Migrant labourers arrive at a bus stand.
Credit: PTI Photo
After the serious setback suffered during the pandemic, India has shown an impressive growth performance.
The contraction of 5.2 per cent in 2020-21 was followed by the surge in the GDP by 9.2 per cent in 2021-22, followed by 7.2 per cent in 2022-23, and the current year’s growth is estimated at 7 per cent.
The Article IV report of the IMF states that India has contributed 16 per cent to global growth during the last year. In terms of international comparison, India is now the fifth largest economy, having surpassed the UK last year, and is set to become the third-largest economy by 2030. With this impressive performance in the background, the Prime Minister has set the target of India achieving ‘developed country’ status in the centenary year of Independence.
Yet, a close examination of the target shows that catapulting the economy from a lower middle-income country to a developed country status in 2047 is by no means an easy task. Although India is the fastest-growing large economy in the post-pandemic phase, in terms of per capita income, it ranks 142 among 197 countries. According to the World Bank Definition, the ‘developed country’ tag requires the country to have an annual per capita income of $13,205. The estimated per capita income in India, at the current exchange rate, is just about $2,500. Thus, per capita income has to grow by over 5.3 times.
At the current exchange rate, India will have to register an average annual growth rate in per capita income of 7.5per cent. The highest per capita income growth recorded in India so far, during 2003-14, was an average 6.3 per cent. Even if per capita income grows at this rate over the period to 2047, India will end up at the upper middle-income level of $10,833, short of the $13,205 required. Although the population is set to rise at a slower rate during the next 25 years, the annual GDP growth will have to be around 9 per cent to achieve ‘developed country’ status in 2047.
It is not enough to accelerate growth, but the growth should be inclusive. With declining employment elasticity of growth, absorbing an increasing number of people entering the workforce has been a challenge and will continue to be so in the next 25 years, when the population is expected to peak.
Besides, 44 per cent of the Indian workforce toils in agriculture and another 42 per cent in small enterprises that have fewer than 20 workers. The labour productivity of these workers remains low, and they persist at the subsistence level. Many of them need to be released to more productive formal sector occupations which not only create opportunities but also empower them with the required skills.
Over the years, the employment elasticity has also shown a decline and, therefore, acceleration in growth alone will not be adequate to meet the employment challenge. According to the OECD, over two-thirds of the people in the age group 23-34 have an education level below upper secondary or, at the other end, only 20 per centof the persons in this age group have tertiary education, which implies that most Indians cannot qualify for high-paying service sector jobs in IT, IT-enabled services, finance, and other business services.
Therefore, the focus of expanding employment will have to be to create a thrust in labour-intensive manufacturing. Even here, according to Niti Aayog’s Action Agenda, small firms (with less than 20 workers each) account for 75 per cent of manufacturing workers and 10 per cent of manufacturing output, which implies that there is a huge labour productivity gap between large and small firms. Not surprisingly, the average wage of a formal sector manufacturing worker is six times the average wage of a worker in an informal-sector enterprise.
In contrast to India’s labour-intensive manufacturing employment being concentrated in firms with fewer than 20 workers, China’s is concentrated in 1000+ worker firms, with much higher productivity. Thus, good jobs will mainly have to be created in relatively large, formal sector manufacturing firms in labour-intensive industries. In such firms, output growth and job creation will go hand in hand. Furthermore, low productivity in small industries makes them non-competitive in export markets. Greater flexibility in capital and labour markets needs to be imparted to achieve export competitiveness.
In the given global environment, the acceleration in growth for a sustained period requires a significant increase in investments and the major driver for this has to be an increase in domestic savings. But savings and investment have been showing a steadily declining trend in India. As a ratio of GDP, the saving rate has declined from about 36.9 per cent in 2010-11 to 29 per cent in 2021-22 and the capital formation to GDP ratio declined from 39.8 per cent to 31-32 per cent during 2016-2020, before reviving to 34 per cent in 2022-23.
Although, most analysts claim an incremental capital-output ratio of 4, the actual ratio has been almost 5 during 2011-19. At this ratio, the investment will have to scale up to at least 40per cent of GDP. Much of this has to be financed from domestic savings, though further liberalisation of the foreign investment regime could lead to an increase from the current 2.7 per cent of GDP. Such a sharp increase in savings and investment for a sustained period is unlikely and therefore, increasing productivity is critical.
It is not enough to accelerate growth, that growth should be inclusive. About 2 million persons will be joining the workforce every year, and a significant proportion of workers toiling in agriculture and unorganised manufacturing will have to be absorbed in better-paying jobs. 43 per cent of the workforce is in agriculture and another 42 per cent workforce in manufacturing, of which 75 per cent are in units with fewer than 20 workers.
The expansion in the services sector is unlikely to absorb such a large number of people joining the workforce, as according to OECD over two-thirds of the people in the age group 23-34 have an education level below upper secondary or, at the other end, only 20 per cent of people in this age group have tertiary education, which implies that most Indians cannot qualify for high-paying service sector jobs in IT, IT-enabled services, finance, and other business services.
Therefore, the focus of expanding employment will have to be to create a thrust in labour-intensive manufacturing in fairly large enterprises in the formal sector.
(The writer is a former Director, National Institute of Public Finance and Policy, and Member, Fourteenth Finance Commission. This is the first of a three-part series)