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    Demystified: Why Didn’t India’s Economic Growth Lead To Employment Generation?


    August 12, 2016

    By Esha Ajmera

    From 1947 to 1991, the Indian economy witnessed a sedate growth. But after that, things changed. So what happened in 1991?

    Before 1991, India was a closed economy. This meant that international companies like Adidas and Nike were not there to sell their products and we had to make do with Indian brands instead. In 1991, India witnessed a steep drop in its forex reserves, such that it could barely buy imports for a week!

    International brands like Adidas started coming to India after 1991

    International brands like Adidas started coming to India after 1991

    Under distress, India resorted to the International Monetary Fund for help. In return for its help, the IMF imposed some conditions on us. This led to our economy opening up its trade with other countries.

    Throughout the nation, the employment rate has increased 1999-00 onwards. Furthermore, there has been a change in the kind of employment growth we have had. In the post-reform period, only the secondary sector witnessed higher employment growth. In contrast, during the pre-reform period, all the major sectors except the secondary sector experienced growth.

    The current employment structure has been depicted in the graph below:


    The reforms had a considerable impact on the employment rate due to 3 primary reasons:

    • Competitive nature of MNCs:

    This forced local firms to reduce prices, usually by letting employees go. Furthermore, it also led to the closure of many Indian industries which hired a lot of labour, since they could not meet the competition.

    • Import of machines on a large scale:

    The rise in employment of skilled labour and machines meant that many unskilled labourers were left without jobs

    • Government Policies:

    The employment measures undertaken by the government emerged as counterproductive. Most of the firms began to employ casual or temporary workers, depriving them of the benefits offered by the government (like job security, unemployment benefits etc).

    The flip side of the coin is that even though during the post-reform period total employment increased, the quality of employment deteriorated primarily on the following grounds:

    • There was a sharp rise in self-employed workers and consequent fall in casual workers in rural as well as urban India.
    • The self-employed workers had low expectations, with 30% of the urban self-employed reporting that an income of less than2000 per month was adequate.
    • Employment generation was primarily in the unorganized sector i.e. these workers did not enjoy benefits of the organized sector such as job security e.g. a situation where instead of getting more engineers (working in the organized sector), we got more rickshaw pullers (which is a part of the informal sector).

    Hence, even today although an increase in employment demonstrates a positive sign of development in India, the quality of employment, which is equally important, remains extremely poor for a majority of the workers.

    What we require are macroeconomic policy interventions addressing demand and supply side of the labour market to bolster demand and concurrent implementation of social policies such as social security and increased wages. For example, minimum wage laws create a situation of excess labour supply in the market. This happens as firms which want to pay less than the minimum wages will use less labour now to reduce their costs.

    On the other hand, state governments in order to attract FDI offer incentives on grounds of investment, project location and employment generation. They ignore the welfare of the labourers in a competition to onboard the company. This was seen in Kolkata between the Tatas and the Singur farmers.

    Hence, social and macroeconomic policies should be such that they reinforce each other. Even though industrialization is necessary for a developing economy, in a country with a population of 1.2 billion the workers’ welfare cannot be ignored and should be of prime importance.

    (Esha is currently studying at IIM Lucknow)

     You might like to read this too:

    GST For Dummies: A Numerical Example To Show How Your Tax Payments Will Get Affected


    Views presented in the article are those of the author and not of ED.

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    In Economy
    • hemenparekh

      Incentivizing Employment ?

      During last budget, Shri Jaitley announced a scheme to incentivize employers to increase employment

      Under this scheme , Government would pay 8.33 % EPS , on behalf of Employers , for NEW hires drawing a monthly salary of Rs 15,000 or less , enabling employers to pass on this ” saved ” amount to the said employee , thereby increasing his ” take home ” salary

      For an employee at exactly , Rs 15,000 pm salary , this would amount to Rs 1250 pm or Rs 15,000 in a year ( like a one month bonus ! )

      If ALL those NEW employees were to be drawing Rs 15,000 pm , then the budget provision of Rs 1,000 cr would benefit some 666,000 persons

      But , considering that many may be drawing a monthly salary of less than Rs 15,000 , the number of beneficiaries could go up to ( say ) 1,000,000 ( 1 million against 12 million persons entering job market each year ! )

      But implementation of this scheme is anything but simple !

