Job creation in India is an issue that has been discussed for a while now. Given the slowdown in the economy, coupled with the pace at which the workforce is expanding each year (estimated at 10 m per annum), there are bound to be major hurdles in the future if this problem is not addressed right away. With unemployment levels of the youth (those aged between the age of 15 to 29) standing at two to three times that of the national average, it really is a serious sign of concern. Job creation has not been happening at the desired pace as well - between 2010 and 2012, the pace of job creation stood at a paltry 2.2%.
When pitching to India for voting for him as the next Prime Minister, Mr. Modi discussed a lot on his plans on focusing on job creation. And having won the clear mandate, the hopes of him sticking to his promise are very high. As was discussed by the new government recently, the focus is likely to be on reigniting the investment cycle - including by inviting foreign investments - and creating jobs in labour - intensive manufacturing sectors as well as expansion of job opportunities by promoting tourism and agro-based industries.
This seems to be in line with one of the findings of the RBI as well. The central bank recently released a working paper wherein it estimated employment elasticity of the Indian economy. What this study aims to do is simply calculate the change in employment with every percentage change in growth levels of the overall economy and specific sectors. Or as mentioned on the central bank's website"Employment elasticity thus represents a convenient way of summarising the employment intensity of growth and is commonly used to track sectoral potential for generating employment and in forecasting future growth in employment."
As per the findings, the aggregate employment elasticity stood at about 0.2 during the post-reform period. What this means is that the employment growth rate rises at about a fifth of the overall GDP growth rate. So, if GDP rises by 10%, employment is expected to rise by 2%.
When gauged from a sector specific point of view, it seems that the organized manufacturing sector - with employment elasticity in the range of 0.4 to 0.5 - is most effective in increasing employment. As for overall manufacturing sector, the elasticity level stood at about 0.3. The paper also finds that the services sector (including construction) has generally been employment intensive. Having said that, it turns out that this figure for the agriculture sector has been negative, thereby implying that for the purpose of creating employment, the focus on this sector would provide unfavourable results. The paper summarizes that for India to meet its demographic dividend challenge, the focus will have to be on the higher employment elastic sectors. This in our view would be a very crucial factor especially when aiming to resolve this issue over time. As reported in a leading daily today, India has the world's largest student population - in excess of 310 m - which is about a fourth of the entire population. By 2020, India is expected to be the world's youngest country with nearly two-thirds of its population in the working age group.
So, while it seems that the government is on the right track as its focus is in line with the outcome of the RBI's findings, the key challenge would be to bring the growth levels in the right areas to curb the unemployment situation and more importantly for creating more jobs in a sustained manner. And this makes it all the more important for bringing about major changes to the country's labour laws, which as per many industry leaders, are in need of an overhaul. And going by the hints that the government has been providing, major tweaking of the labour laws seems likely. This would be a major positive in our view.
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