The Unemployment Question In India: How We Got Here And How To Move Forward

“Haal-chaal theek-thaak hai; sab kuch theek-thaak hai” (I am fine, everything is fine) “BA kiya hai, MA kiya; lagta hai voh bhi ainvee kiya” (Did BA, did MA, seems like a waste of time)

While the government tries to prove “sab kuch theek-thaak hai'' with its growth numbers, recent data reveals about 20 per cent unemployment among educated youth. With educated youth more likely to be unemployed than uneducated youth, you can hear Kishore Kumar lament, “BA kiya hai, MA kiya, lagta hai voh bhi ainvee kiya”.

In 2022, India’s labour force—either employed or actively seeking work—stood at about 554 million, according to World Bank data. 

The India Employment Report 2024 brought out recently, by the New Delhi-based Institute for Human Development and the International Labour Organisation, has pegged the unemployment rate at 4.1 per cent in 2022-23. This means 22.7 million people don't have jobs.

Defining The Problem

To understand unemployment in a developing economy, it’s important to comprehend how it is defined and measured. First, the labour force doesn’t include those not looking for work like students or unpaid domestic work. Second, a person is considered unemployed if they don’t have a job, but are actively seeking one. So, if someone has lost their job, but isn’t looking for work, they won’t be counted as unemployed. 

Informal work is still predominant in the Indian workforce. In this context, to offer a more inclusive assessment of the labour force, one that captures intermittent work and multiple economic engagements, a classification method is used by Periodic Labour Force Surveys (PLFS) and the India Employment Report called Usual Principal and Subsidiary Status (UPSS).

Usual principal status is the economic activity a person spent a relatively long time in during the reference period of 365 days before the survey. Subsidiary status is economic activity for a short duration of at least 30 days in the year before the survey. Simply put, a person not considered employed under principal status would be with UPSS under subsidiary status if they had worked for the specified 30 days.

“In India, the normal notion of unemployment has very limited applicability because the poor can't afford to be unemployed. So, there is a lot of working poverty with people working at very low wages, running on little money and in informal occupations,” said Ravi Srivastava, Director of Centre for Employment Studies at the Institute for Human Development. “Essentially, when we talk about unemployment in the way it is measured, it is conflated with the problem of the educated unemployed.” 

In light of these definitions, unemployment estimates can be said to be conservative at best and part of a larger problem.

The Workforce And Its Components

The number of young people in India is considered an economic advantage as a developing country. With about 80 million young individuals entering the labour market each year, it can quickly turn into a burden if not paired with meaningful employment. 

According to the India Employment Report, the unemployment rate among the youth (aged 15-29) was 12.4 per cent in 2022. Unemployment among educated youth was much higher, 21.8 per cent. Disturbingly, two of every three unemployed people were young graduates. The Secretariat had recently explored the issue in a deep dive. 

The high number of the self-employed is another notable facet; they range from street vendors, farmers, unpaid help in a family venture, to doctors running their own clinics. Latest PLFS data notes that their share within the employed population is increasing, from 52 per cent in 2018-19 to 57 per cent in 2022-23. 

Although this high rate of self-employment ends up lowering unemployment, it is a characteristic of developing economies and points to a lack of alternatives with job security. While this is pushed as a win for entrepreneurship, especially for women, it is often a fallback option for the poor who cannot afford to be out of work.

In the same vein, there is the issue of underemployment, where educated individuals fail to find jobs corresponding to their education and we get graduates in low-paying informal jobs to pay the bills or PhDs applying for the posts of peons. 

The Indian unemployment story is one of masks. Decreasing unemployment can hide joblessness that stems from a loss of hope. If one isn’t actively applying for a job, they aren’t considered unemployed. It hides the self-employed in duress, the underemployed graduates, the periodically low female workforce participation, and the growing number of people in agriculture. 

Root Causes Point To Intervention Areas

All of these perils are symptomatic of two structural problems in the labour market: dearth of labour intensive industries and a mismatch between education and available jobs. 

