Needed, a reframing of the debate on jobs

Despite robust growth in FY 24, 8%, private final consumption expenditure (consumption demand) grew at a far lower 4% — a consequence of the severe blows suffered by the informal economy, where the bulk of India is employed. Growth in the number of manufacturing enterprises has slowed down, and employment dropped considerably between 2015-16 and 2022-23. Simultaneously, employment in low-productivity agriculture grew (42.5% in 2018-19 to 45.8% in 2022-23) while real wages stagnated, even contracting in some periods. Moreover, the formal sector is unable to absorb India’s growing (shoddily) educated youth. Unemployment among educated youth has increased substantially, accounting in 2022 for nearly half of the total unemployed non-student youths. The writing is on the wall. India’s structural transformation has, for the moment, stagnated, and this played some role in how India voted in 2024.

India’s stagnant structural transformation and the jobs crisis form the backdrop against which finance minister Nirmala Sitharaman will present the first full Budget of the newly elected government on July 23. The path she chooses will depend on how the Bharatiya Janata Party (BJP) has interpreted the electoral mandate. We will only know next week. But if the BJP has read the message in the mandate, which we can only hope it has, the task ahead will require a radical course correction in the frameworks of economic policy.

The jobs crisis is rooted in the economic growth model India adopted when it liberalised, exacerbated by policy missteps of the last decade. This model skipped low-skilled manufacturing, growing instead on the back of the far smaller, high-skilled services sector, thereby breaking the link between growth and jobs. More egregiously, it failed to invest in key public goods — quality health and education — despite growth.

It is fashionable in economic policy circles to ignore these realities, arguing instead that political obduracy, driven by vested elite interests, has been the barrier to deepening factory-market reforms necessary for boosting manufacturing and enhancing productivity. We need bold, market reformist leaders who will get the State out of the way, the argument goes. Candidate Modi effectively leveraged this sentiment a decade ago.

But if there is one lesson to be drawn from the last decade — from farm laws to ill-conceived attempts at formalising the economy via demonetisation and the GST as policy levers — it is that building genuine, competitive markets requires recognising the structural inequalities within which markets operate in the real economy. Indeed, it is these inequalities that necessitate State intervention — in local infrastructure (roads connecting villages to towns, not just highways, public transport, and physical markets), in incentivising supply chains and enhancing bargaining power — rather than state exit via deregulation.

Consider the botched-up farm laws. An argument that I have repeatedly made with Mekhala Krishnamurthy in this column is that the protests and demands for a guaranteed MSP did not emerge, as our lazy public discourse seeks to argue, on account of vested interests seeking to perpetuate market distortions — but because reforms did not provide any credible assurances of alternative mechanisms for market development, price support and risk management, etc that would protect farmers. On the other hand, when market conditions have been favourable, repeated government interventions have turned the terms of trade against farmers through export bans to keep prices down. Add to this visible cronyism and concentration of economic power in the hands of a few, and it should be no surprise that market reforms are viewed with some suspicion by the average Indian and the demandfor subsidies and guaranteed MSP persists.

A similar challenge applies to firm growth and the informal sector. Rather than creating enabling conditions, the government pursued forced formalisation via policies like demonetisation and GST in the expectation that this would lead to broader efficiency gains. It didn’t. Instead, it decimated the informal sector, exacerbated by the lockdowns, causing severe distress to the most vulnerable and hitting aggregate demand.

Breaking out of this low-level equilibrium requires designing policy that can demonstrate credible pathways to creating genuinely competitive markets. Rather than succumbing to big bang deregulation and distortionary interventions, it requires a calibrated, coordinated strategy that identifies market failures and enables appropriate state intervention. In essence, this is a governance challenge. It requires incremental reforms that can be achieved by empowering state governments, improving Centre-state coordination and investing in local governments; the opposite of the current deeply centralised reform model that privileges cronyism over genuine competition.

As we near Budget day, policy circles are abuzz with job creation ideas from an employment-linked incentive scheme to skilling. Sensible as these may be, they will amount to no more than lipstick on a pig if the underlying structural weaknesses remain unaddressed. More than budget proposals, what India needs is a national jobs strategy that takes a holistic view of the economy, embraces data, engages with weaknesses and identifies solutions. A special session of Parliament ought to be called to debate the jobs strategy. Wishful thinking? Perhaps. But essential.

Yamini Aiyar will be a visiting senior fellow at Brown University in 2024-25.The views expressed are personal