Employment, Competitiveness And Shared Prosperity: The Indian Conundrum

India reformed on the back of a crisis in 1991 and over the last 25 years has made considerable progress. Today the GDP of Maharashtra is higher than what India’s GDP was in 1991. Life expectancy has increased by ten years. Poverty (both relative and absolute) has declined. (The latest data from the multi-dimensional poverty index, MPI, shows that decline in poverty levels has been fastest in the lowest income regions, among the SC/ST groups and Muslim communities, where poverty rates were the highest.) But India is not meeting its full potential and its demographic dividend risks becoming a disaster. There are also worrying signs of rising protectionism on the international trade front.  

Is India on the verge of another 25 years of rapid growth or are we overly preoccupied with headline growth numbers of our GDP, while our underlying fundamentals remain weak? Inadequate spending on education, health, high levels of corruption, and a weakened financial system and institutions threaten the future. India’s rankings on global competitiveness indices and the World Bank’s Ease of Doing Business index have improved, but India’s external deficits have risen to dangerous levels again. Exports have been tepid and imports have surged. India has reacted by increasing import tariffs on a range of commodities to contain the deficit – but this may produce short-term gains at the cost of long-term competitiveness.  

India is at the crossroads and the stakes are high. Several experts have warned of growth slowing down should India reverse its reforms further. A drop to the so-called ‘Hindu growth rate’ of four per cent, a term coined by Prof. Raj Krishna, will take our GDP up to only $4.3 trillion by 2030 – behind Japan. At the same time bold reforms in land, labour and capital markets could accelerate our growth to nine per cent per annum, which will make India a $9 trillion economy by 2030 (third largest after the USA and China). The current 6-7 per cent rate of growth will take India’s GDP to $6-7 trillion. (Even at a GDP of $9 trillion, India’s per capita GDP would be $5625, below that of China and Thailand today).
 
 The issue of  jobs and competitiveness is inter-related. If  India intends to be a competitive economy in the global markets, it should be able to ‘Make in India’ for both the domestic market (import less) and for the global market (export more). Growth based on competitiveness should also lead to more jobs.

Competitiveness Scorecard
The most recent Global Competitiveness Index of the World Economic Forum (WEF) ranks India 58th out of 140 countries in 2018. This appears impressive at first glance, but India’s rank is lifted up hugely by its market size. If India was an average-sized country, its rank would drop closer to 70th, similar to that of Sri Lanka or Vietnam. The IMD Competitiveness Index (of the IMD Business School in Switzerland) which does not include market size as a factor in its rankings, places India at 44th position among 63 countries.

Unravelling these indices reveals a number of areas where India needs to focus in a coordinated manner. The WEF Global Competitiveness Index reveals areas where India lags behind. Among the institutional factors, the WEF Competitiveness Index identifies issues like quality of land administration and regulatory capacity. It also  underscores infrastructure, logistics, electricity connectivity and transmission as areas of focus. Health and education figure prominently in the weaknesses identified by the index. These include low average years of schooling, low pupil-teacher ratio and deficiencies in higher education, and the lack of safe drinking water.

 A surprising weakness identified by the WEF index is Information and Communications Technology (ICT) adoption. High trade tariffs and service trade openness are also given low scores. Labour markets are identified as a major drawback for India, with high labour tax rates, restrictions in hiring and firing and low female participation rates. The financial sector with high NPLs and regulatory capital ratios are included as weaknesses, despite the Insolvency and Bankruptcy Code. India also has the highest financial intermediation costs in the world and despite Jan Dhan, financial inclusion remains very low. Even though there have been improvements in India’s rank from 133 to 100 and then to 77 in 2018 in the World Bank’s Ease of Doing Business Index, the time it takes to start a business, the costs of running a business and exiting it, the insolvency regulatory framework and trademark applications are highlighted for low scores. These are some of the areas where improvement would require coordinated efforts across several government layers and necessitate legal and procedural changes which would be complex.

The IMD index has many similarities with the WEF index: training and education, regulatory framework, technological framework, IT integration and adaptive attitudes are identified as low scorers. It also highlights city management (municipalities) and R&D per capita as additional important weaknesses. Despite progress, it identifies the need for improvement in e-government, smartphone and tablet access. It also places a huge emphasis on greater public expenditure on education, higher education and women’s education.

These global indices of India’s competitiveness complement domestic business surveys which have identified many of  these weaknesses, all of  which hinder ‘Make in India’ and lead to insufficient employment for people.

The Employment Puzzle 
How much employment is actually being generated remains an area of considerable dispute and controversy.  India’s working age population will increase by around 12 million per year by 2030. India has a high labour force participation (LFP) rate for men of around 0.8 but very low for women – under 0.27. Surprisingly the rate for women has been falling and more and more women are dropping out of  the labour force.  With an average LFP rate of 0.5-0.55, India will need to create 6-6.5 million jobs by 2030. India has been creating employment for about 5-5.5 million people every year. This means, every year a million new entrants seeking employment cannot find productive work.

Another one million jobs are needed per year to absorb some of  the people who could not find suitable work over the last decade or so. If  India is to make full use of  the female labour force, their labour force participation rate must rise to at least 0.5 which would take the average rate above 0.65. Adding it all up will mean that India must increase employment by 8.5-9 million people per year by 2030.  

India has been creating 7,50,000 jobs for every one per cent growth in GDP . So, to create employment for 8.5-9 million Indians would require a GDP growth rate of 12 per cent per annum – a tall order for India. Alternatively, a million jobs for every 8.5 per cent to nine per cent growth in GDP, would be enough to realise India’s demographic dividend. This is an achievable goal over the next 10-15 years even in a difficult global environment.

Improving India’s competitiveness and creating more employment intensive growth is not rocket science.  As India’s competitiveness and job surveys show, a waterfront of issues must be covered.  These can be summarised into a competitiveness quadrilateral for shared prosperity,  clubbed into four broad areas of emphasis: building human capital, expanding infrastructure, reforming factor markets and strengthening institutions.

Education, health and sanitation must be given the highest priority, increasing public spending on these sectors to nine per cent of GDP – three per cent for health and sanitation and six per cent for education. Agriculture must be modernised, with markets freed up and direct income subsidies. A new strategic trade and industrial policy must be followed to take in global value chains. Travel, tourism and mobility services provide low hanging fruit for job creation. Labour reforms and fixing the financial system must be given the most urgent attention.

An Innovative India 
India has grown relatively rapidly at around seven per cent, but it has lost a decade on the employment front.  If it does not get its act together and the growth rate reverses, India risks social strife and even an “Arab Spring”. India must also address huge gender disparities and create more opportunities and an innovative business culture. Moreover, actions must be taken at both the centre and in the states in a spirit of  ‘cooperative federalism’ now enhanced by the work of the GST Council. (A new Finance Commission is expected to deliver its report soon and will have to tread on a minefield of inter-state issues carefully.)

India will become the third largest economy by 2030 – an economic superpower. It could also be a happier country if its growth is inclusive and decent livelihoods are created for its 1.5 billion plus citizens.