increase in employment projected in manufacturing does not take place, unemployment will most certainly rise. So, unemployment numbers will depend to a large extent on what shall happen to manufacturing employment.

In absolute terms, the report in its baseline scenario projects that employment in the manufacturing sector will rise from 48 million currently to 53.6 million in 2007. However, this projection is made under two crucial assumptions. The first assumption is that GDP growth will be at 6.5 per cent and output and investment in manufacturing will grow accordingly.

But, if we take the current slowdown in investment into account, then employment growth would be much lower. In the period from 1994-95 to 1998-99, thanks to very high rates of investment, capital stock in manufacturing grew at an average rate of over 14 per cent. In 1999-2000, its growth fell to below 7 per cent.

At the same time, we observe a trend of rising labour productivity and higher capital intensity in manufacturing in the post-reform period. Assuming that this trend will continue but at the same time capital stock will grow at the much slower rate of 7 per cent as it did last year, employment in manufacturing will actually fall to 42 million in 2007! That is, there will actually be a loss of over 6 million jobs.

Even if the economy pulls out of the slowdown and the rate of capital formation rises, employment will not rise to the projected level of 53 million unless investment climbs back to the unusually high levels of the second half of the nineties. At the moment, there seems to be little prospect of that.

The second crucial assumption that the Report makes is that the trend towards higher capital intensity will be moderated compared to past trends because it is expected that manufacturing growth in future will involve a shift away from the highly capital-intensive industries towards more labour-intensive industries.

Therefore, even though the employment elasticities in each individual industry may fall reflecting technology changes, the shift towards more labour using industries will moderate the decline.

But this is difficult to believe. The latest employment data from the NSS and the figures for capital stock from the NAS together throw up an amazing fact. The capital- labour ratio in manufacturing rose in real terms from Rs 0.5 lakh in 1972-73 to Rs 0.9 lakh in 1993-94 (at 1993-94 prices). And in the years following reforms, it almost doubled to Rs 1.65 lakh (at 1993-94 prices) by 1999-2000!

This is not surprising since changes in both the product mix and production techniques have been widespread. The growth in incomes, especially of the middle classes, increased the demand for both durable and non-durables goods of high quality. The pressure to compete with international standards and the availability of such technology that came with FDI led to the adoption of internationally used methods of production.

In fact, if the technological modernisation and industrial restructuring, including labour rationalisation that has occurred since 1993, continue, there is no reason for the trend to moderate. This throws up the interesting question: If labour reforms were undertaken, what would be their likely impact on the labour rationalisation process?

Would the attempt to reduce overstaffing lead to an acceleration of the trend instead and further reduce jobs in manufacturing? And, if it would, will the economy be able to accept a sharp rise in unemployment?

Implementing labour reforms could have been an easier option if the economy was booming and the demand for labour high. But in a period of slow growth of output and an even slower growth of employment, the opposition may be far more stiff and the need for consensus much greater.

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