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NON-FARM JOBS GROWTH SET FOR SHARP DECLINE: Employment generation in the nonagriculture sector will slow down sharply in the coming years as the economy treads a lower-growth path. CRISIL estimates that employment outside agriculture will increase by only 38 million between 2011-12 and 2018-19 compared with 52 million between 2004-05 and 2011-12.
MILLIONS WILL BE REDIRECTED TO THE FARMS: Due to insufficient employment creation in industry and services sectors, more workers will become locked in the least productive and low-wage agricultural sector. We estimate that 12 million people will join the agriculture workforce by 2018-19, compared with a decline of 37 million in agriculture employment between 2004-05 and 2011-12.
AUTOMATION RISES, LABOUR ABSORPTION FALLS: Slowing GDP growth is not the only culprit. The decline in employment creation has been compounded by falling labour intensity in the economy. The latter is the result of two factors: 1) GDP growth in recent years has been driven by less labourintensive services such as IT/ITeS, business and financial services; and, 2) the capacity of labourintensive sectors such as manufacturing to absorb labour has diminished considerably in face of rising automation and complicated labour laws. HOW DO WE OVERCOME THIS? THERE ARE TWO WAYS:
1. Check the falling intensity of labour participation in the manufacturing sector by simplifying labour laws and encouraging growth of labour-intensive industries (textiles, gems and jewellery and leather). 2. Focus on developing (1) health and education and (2) Physical infrastructure/ construction. This will not only create jobs as health, education and construction are highly labour intensive, but also raise Indias growth potential by making the workforce healthy and skilled/ educated.
THEN THERES THE SKILLSETS CHALLENGE: India not only needs to create more jobs but also skill the labour force to meet market needs. Our interactions with industry show that around 70% of graduating engineers are not employable (they need intensive training) because of lack of technical or soft skills. Also, around 65% of the people do not complete graduation after finishing K-12, but they can be made employable through vocational training.
CRISIL Insight
Figure 1: OF WORK AND FLOW
38
Between 2004-05 and 2011-12, Indias industry and services sectors added 52 million jobs. This large-scale job creation led to migration of labour, pulling 37 million away from farms. Going ahead, slower GDP growth and falling labour intensity would lower job creation in the non-agricultural sector, even as the labour force swells faster than before. This will mean about 12 million more people will be forced to find employment in the least productive and low-wage agriculture sector.
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Agriculture
Total Non-agriculture
-37
P*: CRISIL Projection; Source: National Sample Survey organisation, CRISIL Research
Addition to employment 2004-05 to 2011-12 (7 years) (i) Agriculture Industry Manufacturing Construction Services (ii) Total Non-agriculture Overall (i)+(ii) -37 31 6 25 21 52 15 2011-12 to 2018-19P* (7 years) 12 20 2 17 18 38 50
Level of employment
Note: P*: CRISIL Projections; Source: National Sample Survey Organisation (NSSO)
1
Not everyone in the working age joins the labour force. For instance, in 2011-12, only 58.3% of working-age population was in the labour force. Rest mostly were students, homemakers and others not seeking employment. The unemployment rate is assumed at 2.2%
CRISIL Insight
Such large job creation in the non-farm sector was not only sufficient to absorb the incremental labour force during this period, but also facilitated migration of labour, pulling out 37 million workers from low-productivity agriculture to the more productive industry and services sectors. This trend will change in the years ahead, as average GDP growth over the next 5 years is likely to be much slower at around 6.5%. Add to this diminishing labour intensity of the economy and what you get is nonagricultural employment that could, at best, grow by 38 million from 2011-12 to 2018-19. Not only is this lower than the increase in non-agricultural employment (52 million) witnessed during the high growth years, but it is also insufficient to absorb Indias growing labour force -- estimated to rise by 51 million over the same period. And, due to the lack of adequate opportunities in industry and services sector, an additional 12 million will be forced to either depend on low productivity agriculture or remain unemployed. If some of these people do not resort to farm employment, Indias unemployment rate will be seen to rise above its current level of 2.2% (2011-12) in the years ahead. Infact, even if agriculture employment rises by 12 million (and official unemployment rate remains unchanged at 2.2%), much of this increase will be disguised unemployment. This is because, given sufficient job opportunities in industry and services, labour force tends to migrate to the higher-wage, more productive sectors -- as seen in the seven years to 2011-12. In the coming years, however, due to the lack of opportunities in the non-farm sector, more and more workers will be forced to resort to farm employment. In the last decade, Indias large youth-dominated population (50% of Indias population is below 25 years) began to be viewed as an asset due to high GDP growth. Favouring this perception was also the fact that the population was ageing in the affluent West and also in not so-affluent China (engineered through the onechild policy). Against this backdrop, Indias large supply of youth began to be treated as a major co ntributory factor to Indias brightening prospects the so-called demographic dividend. However, with insufficient job opportunities, this can turn into a demographic liability.
