Economics & Corporate Law

Politics of Employment: The Need for a Structural Shift

Saurabh Gupta

The 2019 elections should involve a strong debate on which party has the better policy to bring a structural shift towards the manufacturing sector, to ensure sustained job creation.

With the general elections fast approaching, varied political camps have started making appeals to the populist sentiments in their fight for incumbency. However, it is important to not fall for these tactics, and to vote on the basis of criteria that are most relevant to the problems faced by Indians today. A significant factor here is the question of job creation, which shall be the focus of this post.

A Correct Estimation of the Problem

With two-thirds of the Indian population aged below 35, India is expected to have the largest workforce in the world by the year 2027.[2] While this sounds like a boon due to the overflow of potential human capital, the fact remains that India lacks majorly in terms of job growth for absorbing this potential asset. The situation seems worse when considered in the context of substandard quality of human capital that is created in India every year due to the high student to teacher ratio, as well as un-qualified and underqualified teachers.

Often it is argued that the unemployment problem is exaggerated. A lot of emphasis has been laid on the ILO statistics which reported India’s unemployment rate at 3.5%, a figure lower than several advanced economies. However, this figure paints a fairy picture by not stating the startling facts that an age-wise unemployment analysis shows.

The Labour Bureau’s last Employment-Unemployment Survey Report (2015-16) shall now be the basis of discussion in this post.[1] According to the estimates, unemployment in the youth (age group 15-29 years) stood at 10.3%, while for people aged 30-59 years, it stood at a minimal 1%. What is most shocking is that contrary to popular perception, low level of education is not the cause of this widespread unemployment among the youth. Rather, the statistics show that the unemployment rates increase with higher educational qualifications. The unemployment rates for people who have obtained a graduate, post graduate and/or above degrees was a whopping 13.7% and 12.5% respectively. Comparatively, the unemployment rates stood at a mere 1% for those who are not literate and are literate below primary level, in the statistics of 2015-16.

Furthermore, digging a little deeper, the statistics show that unemployment rates amongst youth (15-29 years) who have obtained a graduate, post graduate and/or above degrees stand at approximately 30%. Moreover, the “11 million job losses” in 2018, along with the aforementioned statistics, is a clear indication of the magnitude of the problem. With youth population increasing, the problem will only worsen with time if it is not tackled.

Figure 1[2]

Manufacturing Sector in India: The Ray of Hope

Structural transformation usually takes place in a way that it moves from the primary sector to the secondary, and then to the tertiary sector. This ensures that all the sectors have had the required phase of development for a country to have a fundamentally and foundationally strong economy. The India story has been one where the structural transformation took place directly from the primary sector to the tertiary sector.

India is a country which has had a decent growth rate in the past few years. This growth rate has been despite a low growth rate in the manufacturing sector. The share of manufacturing in GDP and employment has remained stagnant at 15% and 12% respectively over the past three decades. The service sector has been in the driving seat of the growth rate. The problem however is that such growth is unsustainable.

Manufacturing is one of the most important components in any economy, and a strong growth rate in this sector translates into strong GDP growth for the long haul. This is because growth in the manufacturing sector leads to a growth in the other sectors as well. Manufacturing sector involves processes that increase the demand for raw materials, energy, construction and services from a broad array of supplying industries. All of these are major contributors to the economy, and traverse the structural dimensions of agricultural (primary), manufacturing (secondary) and the service (tertiary) sectors. Such linkages mean that the multiplier effect has a stronger impact on the GDP growth when it is rooted in a growth in the manufacturing sector.

Moreover, such a structural problem adversely impacts the balance of trade as well. Trade deficits are bound to increase if the exports are composed mainly of services, while the imports are goods heavy. Income from exports of service are not enough to offset what is spent on the import of goods due to the ubiquitous nature of demand of goods as against services. Growth that relies on the manufacturing sector can remedy this problem. With a widening trade deficit and current account deficit, it has become all the more important for this structural shift to take place.

According to the recent CMIE study, the uneducated, wage labourers, and small traders have been the worst hit by the job losses in 2018. Focus on the manufacturing industry would benefit these sections the most, as the jobs created in this sector do not need high qualifications. Manufacturing industries can be labour intensive or capital intensive. Since India is a labour abundant country, it would make more economic sense to tap into the industries that are labour intensive. This is especially important since labour-intensive sectors were among the key casualties of demonetisation, and it was the small and medium enterprises (lacking in capital and comparatively more labour intensive) that could not cope with the rigours of GST.

