Gaudy economic-growth numbers can't solve a simmering unemployment crisis
By Jason Overdorf
(This article appeared in Newsweek International in March 2004).
In general elections next month, India's ruling Bharatiya Janata Party is campaigning, Reagan-like, on the theme that the country is "shining." These are, in fact, heady days for India, which has witnessed average economic growth of 5.6 percent over the BJP's current five-year reign. Buoyed by a booming stock market and reports that the country's GDP rose by an even stronger 8 percent during the third quarter, Prime Minister Atal Behari Vajpayee recently crowed at a political gathering, "Our growth rate has surprised the world." The prime minister also took issue with his critics, who, he said, claim "that [people] are not seeing the rapid economic progress made by the country. There is overall satisfaction," said Vajpayee.
That depends on whom you ask. While millions of citizens have benefited from the country's recent boom—especially those in the IT and outsourcing sectors clustered around cities like Delhi, Bangalore and Hyderabad—hundreds of millions more are in danger of being left behind. India's jobless rate last year was a seemingly manageable 8 percent. But with the country's population surging, the numbers of people out of work or underemployed have been rising steadily. According to the government's Planning Commission, more than 40 million Indians are registered with employment exchanges, and population projections suggest that 35 million new workers will join the country's labor force by 2007. That means India will need to create a staggering 75 million jobs over the next three years, according to the consultancy McKinsey & Co.—assuming full employment.
That isn't going to happen. India is creating new jobs, but not nearly enough of them to keep up with the ferocious demand for work. Between 1994 and 2000, India's rate of new-job growth was a paltry 1.07 percent. With the working-age population (15 to 60) set to balloon, the country could face social unrest unless it can find ways to funnel a mass of poorly educated people into decent jobs.
The current conundrum is a function of population growth and the country's modernization drive. In 1991 India abandoned its socialist, planned economy and began to open various industries to private competition. Some state firms were privatized; others were made more efficient. Since 1997 the public sector has eliminated 4.5 million jobs—or roughly 15 percent of its work force. The private sector was supposed to make up the difference through rapid growth, but instead has slashed a million jobs of its own over the last seven years.
One problem is the nature of India's success story. It's largely the result of investments in technology and in more modern manufacturing methods—a capital-intensive economic strategy that emphasizes productivity and efficiency, getting more output out of existing workers. "The private sector is growing very fast," says S. P. Gupta, chairman of the employment section at the Planning Commission. "But the high-tech [strategy] essentially means jobless growth." Shirish Sankhe, a principal at McKinsey & Co. in Mumbai, agrees. "There are productivity enhancements happening all over the country, especially in sectors where the government is still a big employer, like banking, steel and telecommunications. So despite a huge growth in output, you will see low growth in employment because productivity is very low."
That's certainly true in India's biggest industry. Some 60 percent of India's population—more than 600 million people—still earn their livelihood from farming. The industry is labor intensive and uses almost no machines. As machinery gradually comes into use, however, many farm workers will become redundant. "China pulls 1 percent of its people out of agriculture and [puts them] into construction or light manufacturing every year," says Sankhe. That's a feat that India is not likely to match.
To expand job-heavy industries like construction, manufacturing and retail would require pushing ahead with politically unpalatable reforms, encouraging more foreign investment—and putting an end to lingering socialist ideas. For example, manufacturing regulations limit the amount that clothing and textile makers can spend on new plants. The policy, which can be traced all the way back to Mahatma Gandhi's anti-British "buy Indian" movement, both protects inefficient operations and prevents them from growing. The same bias hampers the vitality of retail businesses, where a ban on foreign direct investment has stopped companies like Wal-Mart and Carrefour from entering the market.
The construction business suffers because rent-control and zoning laws prevent the development of valuable plots of land in city centers for new retail outlets. Despite the high price of land, thousands of tenants in the heart of Old Delhi, for example, pay as little as 10 rupees (US$.25) a month in rent. The archaic policies have limited growth rates in all these sectors to half or less of the rates in the same industries in China.
In those businesses where foreign investment is strongest, job growth as been impressive. "Foreign companies are creating huge numbers of back-office jobs in India for tasks like inventory, payroll processing and customer service," says McKinsey's Sankhe. "But that should be happening in manufacturing as well." That process has begun in the automotive industry. After the government lifted curbs on investment in the sector in the early 1990s, output began to take off. The industry's labor force grew by 11 percent from 1992 to 2000, even as productivity more than doubled. Today, the sector directly and indirectly provides jobs for more than 10 million Indians—and the business is expected to expand even more as Indian-made cars begin to sell in foreign markets.
Unsurprisingly, Indian experts and outside consultancies have different views on how best to create jobs. While Western-trained experts believe India should push ahead with reforms as rapidly as possible, the Planning Commission doesn't think a purely growth-oriented strategy will solve the unemployment problem. It recommends that the government focus on protecting and stimulating what it calls the "unorganized sector"—meaning nonregistered, small, mom-and-pop-style businesses.
India's informal sector accounts at present for 92 percent of India's jobs and nearly 60 percent of GDP. But India's small companies must become much more productive before they can expand and, potentially, create jobs. Experts say making small firms more productive is a much more difficult task than simply enacting the broad-brush reforms that are speeding the growth of big manufacturers. Informal firms need low-cost credit, access to better technology and enhanced knowledge of marketing and cost control. None of these things can be created by merely striking laws from the books. "In a country like India, substantive employment growth will have to be in the rural sector, and that's linked to a whole [array] of labor- and business-law changes that have not been implemented," says Bibek Debroy, director of the Rajiv Gandhi Institute for Development Studies. The government, he adds, must eliminate preferential policies that allow small firms to compete with larger rural companies.
Much of India's jobless are concentrated in a handful of poorly governed states with enormous, uneducated populations. Among the worst are Bihar and Assam—where a recent riot among thousands of job applicants for positions with Indian Railways resulted in more than 30 deaths. The situation is also dire in West Bengal and Kerala, where communist governments have increased the literacy rate but fostered strong labor unions that have stifled employment growth. In Kerala, the unemployment rate has topped 20 percent, while in West Bengal 15 percent of the population is jobless. Until numbers like that come down, it will be hard for Vajpayee to claim it's truly morning in India.
