What should be an acceptable employment rate for India?

Note: This is the first in a two-part series on the need for an employment policy at national level.

In India, inflation and unemployment are related economic problems.

A theoretical construction, the Phillips curve, indicates that the two are inversely related in the short run. In India, we have legislated to control inflation. But no policy considers a certain level of unemployment or employment as a policy objective.

This is strange because while India is not among the worst performing countries in terms of inflation, it has one of the worst labor market participation rates and also the worst employment rates in the world. It’s even stranger because at the end of the day all economic policy making has to come down to improving livelihoods.

The Urjit Patel report of the Expert Panel to Revise and Strengthen the Monetary Policy Framework of January 2014 states in a footnote on page 7 that “the United States, however, recently announced a target explicit unemployment – keep interest rates low until unemployment falls below 6.5%. . This is consistent with what monetary policy can do, i.e. bring real unemployment closer to the level of natural unemployment or real growth closer to the level of potential growth.

But, the committee does not recommend the use of unemployment rate or growth rate targets in the anchoring of monetary policy.

Low and stable inflation is good, but it is not sufficient if it is not conducive to an acceptable rate of employment. India adopted inflation targeting five years ago. During this period, inflation has been reasonably stable around a legally acceptable 4%. But, during this period, the employment rate fell from 42.7% in 2016-17 to 39.4% in 2019-20.

What is the acceptable employment rate in India? According to the rates modeled by the ILO, the global average employment rate is 57%. India is placed by the same source at 47%. Pakistan and Sri Lanka are respectively at 50% and 51% and Bangladesh at 57%. India needs a solution for the low employment rate more than its inflation problems.

Consider the relative importance of inflation over unemployment as policy objectives.

India’s often low unemployment rates mislead us because they mask the extremely low participation rate. What matters is the employment rate – the proportion of the working-age population that is employed.

The scope of monetary policy is limited. But, the objectives of economic policy making are more than the mere competence of a monetary policy committee or even the central bank. An acceptable employment rate should be a committed political objective. Much of policy development today lacks any focus on employment.

Fiscal policies are bound by the Fiscal Responsibility and Fiscal Management Act (FRBM) (2003). The constraints imposed by the FRBM limit the government’s ability to intervene to create jobs. But, there is also apparently a lack of political will to intervene in the post-COVID economic crisis with a strong fiscal stimulus, lest such spending fuel rising inflation. Monetary policies are linked by the February 2015 legislation adopted by Parliament which sets an inflation target of 4% with a band of 2 points on each side. But, there is a trade-off between inflation and growth as recognized by the Urjit committee report. If growth is an indirect indicator of employment, then it appears that the inflation targeting policy is as unfavorable to job creation as the FRBM.

The question is how long to wait for conservative fiscal and monetary policies to materialize and stem the decline in the employment rate. India needs an acceptable employment rate.

A contained public deficit and a contained inflation rate are useless if they cannot help stem the fall in the employment rate, even over a period of five years. To solve the employment problem, India needs policies to organize labor migration from low productivity agricultural jobs to better jobs in factories and offices.

We offer five suggestions for doing this:

First, India must increase government employment. According to data attributed to the ILO, India is the worst performing country in terms of the share of public sector workers as a percentage of the total workforce. Only 3.8% of India’s total workforce is employed in the public sector. No other country is worse than India in this regard. the United States and the United Kingdom are at 15.8% and 21.5%; Germany and France are 12.9% and 24.9%; South Korea and Japan are at 10.3% and 10.5%. Singapore and China are at 32% and 50% and Bangladesh at 8%. The rationale for increasing the share of public employment is not to conform to international standards but to provide adequate services that are woefully short.

Second, the government must take the lead in building physical and social infrastructure. It is also an area where India suffers from a significant deficit. The immediate impact would be an increase in employment in the construction industry. This is the best first step in moving labor off farms. Between 2004-05 and 2011-12, the absolute number of workers fell in agriculture for the first time in Indian history, mainly for this reason. In addition, investments in social infrastructure are needed to enable an increase in government jobs.

Third, infrastructure development should focus on developing industrial clusters for labor-intensive industries. Food processing, leather and footwear, wood manufacturing / furniture, textiles and clothing are easily qualified industries. But, the effort should extend to the creation of manufacturing clusters to exploit the local advantage in each district or set of neighboring districts.

Fourth, the Center should correct the reverse duty structure (IDS) that prevails against Indian manufacturers. The IDS constitutes negative protection for Indian manufactured goods. A 2017 study showed that IDS exists in paper and paper products, chemicals and chemicals, pharmaceuticals, computers, electronics and optics, machinery and transportation equipment; another study showed IDS in electronic products like refrigerators, air conditioners, washing machines, microwave ovens. Performance-related incentives (just allocated by GoI in 12 sectors in AtmaNirbhar Bharat 3.0) will not by themselves generate domestic manufacturing capacity.

Finally, it may be useful to design a mechanism to report a project as a non-performing asset if it does not provide the jobs it promised to provide when it requested some benefit from the government. The promoters of such projects may be required to contribute to a job creation fund instead of their default.

All of the above is only a partial plan to generate growth, to create jobs. It is, however, a call to radically reflect on the problem of job creation by setting a measurable objective and making some suggestions.

Santosh Mehrotra is an editor, Relaunch jobs. An agenda for growth (Penguin, 2020). Mahesh Vyas is CMD, Center for Monitoring Indian Economy.