Preview 5 Year Special Sec1 v1.3 20111007

8/3/2019 Preview 5 Year Special Sec1 v1.3 20111007

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The India Labor Market ReportPreview: a 5-year summary account of the Indian labor market

inTouch analytics10/7/2011


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The India Labor Market Report

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Labor markets: the coming of age

Indias journey on the path of economic reforms has indeed brought her a long way we are one of the

worlds fastest growing economies today. Along this journey, the country has been favored with

serendipity its large and growing population is a potential asset, and this *demographic dividend* can

quadruple GDP and catapult India into the developed economies league over the next decade. All this if

a billion people could be transformed into a productive workforce.

For over half a decade now, India has been chanting the demographic mantra with little real progress

seen on the ground. Because, with opportunities come challenges. The Services sector which is key to

the demographic transformation needs many million knowledge workers but has to contend with only

few. Lack of employability is endemic, and India has been willy-nilly about solving this mother of all

(demographic) problems. Mediocrity in the education system feeds low quality talent into low quality,

unorganized employment.

On the other hand, Indias largely skill-based labor force an inheritance from the agrarian economy of

the past has been stubborn in transition. Jobs in Agriculture and Manufacturing the employment

bastions of yore have stagnated for long thanks to factors of cost, competition and commoditization.

And over 90% of the labor force stays inadequately skilled and therefore chooses between

unemployment and casual employment.

The 15 year milestone is in striking distance. Jobs continue to be created, mostly needing an educated

workforce and many in sunrise sub-sectors. There is a problem of plenty, of jobs and of people. We

need to recognize new opportunities for what they are, prepare the supply side, and appropriately

match both ends. For this, we need immediate fixes to the overall labor ecosystem that create adequate

employable supply from a reformed education and vocational set up.

The Demand pie in the sky

The debate about jobless growth stagnating organized sector employment vis--vis rising casual

employment in the unorganized sector scratches the surface of a reality India has been living with, and

in denial, for some time now: that the organized sector, especially services, is a fertile breeding ground

for jobs. The denial is thanks to an inadequacy in converting this opportunity into large scale knowledge-

based employment.

While policy makers were not looking, job demand patterns have morphed into a mature and diverse

requirement of skills and knowledge. The demand pie includes new age clusters of services- and

knowledge-intensive jobs within its expanded envelope quite the global growth trend. New sub-

sectors have emerged and many existing industry sectors have graduated to a higher plane of operation

that requires knowledge-based talent.


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Fig. 1 Share of sectors in India follow global trends of economic growth[Source: Central Statistical Organization (CSO) for FY1951-FY 2009]

Dependent Var: Log (Value Added) of SectorRange: Log Employment (Hours)

Low Skilled High Skilled

Agriculture -0.57 0.22

Manufacturing -0.25 0.43

Wholesale Trade, Retail Trade, Transport, Public

Administration & Defense

-0.23 0.53

Education, Health, Hotels, Other Services -0.52 0.48

Finance, Communication, Business Services -0.52 0.61

Table 1: Global Employment Elasticity Modern service sectors (gray shaded) score substantially higher[Source: The Service Sector as India's Road to Economic Growth, Barry Eichengreen and Poonam Gupta, February 2011]

A mature stage of growth must also indicate that job creation could follow global trends as well.

Another reality, India chooses to ignore, is that the services sector is immensely capable of creating farmore jobs compared with other sectors; albeit, jobs that require high skilled people.

India, even with its recent skill development initiatives, is busy filling low skilled and low paying jobs that

extend right beyond the doors of the unorganized sector. There is a failure to both visualize and


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actualize an enormous employment prospect. This, actually, is at the root of the problem of

transforming the large and growing demographic potential into dividend.

Bridging the divide

The first step to address this issue would require Indias planning and policy institutions to recognize a

shift in the labor demand paradigm. The immediate burning issue is to put the nearly 50 million

unemployed people to work. In the medium term, however, there is a dire need to stop looking in the

rear view mirror and formulate policies based on current and forecasted labor demand. Given the 58%,

and growing, share of services in GDP, solving for the large deficit of graduate and post-graduate level,

employable talent is an imperative.

Filling a substantial proportion of the additional 270 million working age population in the services

sector would have a multiplier effect: increased marginal growth in GDP, thanks to significantly higher

incomes and improved tax revenue, thanks to growth in the organized sector. Add to this, broaderdemographic and societal benefits of improved literacy and reduced poverty, and we would have holistic

and qualitative transformation.

Three key steps policy makers need to take to effectively capture and capitalize on tomorrows labor

demand prospects

Identify and include greenfield and newage subsectors with promising medium to long termprospects in the industrial framework

Set up a mechanism to map current and future demand at industry subsector level, workingclosely and continually with subsector stakeholders

Share demand intelligence with private training and vocational institutions and set up careercounseling cells to prepare the supply side for new opportunities

A skewed supply landscape

That one in four engineers, one if five IT graduates, or an even smaller proportion in case of MBAs,

graduating from Indian colleges and universities is all that is employable is a statistic we are living with

for close to a decade now. While there is gross addition to the talent pool, poor employability and skill

gaps are constraints the knowledge economy in India is delivering against.