0.78
0.57 0.35
0.26
0.52 0.38
Agriculture
Industry
Services
Non-agriculture GDP
-0.53
So what led to this drastic fall in overall employment elasticity during the high growth years? Indias GDP growth during the boom years was largely driven by the less labour -intensive sectors. In the seven fiscals to 2011-12, information technology, financial services, real estate and other business services grew at over 11% per year, and contributed significantly (22%) to overall growth. However, as these services require only about 1-2 people to produce Rs 1 million of real value-added GDP (Box 1), their high growth did not lead to large incremental employment. In contrast, the more labour-dependent services sub-sectors grew at a much slower pace. For instance, health, education and recreation services, which require 9 people to produce Rs 1 million of real GDP, grew at 6.8% in the seven fiscals to 2012. As a result, employment addition in these sectors was limited.
CRISIL Insight
Figure 4: Number of workers required to produce 1 million worth of real output in services , 2011-12
8.9
5.9
3.7
2.7
1.4
Trade,hotel & Transport,storage Financial, real restaurant and estate and communication business services
Public administration
Further, during the high growth years from 2004-05 to 2011-12, the labour intensity of manufacturing also fell sharply because, 1) a large part of the manufacturing sector's growth came from fast-growing, capitalintensive industries such as petrochemicals; and, 2) rising substitution of manual labour as complicated labour laws in India (rigid rules for hiring and firing of workers) and technological progress led to higher automation. As a result, by 2011-12, the manufacturing sector needed almost half the number of workers it did in 2004-05 to produce Rs 1 million of real output. So it came as no surprise that despite growing at nearly 9% annually manufacturing added only 6 million in employment during the high growth years (Table 1, key messages). The automobiles sector is a prime example of the shift toward automation. Vehicle makers have been increasingly resorting to robotics to skirt mounting labour costs and neutralise unionism. For example, Ford Indias passenger vehicle plant in Sanand, Gujarat (expected to be commissioned by the fourth quarter of this fiscal) will have more than 500 robots manning the body-shop and paint-shop.
Figure 5: Number of workers required to produce Rs 1 million of real output in industry
2004-05 12.2 11.2 2011-12
11.9
7.2
2.7
2.4
Manufacturing
Construction
As manufacturing failed to create many jobs, incremental employment in the boom years came largely from the construction segment, which became the largest employment creator due to a profusion of projects under social-sector schemes. By 2011-12, construction accounted for 20% of total non-farm employment even though its share in non-agricultural GDP was a much lower at around 10%.
CRISIL Insight
quality of education has not kept pace with the burgeoning student intake. It is also equally critical to ensure that the labour force entering the job market has the skillsets to meet market needs. In the banking sector, for example, more than two-thirds of the jobs likely to be created over the next 5 years will be in sales and marketing-oriented roles on the branch banking side, but the industry laments that employees with the requisite product knowledge and customer handling skills are extremely difficult to find, especially in the smaller towns. 4. Accelerate investments in infrastructure: The construction sector is the only major one where employment elasticity rose during 2004-05 to 2011-12 compared with the preceding five years. Its employment elasticity is greater than 1 and it is the most labour-dependent among all non-agricultural sectors, requiring more than 12 people to produce Rs 1 million of real output. A fast-growing construction sector can therefore create significant employment opportunities. Its growth rate can be accelerated through investments in roads, ports etc, which will also help to raise Indias potential growth. CRISILs research shows the sector has the highest employment potential and lowest skill requirement (Figure 6, Details: Appendix A3) two-thirds of employment is of unskilled or semi-skilled workforce (Appendix A2). Given the low skill level of the workforce currently engaged in agriculture, growth in construction can help accommodate labour migration. Also, given the value chain and localised nature of economic activity in the sector, construction generally offers significant spin-off benefits in terms of job creation and impetus to the local economy.
Figure 6: Employment potential vs skill requirement of different sectors
Employment potential score
4.5 4.0
3.5 3.0 2.5 2.0 1.0 1.5 2.0 2.5 3.0 Skill requirement score 3.5 4.0 Gems & jewellery Auto/ancillary Organised retail Construction Textiles Healthcare Banking IT/ITES
Appendix
Labour intensity in India
50.0
47.4
2004-05
2011-12
40.0
31.3
30.0
Labour intensity, defined as the number of workers required to produce Rs 1 million of real GDP, is the highest in agriculture and lowest in services.