As far as the relationship between growth rate and job creation is concerned, according to a recent study by the Azim Premji Univeristy’s Center for Sustainable Employment, movement should be towards the sector which has a higher employment elasticity. In other words, the industry that results in greatest increase in employment per increase in unit of output is the industry which should be focussed upon. Labour intensive manufacturing industries are considered to be the most appropriate industries in this regard. Moreover, greater growth in employment in this sector will inevitably lead to jobs for the educated unemployed as well. For instance, if there is growth in manufacturing in a labour intensive industry, that means there will be greater investment in the sector. This will lead to capital flowing in, bigger companies being set up, and jobs being created for the educated and qualified individuals as well, along with the uneducated.

Structural shift is also of two types. The first is where the economy moves from being an agricultural dominant economy, towards manufacturing and services sectors. This is called the Kuznets Process (after the economist Simon Kuznets). The second type of shift is seen as a movement from the unorganised sector to organised sector. This is basically in terms of regularity and security in employment, and is called the Lewis Process (after the economist Arthur Lewis). While it is true that the organised manufacturing sector has experienced job growth in recent times, this has not resulted in an overall structural shift and increase in the percentage of jobs falling under the manufacturing sector. This is because the increase has been through the Lewis Process, and the increase in the organised sector has come at the expense of the unorganised manufacturing sector.

If India is to solve its jobs crisis, there has to be an increase in the total percentage of jobs falling under the manufacturing sector, and Kuznets Process in this regard may also result in the increase in total number of jobs in the Indian economy due to reasons already mentioned.  Schemes like the National Apprenticeship Training Scheme and Skill India are initiatives to make the youth more employable. These target at the mismatch of demand and supply of skills in the economy, and does not create more jobs. However, this is not enough in order to solve the jobs crisis in India. If India is truly to create more jobs, it needs to make sure that the manufacturing sector is invested in, and credit availability is improved. Effective collaboration between the private sector and the government is the need in this regard. MSMEs contribute nearly 32% to the GDP. However, only 17% of the credit disbursed to the industries reaches the MSMEs, majority going to the large enterprises. The Pradhan Mantri Mudra Yojana aims to improve the provisions of loans to the MSMEs. However, the average amounts loaned remain quite low (Rupees 50,000 at an average), despite low levels of NPAs for this sector. Thus, in order to promote the manufacturing sector, there is a need for low cost capital for the MSMEs which the current government policies fail at providing.

Viability of this Move Towards the Manufacturing Sector

It is argued by many that it is too late for India to go back to the phase of development that it missed due to the fact that the manufacturing sector will soon be ridden with automation. However, such a conclusion should not be drawn so easily. India is a country where labour is abundant, and private investment is low.[ In such a scenario, it is only prudent for us to tap into the resources we have in abundance, and not hurry into the automation of industries and manufacturing. A lot of jobs can be created in the manufacturing sector this way. This is especially true since the very viability of automation in India is also a question in light of the low investment and capital inflows. Automation is generally linked to availability of capital, which further depends on factors like interest rates and credit availability. India hasn’t been the strongest in these spheres, and its better if we tap into our strengths and exploit the advantage we have in terms of our labour in moving towards a manufacturing-heavy economy. Not only will this create jobs, but also increase growth rate, while also ensuring a future where the economy will be able to reap the benefits of automation to the fullest extent, as and when it takes place.


Therefore, a structural shift towards the manufacturing sector should be the focus of job creation in India for the next few years. A lot of government intervention is required for achieving this. Consequently, the 2019 elections should involve a strong debate on which party has the better policy to create more jobs in India, as our economic growth in the near future depends directly on the employability and employment of our youth. Such economic growth will have benefits across the spectrum, and is definitely a need of the hour in the Indian economic and political scenario.

Saurabh Gupta is a II Year, B.A., LL.B (Hons.) student at the National Law School of India University, Bengaluru.

[1]; The estimates are based on the UPS approach, which makes calculations on the basis of the persons aged 15 years and above who were available for work could not get work during the reference period.