One million individuals are entering the workforce every month and there aren’t enough jobs going around for them. This basically means that around 12 million or 1.2 crore youth enter the Indian workforce, every year.
And how many jobs are available for them?
“According to the Labour Bureau of India, only 1.35 lakh jobs were created in 2015 and 4.93 lakh in 2014 across eight sectors.“ Hence, there are barely any jobs being created for those entering the workforce.
Given the fact that so many individuals are entering the workforce every year, India needs a large burst of economic activity in labour intensive sectors which can employ India’s largely low-skill, semi-skilled and unskilled workforce. Only then will the country be able to put its so called demographic dividend to good use.
So, which are these labour intensive sectors that have the potential to employ India’s burgeoning workforce?
The apparel sector and the leather and footwear sector are two such sectors.
As the Economic Survey of 2016-17 points out: “The data show that the apparel sector is the most labour-intensive, followed by footwear. Apparels are 80-fold more labour-intensive than autos and 240-fold more jobs than steel. The comparable numbers for leather goods are 33 and 100, respectively. Note that these attributes apply to the apparel not the textile sector and to leather goods and footwear not necessarily to tanning.” India needs a large burst of economic activity in labour intensive sectors which can employ India’s largely low-skill, semi-skilled and unskilled workforce.
Figure 1 tells us that the apparel sector creates close to 24 jobs per lakh of investment. For a similar investment, the steel sector creates almost no jobs. On the other hand, the leather and footwear sector create around seven jobs per lakh of investment. Hence, these sectors have a great potential to create jobs, given that they don’t need a lot of investment to create jobs. Also, they have a huge potential to create jobs for women.
As mentioned earlier, it is estimated that nearly one million Indians are entering the workforce every month. This number is based on the assumption of a very low female labour participation rate. The men make up for a bulk of the Indian workforce, with women forming a small part.
Nevertheless, the thing is that more and more women are likely to join the workforce in the years to come. And if that turns out to be true, then the estimate of one million Indians entering the workforce every month, will turn out to be an underestimate. In this scenario, if the sectors like apparel and leather and footwear expand, they are likely to create the required jobs.
Over and above this, as the Economic Survey points out: “The opportunity created for women implies that these sectors could be vehicles for social transformation… In Bangladesh, female education, total fertility rates, and women’s labour force participation moved positively due to the expansion of the apparel sector.“
The interesting thing is that there is an immediate opportunity here.
In the last two decades,China has seen an explosion of economic growth. In this scenario, the per capita income in the country has gone up many times over. In 1995, the per-capita income had stood at $610 (current US $, World Bank data). By 2015, this had exploded more than 13 times to $8,028.
This tells us that the labour costs in China have gone up. Some of the goods that it used to produce earlier, and on which a lot of economic prosperity was built, it is no longer competitive in. As far as labour cost goes, India is well -positioned to cash in on this. If labour cost was the only concern, businesses which produce apparel, leather and footwear, should have been moving their manufacturing from China to India.
This becomes clear from Figure 2. The minimum wages for semi-skilled labour in most Indian states are lower than Vietnam, China and Indonesia. Despite this, the space being vacated by China is not being taken over by India.
As the Economic Survey points out: “The space vacated by China is fast being taken over by Bangladesh and Vietnam in case of apparels; Vietnam and Indonesia in case of leather and footwear. Indian apparel and leather firms are relocating to Bangladesh, Vietnam, Myanmar, and even Ethiopia.”
If Indian firms are leaving India and setting up apparel and leather firms in other countries, it is not surprising that the space being vacated in China is moving to other countries and not India.
“In fact, if we look at the cost factor, India has the second lowest manufacturing cost (Indonesia is lower) among the top 25 exporting countries in the world. Nevertheless, it is important to realise here that companies set up a manufacturing base in China not just because of the low cost, but also because of the very good infrastructure that was available. And such an infrastructure is clearly not available in India right now. Indeed, almost all countries in East Asia offer an easier working environment than what is available in India.“
Hence, when it comes to capturing the space being vacated by China, two major factors are holding India back, logistics and labour laws. India’s labour laws essentially ensure that Indian firms continue to remain small and in the process they lack economies of scale to compete internationally.
As the Economic Survey points out: “One symptom of labour market problems is that Indian apparel and leather firms are smaller compared to firms in say China, Bangladesh and Vietnam. An estimated 78 per cent of firms in India employ less than 50 workers with 10 per cent employing more than 500. In China, the comparable numbers are about 15 per cent and 28 per cent respectively.“
Take a look at Figure 3. It shows the logistic costs of different countries. India comes right at the bottom. In fact, the logistics cost of India and Vietnam is the same. Nevertheless, it takes lesser time to deliver stuff from Vietnam to the US East Coast, than it takes from India. This works in favour of Vietnam.
To conclude, the window of opportunity to capture the space being vacated by China is narrowing. And India needs to get its act right quickly, if it wants to capture the space being vacated.
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.