Investment and Employment

Youth unemployment in India, specifically amongst graduates, stands at an alarming 17%. This is despite the fact that, over the course of the last several years, the government has invested unprecedented sums in the creation of infrastructure. This has surely generated jobs, but not nearly enough for those with college degrees. A report by Citibank suggests that a growth in GDP of 7% generates between 8 and 9 million new jobs a year. Apparently, in order to absorb new entrants to the workforce, India needs to create about 12 million work opportunities annually. Under the current economic structure, this seems a hard act.

The bulk of India’s economic output is driven by the service sector that includes travel, hospitality, banking, information technology, logistics et cetera. These sectors are highly productive and, with the use of technology in their business processes, the number of seats in offices has not kept pace with their increased output. As artificial intelligence comes into play, over the coming years, the impetus of growth in employment, within service industries, will reduce further. The only solution to this dilemma, is the creation of new manufacturing capacity, as that would produce new job openings. This has been unusually slow over the past few years.

Business managers argue that consumer demand remains soft and a punt towards capacity expansion does not justify the risks associated with it. Perhaps, they are right. Ultimately, it’s all about managing risk. When the financial risk of a new investment is perceived to be higher than the risk of a fall in market share, only the daring take the plunge. What dampens enthusiasm are imports, specifically from China, where a combination of state subsidies and huge capacities push Chinese producers to dump goods in foreign markets. As the process for imposing anti-dumping duties in India is cumbersome, companies take the more cautious approach. Falling local demand in China has only worsened the problem, as businesses are prepared to work on thinner margins for exports, if only to keep their plants running. Domestic sales of their output command higher prices, the evidence suggests.

There are limits to what the state can achieve in job creation. The private sector needs to step in. But for various reasons that has failed to happen. Overseas investments, by Indian companies remain buoyant. According to the Reserve Bank of India, outbound investment by Indian companies, jumped from USD 1 billion in 2002 to USD 23 billion in 2023 (Rs 1.9 lac crores). This implies that businesses are expanding their operations, but not enough within their home market. The dilemma for policy makers, consequently, is how to increase private consumption. For if consumption rises, investment in new capacity would quickly follow. The rise in consumption can only be sustained when more people are added into the workforce, creating what economists describe as a virtuous cycle.

Policy makers need to think hard on the steps required to encourage domestic producers to expand capacities. The Production Linked incentive scheme introduced by the government has shown tangible results, where new capacities especially in smart electronics have popped up across several large projects. But clearly, that is not nearly enough to create jobs for the millions that enter the workforce each year. Bureaucratic apathy, specifically at the local level, is frustrating as is the competition from cheap imports. Unless the government takes a firm stance favouring local manufacturing vis-a-vis imports, new investments in manufacturing capacity may remain subdued and so will employment generation.