Context

• India's employment landscape presents a complex mix of optimistic projections and alarming realities as various reports offer contrasting perspectives on job growth, reflecting underlying structural issues in the labour market.
• The challenge of employment generation is multifaceted, impacted by labour market rigidities, skill gaps, and the changing nature of technology.
• Amid conflicting trends in employment growth, it is important to explore the current employment trends, key challenges, and potential solutions for bridging the employment deficit in the country.

An Analysis of Conflicting Trends in Employment Growth

• KLEMS Data: A Promising Increase in Employment
  • India’s employment growth presents a paradox, with different sources offering widely divergent narratives.
  • On one hand, data from the Reserve Bank of India’s (RBI) Capital, Labour, Energy, Materials, Services (KLEMS) reports a promising 6% increase in job growth for FY24, up significantly from 3.2% in FY23.
  • This suggests that job creation is gaining momentum as the Indian economy recovers from the pandemic's aftermath.
  • Such growth aligns with the broader narrative of India's robust economic recovery, driven by strong domestic demand, improved manufacturing output, and increased investment flows into various sectors.
• CMIE Data: A More Concerning Picture
  • This optimistic portrayal by RBI’s KLEMS is challenged by data from the Centre for Monitoring Indian Economy (CMIE), which paints a more concerning picture.
  • According to CMIE, the unemployment rate surged to 9.2% in June 2024 from 7% in May, indicating a sharp rise in the number of jobless individuals.
  • The annual unemployment rate for FY24 stood at 8%, far higher than what would be expected from an economy witnessing job growth as reported by the RBI.
  • This discrepancy highlights the complexities of India’s employment landscape, where aggregate economic growth does not necessarily translate into widespread job creation.

Rationale Behind the Discrepancies in Employment Data

• A significant part of the variation in these reports stems from differing methodologies and definitions of employment used by the RBI and CMIE.
• The KLEMS data focuses on formal sector employment, which may not account for the large informal economy that employs a significant portion of India’s workforce.
• The CMIE, on the other hand, captures a broader spectrum of employment, including the informal sector, where job insecurity and volatility are more pronounced.
• The distinction between formal and informal employment is critical in understanding these conflicting trends.
• While formal jobs may be increasing, the informal sector where many are employed in precarious conditions, continues to suffer from instability, leading to higher overall unemployment figures.

Key Challenges in Employment Generation

• Labour Market Rigidities and Skill Gaps
  • Labour market imperfections in India lead to persistent mismatches between job availability and the skills of job seekers.
  • These rigidities are compounded by institutional factors such as wage-setting mechanisms and the existence of significant skill gaps.
  • There are two types of skill gaps in the Indian labour market. First, many job seekers, despite possessing qualifications, lack the necessary skills due to inadequate training.
  • Second, some job seekers have not received any skill training at all.
  • Both types of gaps coexist, resulting in a workforce that is not equipped to meet industry needs.
• Aspirational Gap
  • Moreover, India faces an aspirational gap, where job seekers are unable to find employment that aligns with their career aspirations.
  • For instance, while there is growing demand for IT jobs, many young Indians find themselves in lower-paying manual labour positions, particularly in southern states.
  • These gaps in the labour market need to be bridged to absorb the growing number of new entrants into the workforce.
• Technological Changes and Employment Elasticity
  • Another critical factor is the declining employment elasticity due to technological advancements.
  • Historically, innovations in machinery and tools led to simultaneous increases in output and employment by substituting human labour with machines.
  • However, modern technologies, particularly artificial intelligence (AI), are poised to disrupt this dynamic.
  • AI, often referred to as mechanical minds, could potentially replace jobs that require cognitive labour, just as mechanical muscles replaced physical labour in previous industrial revolutions.
  • While professionals adept at applying new technologies may thrive, there is a distinct possibility that middle management roles could be downsized, creating new vulnerabilities in the labour market.

Necessary Steps to Address the Employment Deficit: Policy Recommendations

• Promoting Labour-Intensive Industrialisation
  • To address the employment shortfall, India must prioritise sectors that are capable of absorbing large numbers of workers.
  • Sectors such as food processing, textiles, and apparel are highly labour-intensive and have strong inter-sectoral linkages with agriculture and other manufacturing industries.
  • These sectors can cater to the domestic market and play a pivotal role in job creation.
  • However, while these industries may support employment, they may struggle to compete internationally, necessitating additional support to improve their global competitiveness.
• Enhancing Competitiveness in Technology-Intensive Sectors
  • While promoting labour-intensive industries is essential, India must also invest in technology-driven sectors to remain competitive in the global market.
  • Technology-intensive sectors such as chemicals, pharmaceuticals, electronics, and motor vehicles have the potential to generate high-value jobs and expand India’s export capabilities.
  • These industries are characterised by higher rates of technology adoption and research and development, making them critical to India’s long-term economic growth.
  • To unlock the potential of these sectors, India must implement a differentiated incentive system that supports both employment generation and capital investments.
• Educational and Skilling Reforms: The Foundation for Future Jobs
  • A critical aspect of India’s employment strategy lies in addressing the gaps in its education and skilling systems.
  • The country’s education system currently falls short of industry requirements, leading many young Indians to pursue multiple degrees from lower-quality institutions.
  • This has exacerbated the employability crisis, with many highly educated youths facing unemployment.
  • Despite rising enrolment rates, the quality of education remains inadequate, creating a mismatch between the skills provided by educational institutions and the needs of the labour market.
  • Educational reforms must focus on improving the quality of education at all levels and aligning curricula with industry demands.
  • Vocational training programs and skill development initiatives must be expanded to equip graduates with the skills required in the modern economy.
  • Without these reforms, India will continue to face a shortage of employable talent, hindering the country’s ability to generate jobs.
• Need for Improved Coordination
  • The contrasting reports from different agencies raise questions about the quality and transparency of employment data in India.
  • This issue is not merely academic; accurate data is essential for policymakers to make informed decisions about labour market interventions.
  • The National Statistical Commission (NSC) needs to play a more proactive role in resolving these discrepancies by standardising definitions of employment and unemployment across agencies.

Conclusion

• The conflicting data on employment growth further complicates the situation, underscoring the need for improved coordination and transparency in labour market reporting.
• To tackle the employment deficit, India must pursue a balanced strategy that promotes both labour-intensive industrialisation and the growth of technology-driven sectors and substantial educational and skilling reforms are needed to prepare the workforce for the demands of the modern economy.
• By addressing these challenges, India can create a more inclusive and sustainable path to economic growth and employment generation.