These statistics are still the tip of a lopsided supply iceberg India has built for itself. The Indian labor

landscape is a complex terrain. Unemployable or inadequately skilled labor is an 83 million overhang wehave been able to do little about over the past 5 years.

Force-fitting this under-employable labor landmass to demand feeds the unorganized sector

disproportionately and stretches the employment envelope on the casual side. Evidently, perpetuating

this practice is not what we want to be doing to our demography. Architecting a supply landscape that


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better suits the demand dynamic requires us to overhaul an archaic HRD regime and therefore

restructure a vexed education-vocation set up.

Immediate and medium term action

The immediate term focus needs to be on policies that positively reinforce the countrys impaired skill

development infrastructure. We need to dramatically improve the throughput of trained manpower

train 10 times the just-over-a-million people being trained currently. This demands quadrupling

vocational training capacities from the present 3.1million to 12.8 million. The imperative is a shift of

focus from the formal public training system to increased private participation. The Government has,

indeed, taken several laudable steps towards skill development over the past 5 years but its stranglehold

over policy implementation, given the numerous limitations of the present state of governance, leaves

many a question unanswered.

The medium-to-longer term focus must be a two-pronged strategy to restructure education greater

access and greater quality. While capacities are being created in education, they are only aggravating the

problems of access especially to the underprivileged and quality. Opening up the sector to

substantial participation by industry and foreign institutions should imbue it with superior academic

standards that help leapfrog employability. This model must accommodate subsidized education to the

poor and deserving to ensure equity. This step to restructure education gestates over a longer period of

time but holds the promise to deliver us to dividend.

A few critical interventions are required at the state level to make the above transformation a reality

Augment public-private partnerships in vocational education with industry linkages right at thepolicy level, and down to the curricula and outcome stages, to include inputs of the demand

dynamic throughout the vocational education lifecycle.

Implement a performance ranking system for vocational institutions to arm candidates withinformation to make the right choices. Vesting candidates with the funding option through

appropriate vouchering and other mechanisms also links funding to outcomes.

Link accreditation of higher educational institutions to their capability to contribute toincremental employability. This, in turn, puts lower limits on quality of pedagogy and

infrastructure, and forces an eventual consolidation in the sector.

A mismatched jigsaw puzzle

Historically, the issue concerning unemployment has been that a 10% unemployment rate in 2006 wouldinflate to about 29.5% in 2020. Over the past 5 years though, sustained, recession-proof economic

growth and state intervention led hope that structural problems of the labor market are being

addressed by interventions in the HRD regime, seem to have allayed these concerns a bit. That

economic growth is not entirely, and on its own, effective in creating the magnitude of jobs needed is an

early realization that stirred the government machinery into skill development related action.


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Persistent growth in casual employment, and a constantly, relatively smaller share organized

employment, reminds us that we continue to live under the threat of a systemic failure to capture

demographic potential. For an inherent lack of demand-supply equilibrium to be addressed, the complex

labyrinth made of the three structural mismatches needs to be straightened out.

- TheSectoral mismatch,a demand-side issue discussed above, is yet to be effectively addressed.- The Education-and-Skills mismatch is a huge supply-side issue discussed above. The recent skill

development initiatives, stressing on vocational education, would partly address this issue.

- TheGeographic mismatch,also inadequately addressed so far, is discussed in a later section ofheterogeneity and needs strong rural-to-urban transitional interventions

Towards effective transformation

While individualized interventions such as skill development are much needed to tackle each of the

mismatch areas, they risk the possibility of being isolated, part-solutions to a bigger problem. The rootcause of labor market heartburn is regulatory cholesterol. Arriving at an effective solution to labor

market woes needs not just medicinal dosages, but a set of new eyes as well. In other words, a holistic,

interconnected, vision of 3Es Education, Employment and Employability is to be cultivated from

which all regime reform is conceived.

This is not difficult. Like most attitudinal changes, this one requires a tangible, measurable goal and

reducing transactional costs of labor markets is it. Archaic, arbitrary and dysfunctional laws, as well as

over-legislation, are the drivers of this cost.

Key steps to be taken in this regard are

The very roles of government and its departments in formulating, and executing on, the regimeneeds to be rethought to reduce multiplicity and encourage individual state government

implementation.

Labor laws need to be freed from their present convoluted form; the complex nomenclatureneeds to be simplified and where required de-duplicated and unified.

In order that unorganized employment is not incentivized laws that constitute distractive andwasteful expenditure for employers (EFPO and ESI are examples) need to be repealed.

Preview 5 Year Special Sec1 v1.3 20111007

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