Labour, Jobs and Employment – Harmonization of labour laws, gender gap, unemployment, etc.

Why has Indian manufacturing been losing jobs since 2016?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not Much

Mains level : Unemployment issues in India

The State of Working India (SWI) 2021 has documented the impact of one year of Covid-19 in India, on jobs, incomes, inequality, and poverty.

Highlights of the SWI 2021

  • The SWI 2021 showed that the pandemic had forced people out of their formal jobs into casual work, and led to a severe decline in incomes.
  • There is a sudden increase in poverty over the past year.
  • Maharashtra, Kerala, Tamil Nadu, Uttar Pradesh, and Delhi, contributed disproportionately to job losses.
  • Unsurprisingly, these are also the states that suffered the maximum Covid caseload.

Labour Participation Rate (LPR) is the ratio of the labour force to the population greater than 15 years of age. It is defined as the section of working population in the age group of 16-64 in the economy currently employed or seeking employment.

Worsened with COVID

  • It pointed to an ailment of the Indian economy that has not only been a longstanding one but also one that has gotten worse over the past few years even without the help of Covid.
  • Agriculture, mines, manufacturing, real estate and construction, financial services, non-financial services, and public administrative services sectors account for 99% of total employment in India.
  • The number of people employed in the manufacturing sector of the economy has come down from 51 million to 27 million — that is, almost halving in the space of just four years!
  • For instance, the number of people employed in agriculture is going up.
  • Equally disheartening is that employment in non-financial services (such as providing education and entertainment industry etc.) has fallen sharply.

Why are these trends worrisome?

  • It is important to understand that traditionally Indian policymakers have been of the view that the manufacturing sector is our best hope to soak up the surplus-labour otherwise employed in agriculture.
  • Manufacturing is well suited because it can make use of the millions of poorly educated Indian youth, unlike the services sector, which often requires better education and skill levels.
  • For the longest time, India has struggled to get its manufacturing industries to create a growing bank of jobs.
  • But, and this is what the CMIE data shows, what is happening in the past 4-5 years is that far from soaking up excess labour from other sectors of the economy, manufacturing is actually letting go of workers.

Return to Agriculture

  • India has seen a hike in the number of people “employed” in agriculture over the past year.
  • This is nothing but disguised unemployment.
  • Essentially, labourers and workers are returning to their rural homes in the absence of jobs either in manufacturing or services.

Why is Indian manufacturing failing to create jobs?

  • On the face of it, every past government has come out with a policy to boost manufacturing jobs. But still, the situation is getting worse.
  • There are different ways to look at this question.
  1. One is to look at why manufacturing has struggled to create as many jobs in the past
  2. The second is to look at the specific reasons why manufacturing has been bleeding jobs, instead of creating them, since 2016-17.

Let’s tackle the historical question first.

  • If one looks at any of the sectors in the economy — agriculture, industry, services — starting a manufacturing unit requires the highest amount of fixed investment upfront (relative to the output that may be generated later).
  • In other words, it is a big commitment on the part of an entrepreneur to put up a huge amount of money without necessarily knowing how it will all pan out.
  • What has traditionally made this truly risky is the highly extractive nature of governments.
  • In simpler terms, far too often governments have been corrupt, with officials and politicians extracting bribes.

Less focus on manufacturing goods

  • As regards the demand for manufacturing goods, experts point out that Indians have always consumed relatively less of manufacturing goods and relatively more of food and services.

There are two possible reasons for this.

  1. One, most Indians are quite poor and hence most of the income is spent on food.
  2. Two, repairs and maintenance are a very high part of our consumption choice.
  • In other words, when Indians buy a manufactured product — say a refrigerator — they tend to use it for much longer than in developed countries.

Core of the problem

  • The trouble lies with policymakers repeatedly neglecting the labour-intensive industries.
  • Since the second five year plan, the P C Mahalanobis strategy was to gain self-reliance by investing in capital intensive industries so that India does not have to import machines etc. from other countries.
  • The hope was that the demand from Indian consumers will make the domestic industry viable.
  • But Indian domestic demand was quite anaemic due to poverty levels.

Other policy lacunas

  • As against the capital intensive industries, which were involved in making heavy machines, the labour-intensive ones (such as leather, handicrafts, textiles etc.) were reserved for the small-scale industry framework.
  • But while the labour-intensive manufacturing firms could not match the capital-intensive firms in terms of GDP value or growth of output, they did have a distinct advantage of creating more jobs.
  • But, by treating them as small-scale industries, policies held back their growth.
  • Moreover, India did not push for integrating its labour-intensive manufacturing in the global supply chains by aggressively following exports.
  • Instead, the idea was to substitute imports in the name of self-reliance.

What has happened since 2016-17?

  • Things have become worse over the past five odd years despite the Indian government unveiling its ambitious Make in India (MII) initiative and the latest Production-Linked Incentive (PLI) scheme.
  • For one India is repeating the same mistakes with MII and PLI schemes.
  • They are again aimed more at capital intensive manufacturing, not labour intensive ones.
  • Moreover, India is reverting to the protectionist approach, aimed at self-reliance, yet again in recent years.
  • Further, much like in the past, this time, too, the domestic demand is weak for aggressively boosting labour-intensive industries aimed at capturing the export markets.

Conclusion

  • The growing rift in the fortunes of informal and formal manufacturing could be the reason why India is seeing such a massive decline in manufacturing jobs.
  • The government has tried its level best to push for greater formalization but it has often been accused of not understanding the nature and functioning of India’s informal economy.

Way forward

  • For the same level of employment, formality is good.
  • But if there is a trade-off between formality and employment generation, choosing formality may not be so beneficial. And this trade-off appears to be quite sharp in India.
  • Indian manufacturing is still at best hope for creating new jobs and soaking up excess unskilled labour through better infrastructure and easier regulatory support — to create millions of new jobs.
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