      MINT ( 22 Aug 2016 ) talks of the following problems facing the government :

      # How to verify that Companies are simply sacking OLD employees and hiring NEW replacements to avail of the incentive ?

      # To avoid any duplication , the government will verify the number of people employed in a company through the electronic challan-cum-returns ( ECR ) that companies file to submit PF contributions online and UAN and PAN details to ascertain whether a person was employed previously ( since no incentive in case of persons who have worked elsewhere earlier, even for a short period ! )

      # A govt officer said : ” What we are trying to do is creating a system where companies cannot MISUSE govt
      money . We are trying to put up a FOOL-PROOF system where ONLY FRESH JOB creations are incentivized ”

      # If a base employment number of a firm falls at any time , the company will not be eligible for any incentives

      # The government will pay the EPS contributions for a period of 3 years, ONLY if a NEW RECRUIT works with the company for at least as many years

      Given these complexities / hassle , what kind of Companies are likely to claim the incentive ?

      Certainly not the large / organized companies , even though they have totally computerized PAYROLL SYSTEMS ! It would just not be worth the trouble !

      But , small scale companies employing a few hundred persons – and needing to hire 10 / 15 FRESHERS each year , may get tempted with this scheme

      Only to discover that it takes them hundreds of hours of clerical effort to claim that incentive , since their payroll is manual !

      I would not be surprised if the Scheme ,
      * manages to provide jobs to no more than 10,000 FRESHERS
      * ends up distributing less than Rs 14 crore by way of incentives
      * costs the government, Rs 50 crores by way of ” administering / monitoring / distributing ” expenses !

      Truth may come out with a RTI application , this time next year !

      I earnestly request Shri Arun Jaitleyji / Shri Bandaru Dattatreyaji / Shri Prakash Javadekarji , to create millions of FRESH jobs through implementation of my following suggestion ( sent to them earlier through E Mail )

      Create Wealth to Create Jobs
      ( )
      ( 26 Feb 2014 )
      Here is my suggestion :

      Set in motion , ” INVERSION of JOB REDUCTION ” regime , under which ,

      ” The more jobs a company creates , the less Corporate Tax it pays ”

      Example :

      * Up to employment of 100 persons ………………………….30 %

      * 101 – 500 persons……………………………………………. 25 %

      * 501 – 1000 persons …………………………………………… 20 %

      * 1001 – 5000 persons ………………………………………….. 15 %

      * 5001 – 10,000 persons …………………………………………. 10 %

      * Above 10,000 persons …………………………………………. 5 %

      Let us celebrate those who provide employment to large number of persons

      Let us celebrate BIGNESS

      Let us create hundreds of WORLD SIZE corporations and take on the World

      On top of this , provide Additional Tax – Breaks ( Discounts ? ) to corporate as follows :

      * Average Age of Employees at 30 years………………….. 1 %

      * Ave age at 25 years…………………………………………. 2 %

      * Ave age at 20 years …………………………………………. 3 %

      Of course , very strict and transparent rules will need to be framed to compute :

      > Number of Employees ( Only Permanent – not Probationers / Trainees / Apprentices )

      > Average Age ( as on 31 March of Tax year )……etc

      But , here is an important aspect of this ,

      ” Incentivize Job Creation ” Scheme

      Today’s labour laws make it extremely difficult – if not impossible – for employers to layoff / retrench workmen , if demand for their products / services , shrinks

      Hence , to take advantage of this Scheme , employers are unlikely to hire thousands of youth , if they cannot easily trim the workforce , to match the shrinking demand

      So , an important corollary of this Scheme is to modify our existing Labour Laws to facilitate layoff / retrenchment , when situation so demands , while protecting the interests of the workmen concerned


      * Emphasize on TOTAL employment number and not on ” Additional Hire of only FRESHERS ” , during a year
      * No linkage to types of employees , or amounts of salaries / wages ( whether covered by EPS or not )
      * Only year-end ( 31 March ) Employment Numbers form the basis ( Just ONE figure )
      * No need for any BASE YEAR
      * No need for complicated ” checks ” for duplications
      * Involvement of just ONE government department , viz: Income Tax Department
      * No need for checking whether FRESHER worked for 3 years or not ( or had earlier worked anywhere else )
      * Companies from all around the World, would rush to “set up shop” in India and close their operations elsewhere

      To know how simple it would be to implement my suggestion , read detailed procedure in my following blog
      ( also sent to the NDA ministers as email , on 01 June 2016 )

      From BAD to MAD
      ( )

      25 August 2016 / blogs