Facing Up India's Unemployment Problem

I didn't write for almost three weeks as I was in India. The essence of my work there is to deal with employment creation. Part of my work is pro-bono - a city initiative focused on Industry 4.0 - and the other part is commercial, advising a large Indian corporation on the development of next-generation Skills training programmes. But the sense of crisis regarding unemployment cuts across scale and scope of my work and is a recurrent theme that pops up everywhere.

India has a really big challenge. About 2 million people reach working age every month in India, and even if only half of them are actively seeking employment, the few thousand jobs that the organised sector creates are woefully inadequate. India may be the fastest growing large economy in the world, but demonetisation of 2016 and poorly implemented General Sales Tax (GST) have hit businesses hard and froze up recruitment in many sectors. The widely promoted 'Make in India' initiative - the government's attempt to win over large global manufacturers to open factories in India - went down with a whimper, as India's infrastructural bottlenecks and regulatory challenges discouraged most takers. And, despite these failures, Indian political parties went about their business as usual, treating the army of unemployed as recruitment pools for street cadres and vigilante armies.

However, the next few years are likely to be different. For a starter, the jobs in the IT Services industries may start drying up dramatically, denting the Indian dream severely. The exports, already dropping precipitously, may not hold up at the time of global trade war, and the falling Rupee and stagnated productivity may bring inflation back into the mix. The sops that the political parties regularly hand out - government jobs and patronage to local clubs - to keep their army of the unemployed happy may finally become inadequate, inflation being the great locomotive of political unrest. If unattended, India's 'demographic dividend' will turn into a 'demographic disaster in no time.

There are no easy answers here. But, generally speaking, one hears of four broad strategies. 

First, the government talks about creating new factories and offices by offering new 'incentives' to corporations, global and domestic. Apart from the fact that the incentives have limited effect on job creation in the absence of adequate infrastructure and skilled people, the global supply chains are shortening, rather than diversifying, at this time. Even if India can get its act together quickly, the best incentive for a global corporation to build factories in India would be India's domestic demand, which is a function of a strong and vibrant middle class. So, the government has to help create jobs first and get the factories later, rather than the other way around.

Second, one hears a lot of discussion about skills and sending skilled labour abroad. Unfortunately, this has been the biggest missed opportunity in India in the last decade or so. The government has thrown a lot of money at it, much of which has been lost to corruption and cronyism. But, instead of creating a vast skilled workforce as intended, the government spending has somewhat crowded out India's world-class private skills training companies that thrived before the Government intervened. The efforts have failed, and though much tinkering is still going on, any quick turn-around in skills training seems very unlikely. Besides, the global mobility of labour is decreasing rather than increasing and the vision that thousands of Indian workers would soon be found in Japan is very much a wishful thinking.

Third, there are certain efforts to move up the value chain and educate students in cutting-edge technologies. While this is a common sense reaction to the rapid transformation of technology work and resultant crisis of the Business Process Outsourcing (BPO) industry, the prognosis that this would solve the problem has to be more carefully considered. This is the bit about India's unemployment problem that is least discussed - that it is often the better educated who face joblessness than the less educated! The Western formula that education solves the employment challenge doesn't really apply to India because of the global division of labour - jobs requiring greater skills are often outside India - and because India's education system is woefully inadequate. India produces 24,000 PhDs, the fourth highest in the world, but this doesn't mean that there will more innovation in India: It is more likely to mean that there will be more unemployed PhDs.

Fourth, there is the conversation about people starting up and being their own boss. This gets the most attention and indeed could be the solution for the 'educated unemployed' problem. However, without a thriving education sector and a vibrant research culture, interesting start-ups will be hard to come by. But, also, not surprisingly, access to capital has been a huge constraint for those courageous enough to jump into the fray. The Start-Up culture in India is therefore dominated by scions of big industrial houses, funded by family money. For the other start-ups, life is much harder as they have to depend on investor money made in commodities or real estate sectors, which is often not worth the hassle as these investors cause by imposing investment agreements which leave little on the table for the entrepreneur and by disrupting the work culture through infusion of their own practices. The government has tried to unlock other sources of capital in vain, but the Indian banks are in the middle of their own crisis. Recently, new rules were introduced to encourage seed investment in Start-ups through tax breaks, something like UK's SEIS, but they were devilishly complex - it requires pre-money valuations to be certified at the time of investment, for example - and it won't help the sector much.

Indeed, these strategies are not parallel tracks but are being pursued simultaneously. However, more is not necessarily better, and the lack of thought and reflection in launching and implementing these policies has really made the problem worse. My comments above are meant to highlight some of the challenges but perhaps it is plain to see that the underlying problems stem from just a few things: India's bureaucratic culture, its broken education system, its inadequate physical and human infrastructure and its complex rules. Tellingly, all the solutions discussed here are designed from the above and nothing worthwhile has emerged from the public.

This is indeed a hard thing to change, but if it's not changed, India will soon be in the thrall of a Donald Trump solution: Breaking the Free Trade consensus that has been driving policy-making since the 1990s and reversing some of the Trade Liberalisation initiatives. This seems most unlikely at this moment - India has been a big beneficiary of global trade - but this would be easily achieved in the event of a global trade war and if the magical benefits of IT Services industry are to vanish overnight. However, the rewards of going down this route will be quite limited - most of India's industries are already protected - but that makes India even more vulnerable to catch the current global cold of trade restrictions quickly.

Taking that route would be unfortunate, as it would really give an illusion of a solution instead of a real one. But, if the unemployment persists and grows, a reversal of liberalisation would be very likely. Hence, one must start exploring alternatives, and my feeling is that the real strategies will need decisive breaking of the mould. It has to start with a break with the bureaucratic culture and empowering the people in general; letting go of omnibus schemes which the Indian government is so fond of, and encouraging more local strategy making. This would need a comprehensive liberalisation of India's Higher and Skills Education that will introduce variety and imagination in the sector, alongside decisive public investment in primary and secondary education, and, most importantly, in Healthcare. And, finally, this will need a complete rebooting of India's trade policies - it is incomprehensible why India trades so little in its immediate neighbourhood while wanting to build a world-class manufacturing Industry - which will need policy foresight and political courage in equal measure.






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