0.0
Agriculture
Industry
Services
GDP
0.90
0.65
Employment elasticity of manufacturing fell sharply during 2004-05 to 2011-12. Despite growing at almost 9% per annum, the manufacturing sector did not add many jobs during this period. This is because of increasing substitution of labour by capital (machines) due to (1) complicated labour laws and (2) technological progress. A percentage point growth in construction sector ups construction employment by more than 1%.
0.17
Manufacturing
Construction
0.55 0.47
0.16
0.20
-0.05
Although the employment elasticity of finance, realestate and business services is the highest, it did not create much additional employment in absolute terms as the sector has a very low employment base. This is unlikely to change given the nature of its work.
Trade,hotel & Transport,storage Financial, real restaurant and estate and communication business services
CRISIL Insight
Creating employment: Indias toughest challenge
All-India employment
2004-05 268 231 2011-12
106
127
115 83 54
60 26 50
All-India employment increased to 473 million in 2011-12 from 458 million in 2004-05. Agricultural employment fell as labour force migrated from agriculture to industry and services.
Agriculture
Services
Industry
Manufacturing Construction
60
Construction sector created the largest incremental employment between 2004-05 and 2011-12.
54
50
26
4
Manufacturing Construction
In 2011-12, the services sector employed more than manufacturing and construction combined. Among the services sector, trade, hotels and restaurants are the largest employment generator, accounting for almost half of total service sector employment in 2011-12. Between 2004-05 and 2011-12, education, health and recreation services added even more employment than the fast growing financial, real estate, business and IT services sector.
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Type of employment
In millions 2004-05 2011-12 Change in employment Selfemployed 260 247 -14 Salaried 65. 85 19 Casual 132 141 9 Total employed 458 473 15
Self-employment declined by 13 million between 2004-05 and 2011-12, a likely result of a decline in agriculture employment. Contrary to perceptions, more salaried employment was created (19 million) compared with casual employment (9.4 million) over this period.
Source: NSSO reports on Key Indicators of Employment and Unemployment in India 2004-05 and 2011-12, CRISIL Research
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CRISIL Insight
A2. Mix of incremental employees required in terms of educational qualifications across sectors such as construction, IT/ITES and organised retail
Construction
Technicians & Foreman, 5%
More than 65% of the labour force required in construction would be unskilled or semi-skilled. This proportion is however lower than that in the past on account of increasing mechanisation in the industry. Going forward, companies in IT/ITES sector are expected to scout for people who not only have technical expertise, but also possess domain knowledge. Also, the sector will see much fewer jobs created due to increased automation of routine tasks and lower growth in voice-based processes. This, coupled with the increase in number of engineers passing out (engineering intake has almost tripled in last 5 years), will result in lower proportion of engineers finding jobs in IT/ITeS companies. In organised retail, most of the employee additions are expected to happen at the front end i.e. client facing role.
IT/ITES
IT 25%
Post graduates
Graduates
ITeS 7%
72%
90%
2%
XII pass
2%
1%
1%
Below XII
Organised retail
Post graduates
10%
20%
Graduates
XII pass
50%
20%
Below XII
Mainly soft-skill training would be required for nongraduate employees getting into organised retail sector.
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A3. Employment potential vs skill requirement Matrix gives clear picture of key focus areas
CRISILs Employment potential vs skill requirement Matrix attempts to differentiate across various sectors based on the employment potential and level of skills needed to be employed in the sector. For assessing employment potential, we have considered the following:
Current employment provided by the sector Additional jobs likely to be added over the next few years based on sectoral growth outlook and dynamics Job creation potential per unit of capital investment, given the relative capital scarcity India faces
To assess the skill requirements across sectors, we have used a simple framework encompassing:
The profile/mix of people needed by the sector The extent of formal/technical education required
Analytical Contacts:
Dharmakirti Joshi Chief Economist, CRISIL Research Email: dharmakirti.joshi@crisil.com Vidya Mahambare Principal Economist, CRISIL Research Email: vidya.mahambare@crisil.com Ajay Srinivasan Director, CRISIL Research Email: ajay.srinivasan@crisil.com Neha Duggar Saraf Junior Economist, CRISIL Research Email: neha.saraf@crisil.com
Media Contacts:
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