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Employment Generation in Indian Manufacturing Sector Relevance of Export Sector in Job Creation

Prof. S K Mohanty Dr. Sabyasachi Saha

Workshop on

Job Creation in Manufacturing Sector Strategy for Sustainable Economic Growth in South Asia

June 21, 2017

New Delhi

Context

1

• Manufacturing sector is around 15% of GDP in India

• This is lower than the newly industrialised countries of Asia and that of many industrialised nations (who have a lower share now compared to the earlier industrialisation phase)

• Apprehensions - without steady expansion of manufacturing sector job creation would be difficult

• Share of manufacturing in total employment increased to 12.2% in the first half of the last decade

• Declined to 11% in the second half of the decade indicating higher capital intensity (12 FY Plan)

• Role of external sector in job creation

Structure of Presentation

• Issues in manufacturing output and employment

• Debate on the linkages between manufacturing growth and jobs

• Relevance of the external sector in the debate

• Indian manufacturing and sectoral policies

• Methodology

• Trends in Indian export sector

• Are exports job displacing?

• Destination matters in creating jobs in the exports sector

2

Issues in Indian Manufacturing

Jobless Growth

Deindustrialisation

Dualism

Need to understand the nuances and decipher evidence on both these aspects for better policymaking

Employment-Unemployment (Overall)

The National Commission for Enterprises in the Unorganised Sector (2009): employment growth declined from 2.03% for 1983 to 1993-94 to 1.85% between 1993-94 and 2004-05

NSS 68th Round (2011-12):

– unemployment rate (UR) in usual status (ps+ss) – 2%.

– UR among the youth (age: 15-29 years) was much higher

Fifth Annual Employment – Unemployment Survey (2015-16) the UR was estimated to be 5% (ps) at all India level

The Sixth Economic Census (2013-14):

– Manufacturing - largest employer providing employment to 30.3 million (23.1%)

Jobless Growth and Manufacturing

Mehrotra et al (2012) – Industry employs 22.7%; Services employs 24.4%

Goldar (2011): Between 2003-04 and 2008-09, employment in the organised manufacturing sector increased at a very high rate of growth of 7.5%

Choudhuri (2015): Employment in Manufacturing peaked in 1996-97, thereafter declined

EXIM Bank (2016): export-supported employment (direct+indirect) in manufacturing increased from 26.2% in 1999-2000 to 38.5% in 2012-13

Several Studies highlight rising informal employment in manufacturing

Deindustrialisation?

Persistent concern for the Indian economy has been its stagnating manufacturing sector

On deindustrialisation - Rodrik, 2015; Amirapu and Subramanium, 2015; Dasgupta and Singh, 2006; Felipe et al, 2014; Kumar, 2017

Many other studies point towards steady growth of the manufacturing sector in India (7-10%) over a longer term; Virmani and Hashin (2011), Nagraj (2017), Goldar (2011), Rajakumar (2011)

Manufacturing dominant sector for export performance; Mohanty and Arockiasamy (2009); Agarwal (2015)

Slowdown in manufacturing sector is more recent, beyond 2011

Dualism

Indian manufacturing firms are predominantly small in size.

However, India’s long term policy stance of small scale sector reservation has been seen as a constraint; RIS (2006)

Kumar (2007): In terms of exports larger firms enjoyed definite advantages over small ones.

Higher export intensity is evident in the case of low-technology segment of manufacturing that were also labour-intensive

Kathuria et al (2013): After economic reforms average efficiency levels have increased, the increase has been more for formal firms

Industrial Policy 1991

Industrial Licensing – abolished except for specified industries (Zoning, Land Use Regulation and Environmental Regulations continued)

Foreign Investment – ceiling on FDI was raised to 51% in many segments

Foreign Technology Agreements – automatic approvals were instituted to facilitate import of technologies

Public Sector Policy – reduced role for the Public Sector and restricted to select areas only

MRTP Act – Removal of threshold limits; allowing expansion and Mergers and Acquisitions

National Manufacturing Policy 2011

Revival of sectoral policies – employment intensive sectors; capital goods; strategic industries; industries with competitiveness; SMEs; public sector enterprises

Simplified Rules and Regulations including Exit Rules

Technology Acquisition and Development

Sustainable Industrialisation

Human Resources and Skills

Infrastructure and Government Procurement

Clustering and Agglomeration (NIMZs)

