First published on The Dialog.

The problem of “jobless growth” under the wider umbrella of Indian economy has attracted a lot of attention in media recently. Of all the challenges thrown up by the neoliberal reforms of the late 1980s and early 1990s, this one is among the most serious and the one with potentially catastrophic long-term consequences, if not addressed soon. One way to visualize the seriousness of the problem is via the data presented in Figure 1 below. It shows annual growth rates of GDP and of formal sector employment over ten year periods starting in the 1970s. Notice that while GDP growth becomes faster, employment growth becomes slower. During the pre-economic crisis spurt in GDP growth where the Indian economy grew at an average annual rate of over 8%, the rate of formal job growth was less than 0.5% per year. The result has a persistent informality and casualness of employment and lack of stable jobs with benefits and inflation-adjusted wages.

Figure 1: Jobless Growth

The previous UPA government’s inability to create jobs acted as a catalyst for a change and Modi campaign promised a much more rapid rate of employment growth. While more time may pass to see if they achieve this, the initial indications are that the problem will persist. Quarterly job creation data from the Labour Ministry shown in Figure 2 suggests that, if anything, jobs are being created more slowly under the present regime. The figure shows cumulative jobs added each quarter since the end of 2008 up to the end of 2015.

Figure 2: Quarterly formal sector job creation (Labour Ministry data)

Some of the reasons for such a sluggish growth might be mechanization, global competition, skill mismatch, and labor strife, however are these discourses being addressed at the policy level? While global economic conditions and factors outside the control of Indian policy-makers may be part of the reason, it is equally the result of self-imposed ideologically motivated constraints.

It is true that increased openness to trade and capital, places certain important constraints on developing country government who might want to pursue policies that depart from the “Washington Consensus.” But scholars such as Dani Rodrik have argued in his book, One Economics, Many Recipes, that developing country policy-makers are not even using the policy freedom that does exist in order to suit their own domestic conditions and meet their own challenges. Instead they are choosing to accept deregulation, liberalisation, and openness as goods in themselves rather than as one among many policy options to be followed selectively in the pursuit of broad development goals.

A case in point is the obsession with labour laws and lack of flexibility in the labour market as the reason for lack of formal job creation. Despite the fact that surveys show, constraints such as lack of infrastructure and weak demand are much more binding than labour laws (for e.g. see Kotwal, Ramaswami and Wadhwa 2011).This is even truer of employers in micro, small and medium enterprises, who often operate well under the ceiling at which labour laws apply and can hire many employees before the laws kick in, but who are still unable to expand employment because of inadequate electricity, lack of access to markets and/or credit, and weak demand.

Another case is aversion to the very mention of any “industrial policy” for fear of a return to the “license-quota-permit raj.” Never mind that the entire gamut of policies followed under the neoliberal regime, such as Special Economic Zones, FDI, Make in India and so on are all industrial policy measures, though not labeled as such. Industrial policy in the service of export promotion and foreign investment is welcomed and any policy focusing on domestic firms and markets is viewed with suspicion and has to prove itself twice as hard.

An employment-first development strategy will involve fundamentally different choices than the growth-first strategy that we have followed for the past 25 years and that has brought us to the present-day crisis. It is clear that such a strategy cannot be implemented if precedence is given to the latest technology (which almost always has been developed in labour-scarce, capital-abundant contexts) and to global competitiveness. But such is the hold of these two ideologies that the merest mention of departing from them invites allegations of wanting to “take India back” to some dark time. Of course these allegations come from those whom the present economic regime has blessed with well-paying, secure jobs; precisely the thing that is denied to the vast majority by the very same regime.

It is now abundantly clear that uncritically accepting deregulation, trade openness and openness to capital flows (FDI or short-term) leads to highly undesirable outcomes such as increasing capital intensity of production, resulting in growth without jobs. The solution to this is not more globalization and reliance on some mythical foreign demand (for which the moment may, in any case, have passed), but rather doing the hard work of designing appropriately open trade policy, providing key infrastructure, particularly to MSMEs, and raising rural incomes (and therefore demand) by raising public investment in agriculture. After all sound agricultural policy is the bedrock of any decent industrial policy.