India is facing a jobs crisis: between 2004-05 and 2011 -12, 37 million people moved out of agriculture. And between 2011-12 and 2018-19, 12 million jobs will be added to agriculture. Which means there is going to be a serious imbalance, and which also suggests the economy is not doing as well as it should be, according to the latest report titled ‘Slowdown to re-direct 12 million to farms’ by ratings agency CRISIL.

Govindraj Ethiraj, Editor, IndiaSpend, talks to D K Joshi, chief economist, CRISIL, on the report, and what needs to be done to address the jobs issue. Edited excerpts:

Govindraj Ethiraj: This is indeed frightening. Right when we thought jobs would be created in urban India that would absorb people from the countryside, you are actually expecting a reverse flow. How did we reach this position?

D.K. Joshi: Well, a couple of things here; one is that the growth itself has materially come down. Between 2004-05 and2011-12, GDP growth was 8.5% per annum. 7 years after that, till about 20018-19, GDP growth will be close to 6%. So, you are growing at a much slower pace - 250 basis points lower than what you were growing earlier. That itself reduces the job opportunity.

The second thing that has happened is that the ability of the economy to absorb labour has reduced, which means the labour intensity has reduced. In other words, fewer people are required to produce the same amount of output. And this has happened particularly in segments which were labour-intensive like manufacturing. Now manufacturing employs far fewer people than it used to earlier.

Govind: The statistics you quoted is 15 people for every Rs 10 lakh of GDP earlier and 9 people for every Rs10 lakh today.

Joshi: That is for the overall economy. I think within that the manufacturing sector has been hurt the most, and it is regarded as the most labour absorbent. The reasons for that are complicated labour laws and automation, which is part of the manufacturing sector’s progress. I think it is happening at a rather fast pace.

Govind: What you are saying now is this will happen because you are also projecting GDP growth to be down, going by the current economic situation, right? Is it possible that it could reverse?

Joshi: Reverse in the sense that...

Govind: Could GDP growth go up, for instance, next year, and then we start seeing a change or a reversal in job flow or creation?

Joshi: Well, I think this is an average for the next five years and for the seven year period. I think by all statistics, we have already lost out 2012-13. And from 2014-15 to 2018-19, we are assuming 6.5% growth.

Govind: So, you are saying we have already seen two years of reverse migration as you have termed it.

Joshi: I think it would have happened, we don’t have the numbers as yet. I think CSO or NSSO conducts the surveys every five years, so as of now we don’t have the statistics I think.

Govind: So, why is this happening? I mean you talked about the manufacturing slow down. Why has not there been enough, let us say, economic activity on the agricultural side or the rural side to absorb this or retain jobs that are leaving or were leaving?

Joshi: I think as the economy develops, people move out of agriculture into more productive non-agriculture activity. That is what has been happening, and that’s a general thing. That is desirable because non-agriculture is more productive than agriculture. You improve the productivity of agriculture, you push the growth up. Now why that is unlikely to happen is because the non-agriculture sector itself is not going to create that much of jobs. One because of growth decline and secondly because of its reducing ability to create jobs.

Govind: So, you are saying agriculture as a sector can never be a job creator or absorber as perhaps manufacturing or services?

Joshi: It already employs a disproportionately large number of people.I think about nearly 50% of the population works in agriculture and it is only 14% of the GDP. On the other hand, 86% of the economy is absorbing 50% of the labour. So, it is already disproportionate. You need to move people out of agriculture. And by the way, so many people are not needed in agriculture. It is mostly disguised employment. I mean,people appear to be working but they are doing nothing. So, even if you move people out of agriculture, productivity in agriculture is not going to fall.

Govind: You have also said that we are seeing productivity increases like it’s happening in the other parts of the manufacturing world. People coming in to urban India or to the manufacturing sector, it’s quite likely that they might not find the jobs because productivity increase is perhaps quite sharp?

Joshi: Absolutely. I think so. That is why one needs to look at the global dynamics where there will be more demand for exports etc or where, for instance, countries like China are moving out, activities like textiles etc. And I think these are highly labour absorbent sectors, and they are not doing very well in India right now. I think you need to push these sectors, which absorb a lot of labour because otherwise, how will you employ them? And I think there is a global opportunity also coming because China is withdrawing out of these areas because wage rates are going up there. So, I think we need to latch on this opportunity. Others are already lapping it up.

Govind: So, how could this be fixed? The Government has been talking about a skilling programme, for instance. The Government has been talking about a manufacturing blue print for the country and so on and so forth. Doesn’t all this help solve the problem to some extent?

Joshi: Absolutely. If the programme that the Government has to take the share of manufacturing to 25% over the next ten years, it will obviously create a lot of jobs. There is no sign of that happening as of now. Manufacturing is trailing GDP growth for the last two years. And the prospects are not too bright going ahead. There is a huge amount of work that is required to do that. What should I say, a very optimistic projection of manufacturing at 25% of GDP? No other country has pushed its manufacturing so fast ever. So, it would have been very difficult any way. Now, it has become far more difficult.

Govind: What about services, which was supposed to be the panacea of sorts, which would absorb additional labour and perhaps would take India to a service oriented country as opposed to a manufacturing oriented country?

Joshi: Well, the service sector is absorbing labour but it cannot absorb labour at the speed which manufacturing can. I mean there are many ways of looking at it. If you look at, for instance, three services, which have grown very fast in the last few years. One is IT/ITes, which is also referred to as business services, then you have real estate services and then I think financial services. Now, these account for about 19% of GDP but only 3% employment in the country. So, they are not very labour absorbent. These are the fastest growing parts of the services. The labour absorbent part of the services are health, education, which haven’t grown that fast.

