Job Creation Critical to India's Development

Op-Ed / Opinion | 2 May 2006

India's economic reforms have transformed it from a plodding economic behemoth into a rising nation. In the past three years, growth has averaged more than 8%. The reforms are improving the lives of millions of Indians. But to spread the country's success, the economy must create more and better jobs. Else, the sustainability of growth will be undermined as inequalities trigger political and social responses that turn economic policymaking into a zero-sum game.

Despite per capita GDP growth of around 5% through most of the 1990s, a growing number of employed Indians are working on daily or periodic contracts. Employment growth in the organised sector-where the 'good' jobs are-has been excruciatingly slow, if not negative, in recent years. While average wages have increased, it is the larger pay packets for the small sliver at the top end of the income scale that have been the main driver.

These trends are not limited to India. As a new book, Labor Markets in Asia: Issues and Perspectives points out, unemployment rates are higher today in many countries in East and Southeast Asia than before the 1997 Asian financial crisis. Even an economic powerhouse like China is affected. In the 1980s, a 3% growth rate of output in China induced a 1% increase in employment. In the 1990s, it took 8% growth to create the same increase.

In India, spreading opportunity will require focusing of public investment on the rural sector, home to about 75% of the labour force. Much work in this sector is characterised by very low productivity and meagre earnings. For rural living standards to improve, farm productivity must rise and jobs created in higher productivity non-farm production. This will only happen if public investments in rural infrastructure rise and delivery of agriculture extension services, credit and various producer services for farm and non-farm enterprises improves.

Many observers have blamed rigid labour laws for slow job creation in the formal sector. Some aspects of India's labour laws need to be reconsidered, as markets are increasingly relied on to allocate resou-rces. An example is Chapter VB of the Industrial Disputes Act that requires units with over 100 workers to seek government permission before laying off workers.

But whether labour laws are the main drag on private sector job growth is open to debate. There are signs that Indian firms have learned how to cope with the more difficult aspects of labour laws, for example, through voluntary retirement schemes and other negotiated solutions with workers. If labour laws are not the main drag, policymakers would likely get better and faster results by focusing their attention and political capital on reforms in other areas of the economy. First, the woeful state of power and transportation infrastructure needs urgent action. Establishing an appropriate regulatory and pricing framework is essential to attract private investment in these areas.

Second, reform is still required in areas including regulations on land, insolvency laws, and continuing reservations for small enterprises in certain labour-intensive product lines. The red tape that slows business in India must be reduced.

Finally, the government needs to be proactive in enabling producers to restructure and diversify into new economic activities. This is crucial for job creation, given that the adoption of modern technologies allows goods to be produced with fewer workers. The public and private sectors need to work together to find productive activities that create large numbers of new jobs. This approach must also apply to the development of non-traditional activities in agriculture or services.

Take food processing. Compared with other Asian countries, only a small fraction of India's fruit and vegetable production is processed. This industry has the potential to expand. So far, it has been constrained by factors ranging from cultivation of traditional varieties of fruit and vegetables unsuitable for processing to the weak infrastructure for post-harvest preservation, lack of modern storage, etc. Coordination failures abound. Overcoming these problems will require effective public-private partnership.

India has shown it can change. The government is focused on improving the lives of the poor. A structured and integrated nationwide approach to job creation is the country's best option for ensuring all its people benefit from strong growth and that growth is sustained.