Abhijit Mukhopadhyay is an economist. He can be contacted at abhijitmukhopadhyay[at]

Abhijit Mukhopadhyay

Liberalising process of Indian economy started in 1991 because of a balance of payments crisis. Though sometimes the backdrop of the initiation is linked to GDP growth, but the compulsion to open up the economy originated from what can be broadly called a payments crisis for external transactions for India. If one looks at the average GDP growth then India’s GDP grew at an average of 5.8 per cent during 1980-90 and at an average of 5.6 per cent during 1991-2004. Industrial growth was also higher in the 1980s at 6.5 per cent, compared to 5.8 per cent during 1991-2004. So, growth was not the problem, it started picking up much before the 1991 reform process – in the 1980s.

Any country, except the ones with internationally accepted currencies (US dollar, Japanese Yen, British pound and Euro), needs foreign exchange reserve to pay for their international transactions as those cannot be settled in domestic currencies. Indian reserve dwindled to the historically lowest level and then the country had to seek assistance from agencies like IMF and World Bank. Liberalisation came more as the baggage of those financial assistance in the form of structural adjustment and macro stabilisation policies.

An objective assessment of the performance of Indian economy shows that there definitely has been a transformation in the structure of the economy since 1991 reform, and the growth had been spread better across the economy with the ongoing technological progress of the world. These factors made the post-liberalisation growth story relatively stable and wide spread – which one has to admit in the beginning. In certain sectors of the industry and many in the services, definitely there has been some unleashing of capital – both domestic and foreign. This has been made possible because of removal of a lot of government red tapes which existed earlier.

marble_grinding_near_taj_mahal_june_2006However, liberalisation was ushered in not only with the hope of a better performance in GDP growth but also with the promise of more jobs and better lifestyle for majority of the population. Unless the economic growth benefits the people of the country, there is no point in accelerating the process of the growth beyond a certain point. Let’s see how India did on that count.

According to ILO data, in 1991 total employment was roughly around 323 million and the size of the labour force was around 337 million – depicting a gap of roughly 14 million. By 2013, total employment stands at around 470 million and the size of the labour force is at about 489 million – thereby showing a gap of around 19 million. So, compared to 1991 more people are unemployed now and the gap between total number of workers and employment is increasing. And this is official government version of the data. Latest Asia-Pacific Human Development Report, released by UNDP, says that between 1991 and 2013, the size of the “working age” population increased by 300 million. But, Indian economy could employ only 140 million – less than half of the new entrants to the labour market.

The difference between these estimates comes from the wide variance in definitions of gainful employment and potential workers in different studies and surveys undertaken by Indian government and other non-government agencies. However, there is no broad disagreement in the observed fact that the gap between people looking for jobs and number of jobs created is increasing.

One reason, given by the demographers and economists behind this increase in employment gap, is the demographic transition through which India is going now. More and more young people are now joining the workforce every year. India’s population is likely to surpass China’s by 2022 or even earlier. It is estimated that by 2050 more than 280 million additional people will join the labour market, working-age people in India is expected to reach around 1.1 billion by 2050. After that, this demographic shift towards increasing younger population share will cease and wane. This is a serious shift in demography, and unless adequate livelihood opportunities are created for these young people the society and country may see huge social unrest.

There has definitely been a shift of workers towards non-agricultural sector from agriculture, but that shift has not been as big as one would expect. Roughly 50 per cent of Indian population are still dependent on agriculture and allied activities while the share of agriculture in GDP has dwindled down to around 16 to 18 per cent. Interestingly, the share of industry did not go up as expected while that of services kept on increasing above 50 per cent, particularly after 1991. One may say that what difference it makes if jobs are created somewhere. But, it is well known that industry has more backward and forward linkages than services sector. For a typical example, a car factory is expected to create far more employment in the adjacent area in terms of components and other inputs/outputs than that can be created by setting up a BPO office. Recent initiatives like Make in India possibly tries to address that problem with a target of increasing the manufacturing share in GDP to 25 per cent. However, till now share of services in GDP is still high while that of agriculture is very low and the share of industry has also not improved much.

But, interestingly share of agricultural employment in total is around 50 per cent, share of industry at around 22 per cent and share of service sector employment in total at roughly 27 per cent. So, we have a bizarre employment scenario. Agriculture’s contribution to GDP is going down but it still employs half of the workers, industry is not generating employment as much is expected, and finally the sector which contributes the most in GDP generates roughly one-quarter of jobs in the economy. This imbalance is needed to be addressed seriously if India wants a long term solution to its employment problem.

Quality of employment, seasonality of employment (particularly in agriculture) and frictional unemployment (because of the ease with which practically workers can be fired today) are some of the other problems. But, the upshot of a review of post-reform era employment generation is that more regular and quality jobs have to be created in India, particularly in manufacturing and non-manufacturing industries. Increasing GDP may not always help because there are visible phases of “jobless or jobloss growth” in the recent past. Given the demographic transition India is experiencing, a failure to generate livelihood opportunities in future has the potential to create social and political unrest and disasters across the country.