One of India’s greatest assets is youth. Jayan Jose Thomas calls for changes in established thinking to harness its potential.

India, like many South Asian countries, has a young population. This is at once an opportunity for future economic growth, but it presents policymakers with the challenge of creating employment. According to the World Bank, the projected increase in South Asia’s working-age population during 2020-2050 is some 254.m accounting for 30.6% of the increase worldwide. India alone will account for 16.5% of the increase. Meanwhile China’s working-age population will decline over the same period by some 226m with falls in most parts of the developed world.

Clearly generating new jobs in India and the rest of South Asia is critical for economic growth and development, not just within the region but globally. But unemployment in India has increased in recent years, leading to protests by the youth in many parts of the country. Alongside the expansion of labour supply, increasing enrolment in education and a growing exodus of young people from agriculture are swelling the jobless ranks.  Of all 15-29-year-old females in India, only 16.3% were attending schools or colleges in 2005. This proportion increased to 31.0% by 2018. 

And while agriculture and allied activities such as forestry and fishing provide livelihoods to nearly 43.5% of India’s total workforce, low productivity levels in agriculture and stagnant public investment from the 1990s onwards, have fuelled a drift away from the sector. Young, modestly educated people in rural areas are increasingly keen to exit what is seen as “disguised unemployment” in agriculture.

Increasing enrolment in education and a growing exodus of young people from agriculture are swelling the jobless ranks.

Will the pull of new non-agricultural opportunities be sufficient to absorb the rising labour supply in India? Apparently not.

Research based on India’s official employment statistics – mainly the Periodic Labour Force Surveys published by the government – shows that during 2012-18, the supply of potential non-agricultural workers – people who, with training, could work in industry, construction or services – grew by 17.5m a year.

The result has been an unprecedented increase in unemployment rates in India, especially among men. At the same time, faced with an inadequate number of new jobs generated in the economy, women withdrew from the labour market with only 23.0% employed in 2018, down from 42.8% in 2005. Correspondingly, there had been a sharp rise in the proportion of women who reported their status as attending to domestic duties in their own households.

Until it was hit by the Covid-induced crisis, India’s economy was growing at relatively fast rates. However, in 2020, the first year after the Covid-19 outbreak, India’s GDP growth fell to negative rates (-7.3%), leaving millions of its informal sector workers without any source of income. At the root of India’s employment crisis is stunted job creation in the manufacturing sector. The size of the manufacturing workforce in India fell from 61.3m in 2012 to 58.6m in 2018. It rose marginally to 59.8 million in 2020. Most of the job losses after 2012 occurred in micro and small industries.  

A growing view in policy circles is that India’s labour laws on firing workers or reducing wages are over restrictive.

So what measures are needed to ensure that India’s economy recovers fully from the crisis inflicted by the Covid-19 pandemic, and to generate adequate employment? A growing view in policy circles is that India’s labour laws on firing workers or reducing wages are over restrictive and, with fewer constraints, employers would be keener to expand their business and hire more workers. 

Of India’s total workforce of 471.0 million, only 12.3% are regular workers who receive some form of social security and are covered, at least partially, by laws that protect labour rights. The rest are mostly casual workers or petty producers surviving under various degrees of informality. One of the moving images of India’s national lockdown in March 2020 during the Covid-19 outbreak was of thousands of poor migrant workers walking hundreds of kilometers to return to their villages. 

Given the distressful working and living conditions of India’s informal workers, policy suggestions that may erode labour’s negotiating capabilities and reduce their wages further are arguably cruel. Yet in response to the Covid-19 crisis, some state governments in India passed laws that allowed an increase in the number of daily working hours from eight to twelve. India’s Union government has been in the process of amalgamating 29 labour laws in the country into four labour codes, which, analysts suggest, may weaken labour’s position.

At the same time, there is little discussion in mainstream media and policy circles of how the poor wages received by most of India’s workforce might be dragging aggregate demand and economic growth down. According to a consumption-expenditure survey conducted by the National Sample Survey Organisation for 2011-12 (the latest data available), the poorest 50% accounted for only 13.4% of overall spending on durable goods (such as furniture or refrigerators) in urban India; the share of the richest 5% was some 64%.

It is growing clearer with time that the crisis relating to economic and employment decline in India can be overcome only by widening the sources of demand.

It is growing clearer with time that the crisis relating to economic and employment decline in India can be overcome only by widening the sources of demand, by raising the consumption of, and investment for, the poor (see box, Pay the payers).

Pay the payers

Economists, Stephen Marglin and Amit Bhaduri, argued in 1988 that wages have a dual character. Wages are an important component of costs to capitalists, but they are also a source of demand. Marglin and Bhaduri countered the mainstream argument that firms should reduce costs by squeezing wages, in an economy that suffers from insufficient demand. Cutting wages, they posited, will shrink markets further and deepen a depression. They advocated “wage-led” economic growth or policies to raise workers’ wages and incomes, which, they said, would expand markets and recover an economy from depression.

Marglin and Bhaduri’s argument during a depression, some of the factories and machines may be lying idle, and therefore, capacity utilization rate (u = X/K) or the value of output as a share of the capital stock is less than its optimal level (assume that X is value of output, K is capital invested, W is wages and P is profits).

The profit share (π = P/X, or profit as a share of the value of output) may decline as wages and thereby wage share (W/X) increase. However, what matters (to the capitalists) is not profit share but profit rate (r = P/K), which is profits as a share of the capital invested or profit share multiplied by capacity utilization rate (r = π.u).

During a phase of “wage-led” economic growth, wage share may increase and profit share may decline, but profit rate may not fall because the higher demand that accompanies the wage increase allows firms to utilize their capacities better.

Proposals might include the setting up of industries linked to food processing or affordable housing in rural areas. The multiplier effects of such investment could be huge. Food processing can help boost agricultural incomes, which is still the source of livelihood for millions of Indians. 

India’s working classes, who have long been battered by oppressive economic and social structures in the country, deserve real improvements in living and working conditions. This can happen only with a massive expansion in government spending to grow workers’ skills as well as their incomes and purchasing power. A boost to government spending on health and education, which are currently low in India, could aid progress in achieving human development. The country also requires massive spending on roads, rural infrastructure, agricultural research, public transport, among other fundamental areas.

The rising numbers of the young in India as well as in other South Asian countries offer a potential new source of demand that could revitalise the global economy. However, translating this potential requires policies that help raise the incomes of poor workers. These are policies that very often run counter to mainstream economics. Clearly, significant change at policy level is needed if India is to capitalise on the advantages its youthful population offers.

Further reading

Marglin, Stephen & Bhaduri, Amit (1988). Profit Squeeze and Keynesian Theory. Working Paper 39, World Institute for Development Economics Research (WIDER).

Thomas, Jayan Jose (2020). Labour Market Changes in India, 2005-2018: Missing the Demographic Window of Opportunity? Economic and Political Weekly, 55 (34), 57-63.

Jayan Jose Thomas

Jayan is a Professor of Economics at the Indian Institute of Technology Delhi. His research deals with macroeconomic issues of developing countries, mainly labour and industrialization.  He had also been …

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