Govind: Okay, so, from a prescription point of view, you would say that areas like construction, health, education and infrastructure need more investment if we are to try and reverse this problem?

Joshi: Absolutely, I think you have to eventually provide employment to people. So, I think you need to make sure that you nurture your high-end capabilities whether it is IT/ITes or financial services. We rank so low in health, education,and infrastructure. I think our ability to sustain growth will also be reduced. So, if you invest in construction, which is highly labour intensive, if you invest more in infrastructure, health and education, you are creating a better future for yourself.

Govind: Let me come back to a question I asked you earlier. Is there a possibility that GDP growth might actually accelerate faster than we anticipated? May be for an external reason rather than internal reasons?

Joshi:Well, I think that possibility is very low right now for a couple of reasons.One is that the global dynamics are much weaker than when we grew at 9%, and I think nobody is talking of a sudden sharp lift in global economy on a sustainable basis. The Europe debt crisis is far from over. Japan is experimenting. China has materially slowed down. I think its new normal is 7-7.5%. US is probably the fastest growing developed part of the world. But I think there are mixed developments across the world. So, there is not enough kick from the world economy.

Domestically, we have our own problems like inflation, fiscal deficit. How do you boost growth? I mean, you can’t cut interest rates sharply to boost growth? You can’t expand Government spending because of fiscal pressures. So, where will growth come from? I mean the question is unanswered.

There are surprises because I must also point out that there is the cognitive bias in all forecasters that they get influenced by the current scenario. But if you correct from that, if you are going beyond 6.5%, it’s going to be very difficult. If you look at the planned growth rates for the last two plans, GDP growth was around 8% average. And now I think, in the 12th plan, which we are currently in, two years, we have already lost because we have got 5% growth. To get 6.5% growth, you need 7.5% in the next three years. So, you have already slipped quite sharply in growth. The drop has been much sharper because you were getting used to a higher equilibrium rate.

Govind: If you were to sum it up now - the problem is, as you say, severe. I mean this is obviously going to have a social impact. Or are we, as an economy, resilient to weather this as we have weathered perhaps similar crisis?

Joshi:Well, I think it is quite interesting that India’s population was getting viewed as a demographic dividend. It was always regarded as a liability earlier because you had to provide more services to people. Feeding them was a problem but once the economy started growing fast, it was being viewed as dividend where you can become a work factory for the world, so to say. I think so there were opportunities that were being seen. But I think if you don’t have jobs for these people, I think it’s going to be a big drain on fiscal resources because you will have to support them through state programmes and so on whether it’s NREGA or whatever it is. So, I think it’s going to become a liability.

Govind: There is a social outcome and there is an economic outcome, which you feel could be in the form of drains and so on.

Joshi: To avoid the social outcome, I think you have to support these people. Otherwise, I think young people without jobs is not such a pleasant scenario to be in.

Govind: That’s one outcome. What’s the one or two solutions we need to focus on now to make sure that we can try and alleviate the situation, if not reverse it?

Joshi: One is to get rid of bottlenecks to growth, at least start moving on a higher growth trajectory. By the way, even 6.5%is not certain. It is contingent on the Government getting rid of bottlenecks, which have now emerged. And it also depends largely on the political mandate whether you get a decisive mandate or not.

I think, from an employment perspective, we need to focus on infrastructure. We need to focus on health, education, which are the more labour absorbent part of services. We need to skill people, as you were pointing out. Even if you have jobs, you don’t have enough people for those jobs. I mean the kind of jobs that will be generated in banking and financial services would be more client facing, and we don’t have enough trained people for them. So, I think keeping tab of the market and keeps killing people accordingly.

What we found during our interaction with the industry is that 70% of the engineers who come out are not directly absorbable because they need to be intensively trained before they can be put on the jobs. So, I think there is a lot that needs to be done on the skill development front.

Govind: So, who is thinking of all of this?

Joshi: It’s not that people have not thought about it. There is a blue print for improving the manufacturing sector. Similarly, there is a blue print for skilling people. I think there is already a lot of work going on but I think it needs to happen fast. Unless you grow fast, I think you will not be able to create jobs. So you need to increase the size of the cake.

Govind: What we didn’t talk about is the entry of women into the work force. On the social side, we are obviously doing a lot of things, right or partly right, in terms of education and encouraging them to join the work force. On the other side, the economic side, we are just not prepared for it unlike China.

Joshi: Women participation is very low in India unlike China. I mean, men and women work force participation rate is almost similar in China. I think if you had to make more women participate in the job market, you need more jobs. In our calculation, we are working with the same work force participation rate that we see today, which should change. I mean it is desirable to get more women into the work force.

Govind: So, if you were to conclude, would you do so on an optimistic or a pessimistic note?

Joshi: I think we need to work hard in this area. There have been surprises, positive surprises, but I think 9% growth that we saw seems very difficult right now even from a monetary policy perspective. It will generate higher inflation. To give you an example, I often give this one, of a bullock cart. I mean, if you put a car engine on a bullock cart, it can move ahead very quickly for some time but then the wheels will come off because the body is not structured for that kind of speed. So, I think we need to improve our infrastructure. We need to strengthen our economy so that if it starts moving fast and it doesn’t create much inflation. So, I think there are many issues involved here. It’s a pretty complicated situation we are in.

Govind: But this is a starting point because the acceptance of the fact that we have a serious jobs problem which could lead to many other problems is, I would imagine, to be the beginning or the start point.

Joshi: I mean what is given is that the workforce is going to expand. You can’t alter your demographics in a short period of time. But what is not given is whether you will have enough growth and enough jobs.