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Monday, Dec 15, 2003

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Fast running out of jobs

P. V. Indiresan

Unemployment is growing, and economic theory has no clear answer to the problem. It is not merely the unemployed who suffer, the nation loses because it does not get what the unemployed could have produced. Its socio-economic impact is considerable, says P. V. Indiresan, offering certain remedies, looking at the conventional solutions.

FOREIGN ANALYSTS have predicted that India will be the third largest economy in the world by 2050. We are flattered whereas we should be asking why such progress will have to wait till then. Neither do we ask what kind of a society we will have at that stage. We have ambitions and hopes but not necessarily vision.

On the Indian horizon, just as there are rainbows, there are dark clouds too. In the past few weeks we have seen the brutal murder of dozens of people in West Bengal over a dispute about recruitment in a tea estate. Migrant Biharis have been targeted in Assam and in Mumbai. In this era of globalisation, even as we go about complaining bitterly that the US is tightening immigration, we are demanding State-based reservations. We want to impose restrictions on the movement of our own labour within our own country as though we are not one nation but many.

These unrests are the result of growing unemployment. According to a former head of the CBI, the steady expansion of Naxalism can no longer be tackled as a law and order problem but only as an economic one, by remedying both unemployment, particularly educated unemployment, and economic disparity. Because of growing social unrest, fear is stalking the country. Thirty years ago, the practice in Delhi was to have windows without bars. Now, everyone has switched over to "gated" communities with restricted entries to entire neighbourhoods.

There are probably more chowkidars in Delhi than teachers. Is it the vision of India that the country will become rich while millions will be poor? Will India of 2050 have prosperity but not security?

Economic theory has no clear answer to the unemployment problem. Unemployment has reached alarming levels even in such rich countries as Japan, Germany and the US. In some developed countries, large numbers of youth are not only without jobs, but are not expected to get employed ever in their entire lifetime. Basically, unemployment results when labour productivity increases faster than consumer and investment demand. Likewise, inflation rises when demand rises faster than productivity.

Current wisdom, as dictated by the Washington Consensus, is that inflation is a greater evil than unemployment.

That might be valid in times of full employment, but hardly when millions are unemployed. It is not merely the unemployed who are the sufferers. The nation itself loses because it does not get what the unemployed could have produced. Work is a perishable commodity. If a person does not work for one day, the possible fruits of that day's work are lost forever.

It is estimated that the demand for employment will increase by 35 million over the next five years. As there are already over 40 million on the rolls of employment exchanges, we should, ideally, create 75 million jobs; 15 million jobs a year. As not all persons registered with employment exchanges are without jobs, at least, 10 million jobs should be created each year.

According to experts, such employment creation is achievable provided, first, labour laws are liberalised. On that score, there is general agreement among scholarly economists.

Although they will not say so openly, even labour leaders, including the Left Chief Minister of West Bengal, agree that restrictive labour laws have become the major, and avoidable, impedance to growth.

Although employment in agriculture has stopped growing, most experts believe that food processing will produce many jobs.

That may be true: Potatoes in season cost Rs 2 a kg; packaged potato chips sell at hundred times that rate. However, as these experts also advocate contract farming, and Western style retailing, potato chips may make some people very rich, but will such good fortune be spread evenly?

Another group of experts swears by infrastructure: These experts say investment in irrigation, power, roads, and telecommunications will multiply jobs, and usher in prosperity. That is true; jobs mushroom when infrastructure improves. However, infrastructure has enormous appetite for capital, and as the resistance to toll roads shows, people are averse to paying the price.

Exports are a third option, exports of goods, of services and of labour too. Obviously, we can exploit our cheap labour to raise our exports. However, that is feasible only when our quality rises to international standards.

Further, though wages are low, our labour productivity is lower still. Hence, exports are not as lucrative as they appear at first sight.

All these remedies follow the supply-side approach. It may be wiser to look at the issue from the demand side too.

For instance, in a recent recruitment exercise for the Railways, there were over 700,000 applications for about 20,000 low level jobs. Such a rush occurred because Indians are desperate for the security that only government jobs guarantee. Unfortunately, the government is already over-staffed and has few openings to offer. Then, how can we satisfy this pathological urge for job security even as industry demands a hire-and-fire policy?

In a population of a billion, the workforce is around 375 million, and currently the growth rate of employment is barely one per cent, or about 4 million new jobs a year, one in 250 of the total population. As we are investing around Rs 4,000 per capita per year, on an average, Rs 10 lakh of investment are being used to create one new job.

On the other hand, we need not merely 4 million but at least 10 million new jobs a year. That is, we should create one fresh job with an investment no more than Rs 4 lakh. Such economy may be realised by reducing transaction costs and delays.

The economy has been growing at 5-6 per cent a year but jobs are increasing at barely one per cent. Evidently, most of the economic growth, and the benefits of investment, have been captured by the already employed leaving little for the fresh entrants.

In particular, the organised sector accounts for 40 per cent of GDP but employs barely 8 per cent of the workforce. In other words, wages in the organised sector are five times those in the unorganised sector, but their employment is not growing at all; it is actually shrinking.

Yet, large corporations that generate next to no employment growth are able to demand credit at rates as low as 6.5 per cent while small firms are charged as high as 15 per cent. Really tiny firms that generate the bulk of employment may not get any credit whatever because they have no collateral to offer.

Development is also badly skewed geographically. The seven North-Eastern States, West Bengal, Bihar and Orissa have barely half the national average of per capita income, and over twice the unemployment rate.

Also, most jobs are being created in the urban areas leading to unmanageable rural-urban migration. It is curious that employment is being created in the most expensive and congested locations such as Mumbai, Bangalore, Delhi and not at all in really cheap ones with wide open spaces.

Basically, we are facing not merely unemployment but growing unemployment. The major causes of increase in unemployment and possible remedies for the same are indicated in the accompanying table.

Few persons appreciate that a person with a steady income of Rs 100,000 a month does not affect the economy as much as a person whose income has increased to Rs 100,000 a month.

The latter person will almost certainly cause inflation, and worsen income distribution too. Yet, the present policy is to tax both those with steady incomes and those with increasing incomes the same way. That is the kind of anomaly the suggestions made here seek to correct.

(To be continued)

(The author is former Director, IIT Madras. Response may be sent to

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