India's jobs dilemma

There has been a huge debate on whether India is creating enough jobs or not, despite being one of the fastest growing major economies in the world, and expecting to easily clock an average of above 7 percent GDP growth during the Modi government's tenure. It is largely accepted that given India's population growth rate and demographic profile, the country needs to create roughly 12-14 million jobs annually. There is also data to show that in the past, even during the fast growing years between 2000-2007, the number of jobs being created annually was much lower than the growth rate. In other words, while India was growing at a rapid clip, it was not creating the commensurate number of jobs even during those years.

After the National Democratic Alliance (NDA) government led by Prime Minister Narendra Modi took over the reins, the feeling that the country is not creating enough jobs has only increased.

While many economists and analysts (and even some labour ministry data) have pointed to extremely low job creation in the first three and a half years of the Modi government, a few have given counter views as well. Government spokespersons have emphasized that the problem is not that India is not creating enough jobs, but that we do not have robust, reliable data on job creation that is reasonably recent. Another defense has been that in India, a lot of people are self-employed or small entrepreneurs, and therefore do not get captured in formal job estimates. Niti Aayog has been tasked with recommending a robust way for measuring job creation with minimum lags so that it can be used for policy decisions and debate. The Niti Aayog, in turn, has given a series of recommendations, including an annual household jobs survey, regular enterprise surveys, and as well as use of other data bases like Employees Provident Fund (EPF) data and Employee State Insurance Corporation (ESIC) data. In fact, two economists, Sowmya Kanti Ghosh (chief economist, State Bank of India) and Pulak Ghosh (professor at IIM, Bangalore) used EPFO data to conclude that more formal jobs had been created than earlier estimated. (The study drew its share of criticism for extrapolating from limited data and other reasons, but the Niti Aayog which commissioned the study also admits in estimating jobs from EPFO data has problems).

The problem with much of the jobs debate is that it generally focuses on the absolute number of jobs that need to be created. Even the government defence has largely focused on people being self employed and therefore gainfully employed. (Note the controversy over the Prime Minister's comment that selling Pakodas is also employment).

The issue is that the jobs debate (and the policy response) cannot be separated from the income debate. Recently, there was much noise when The Economist came out with a cover story on India's missing middle class. The newspaper, estimated that there would be all of 78 million Indians in the middle class if the National Council of Applied Economic Research (NCAER) cut off of Rs 250,000 annual income (or roughly $10 a day at market rates) is applied.

Amitabh Kant, CEO of Niti Aayog along with two co-authors countered The Economist estimates in an article in Mint newspaper pointing out that another study by economists Sandhya Krishnan and Neeraj Hatekar in the Economic and Political Weekly estimated that the middle class should start with the lower middle class income of $2-4 a day. (Middle-middle would have an income range of $4-6 while the upper middle would bring in $6-10 a day).

The problem with the second calculation is that it sets the bar too low for both a country with ambitions to be an economic superpower and the aspirational youth joining the workforce every year. The income of $2 a day for a family is just below the National minimum wages. It amounts to less than Rs 5,000 per month.

Setting a goal of creating enough jobs to put people in the lower middle class definition of Krishnan and Hatekar would skew the policy response. In fact, it already has to an extent. Much of the current debate focuses on the government response of giving the economy a stimulus and creating jobs by increasing infrastructure spends. But increasing infrastructure spends, while good in the long run, largely creates low level jobs directly. (Indirectly, it creates some good jobs in steel and cement factories as well).

The government needs to start debating about how to create more white collar jobs with good salaries adhering to the NCAER definition of middle class ($10 a day) than about how to create a larger number of jobs, even if low paid (though those are necessary too). Adding the income component to the jobs debate will also bring changes to the policy debates - and focus the government's attention on better manufacturing and services policies that will actually encourage large scale creation of better paid jobs.

In the past, this has happened by accident - when jobs were create in IT, ITES, Telecom and Retail. There is no reason it cannot happen by design if the government starts thinking about it seriously.