India's model of growth strayed from the conventional movement of labour from farm to factory. It bypassed the maturing of the manufacturing sector, letting services emerge as the main driver of growth and employment over the past three decades.

Although the services sector created wealth much faster and generated millions of new jobs, it has its limits in absorbing surplus labour. Without a vibrant manufacturing sector, unemployment was bound to become a drag on the economy, and it has. 

As a result, the employment share of agriculture is the highest at 46.4 per cent in 2022, but its share in Gross Value Added (GVA)—a broad measure of a country’s economic output—is 15.6 per cent. 

The employment share of manufacturing is 11.6 per cent, while its GVA share was 18.7 per cent. Finance, business and real estate, which account for the biggest share in GVA, employ only 3 per cent of the labour force. 

A manufacturing-led growth strategy is thus imperative to ward off the unemployment crisis. Despite efforts to make India a global manufacturing hub, it hasn’t been fully realised. Additionally, the pandemic induced a reverse migration of surplus labour to agriculture whose effects haven’t fully dissipated.

Consulting firm McKinsey estimates that to achieve its growth potential, India needs to create 90 million non-farm jobs by 2030. A tall order in the current scenario.

The second structural problem is the mismatch between the supply and demand between educated and skilled workers and available jobs.

Policy Interventions: The Way Forward

The ongoing elections are the opportune time to question if we need new thinking. In their respective manifestos, the ruling BJP has focused on being an enabler for growth conditions that can result in jobs, while its principal opposition, the Congress, seeks to be a provider of jobs to assuage immediate conditions.

The past two decades have shown we can't create enough jobs by focusing just on high skilled jobs in the service sector. While some think we’ve missed the boat, some economists still believe India’s current trend of job-less growth can be course-corrected by refocusing on labour intensive manufacturing industries.

The question is whether India can capture the manufacturing space gradually being vacated by China, or cede it to countries like Vietnam and Bangladesh, which have lately become the beneficiary of a China de-risking strategy of western economies. 

The state of Tamil Nadu is a good example to look at. The state’s dependence on agriculture has shifted to manufacturing and services equally through a model of decentralised industrialisation and diversification.

This has been done through medium-scale businesses in the form of clusters of firms specialising in textiles, spices, and auto parts. Established in suburban areas, the clusters employ people from surrounding rural areas who may have resorted to agriculture or migrated to bigger cities for work.

Other promising opportunities, said Srivastava, are the care economy, which can provide jobs to young people, particularly young women, and the green and blue economy.  “We have to nurture areas where jobs can be created in tandem with changing technology and changing workforce.” 

But, job creation and skill creation have to go hand in hand. Srivastava reiterates there has to be a massive restructuring of the educational skill ecosystem. “The focus should be on skills that can be used in different types of jobs. These move away from rote disciplines to learning soft skills, communication, problem-solving, leadership, IT, and other generic skills,” he said. 

The way forward is through a partnership of all stakeholders; the government as a primary force, the private sector and the voluntary sector as partners to ensure the right kind of skills are generated.

India can learn from South Korea, Japan and China. “They invested heavily on education, because without a good education system, be it primary, secondary, or tertiary, you cannot ensure that our skill will complement the technological advancements  that we are seeing every day,” said Nilanjan Banik, a professor at Mahindra University in Hyderabad.

Why Course Correction Isn't That Easy

The primary challenge is one of mindset; to move away from treating growth as the economy's sole objective and jobs need to be pulled up on the priorities roster.

Further, manufacturing is already too capital-intensive and mechanised. This could discourage investment in labour-intensive techniques. Additionally, India window of opportunity to capitalise on its growth story is limited, before its “demographic dividend” ages out.

As the economy changes, there is still a dearth of data on what kind of jobs are being created and destroyed, and on grey areas in policy such as gig work. Without further analysis, policy recommendations may miss the mark.

Unless something changes, employment will remain a burning question in elections to come and regardless of who wins, political parties will continue to echo “sab kuch theek-thaak hai” like a stuck record.