Make in India

From SEZs/NIMZs to Industrial Corridors (Industrialisation and Urbanisation)

Strong focus on Entrepreneurship Development (Start-Up India); SMEs (MUDRA)

Ease of Doing Business (Entry, Exit and Tax)

Host of New Sectors: Defence, Pharma, Medical Device (in manufacturing)

Recent Sectoral Policies

National Policy on Electronics (2012) – for Electronics

System Design & Manufacturing (ESDM)

National Textile Policy (first launched in 2000 (new

version expected soon)

National Capital Goods Policy (2016)

Automotive Mission Plan (2016-26)

National Electric Mobility Mission Plan 2020 (NEMMP)

Relevance of the external sector in the debate

Greater role of trade in explaining employment unlike what was evident from 1990s literature (Hoekman and Winters, 2005)

Trade liberalisation has increased global integration of Indian manufacturing sectors – (Vashist, 2016)

Impact of trade –

– Increase in wage premium and increase in ratio of skilled to unskilled employment in all sectors (Inequality has increased)

– Skill premium has increased in both developed and developing countries

– Large reduction in relative price of low-skilled labour intensity goods

Wage responses to trade liberalisation is more than that on employment effect in developing countries

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Relevance of the external sector in the debate

Composition of manufactured export – drastic change over last two decades (Sen, 2008 – different views)

– Increasingly specializing in exports of relative skill intensive products

Trade openness has shrunk India’s manufacturing base in value added and employment –(Nambiar, Mumgekar and Tadas, 1999)

Rapid growth in employment under liberal trade regime has not been materialised

Factor content in Indian Manufacturing (Sen, 2009)

– Exports – Unskilled Labour intensive 45%, Human Capital Intensive 24%

– Imports – Technology intensive 44%, Human Capital Intensive 27%

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Methodology

Manufacturing sector operations- corporate sector, SSI and cottage industries, separate production functions (63X3)

Assumed that output is shared between domestic consumption and exports

Employment generation capacity differs across 3 types of industries

Direct and Indirect employment using IO

RTA-demand different product-mix

ASI and MSME databases for employment at 5 digit NIC codes

Methodology (RIS, 2007)

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Sl Variables

CAGR (%) Value (Lkh)

2003-07 2008-14 2003-14 2003 2014

1 Number Of Factories 3.1 6.8 5.8 1.2 2.3

2 Fixed Capital 14.7 15.2 16.6 457.8 2474.5

3 Number of Workers 7.7 3.4 5.5 60.0 107.6

4 Wages to Workers 13.7 15.3 15.0 30.1 140.5

5 Total Inputs 20.8 13.6 17.1 1011.7 5719.1

6 Value of Output 21.0 13.2 16.7 1254.0 6883.8

7 Net Value Added 23.9 10.8 15.6 198.8 975.2

8 Gross Capital Formation 37.0 4.7 15.2 72.8 344.6

9 Gross Value Added 22.0 11.3 15.3 242.3 1164.7 15

Output growing faster than employment Implications for Wage Bill • During buoyancy

and recession,

output grew faster

than employment

• From buoyancy to

recession, growth

of employment

declined but

growth of wage

bill to workers

increased

• Rise of white

collar

employment

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RTAs

Number

of RTAs

Employment

intensity of

exports

Distribution of

RTAs (L/M/H)

Africa 20 Low 14/3/3

Asia 18 Medium 5/12/1

Europe 15 Low, Medium 7/8/0

LAC 14 High 0/1/13

Oceania 6 Medium 0/6/0

Trans-

Continental 11 Medium 2/7/2

Total 84 Medium 28/37/19

Prospects of employment from Indian export sector by RTAs • 84 RTAs considered-

India's employment

intensity of Exports

• Africa and partly

Europe- Low

employment

prospects

• Most RTAs in other

continents and Trans-

Continental RTAs-

medium employment

opportunities

• High coefficient in

LAC- particularly Latin

American region

• Spread of India's employment intensity to exports in different countries

• Purple showing high employment intensity and green low figures

• Regions of India’s interest- Central America, western South America, east

and Central Africa, partly Asia- large employment prospects

Concluding Remarks

• Manufacturing output growing faster than employment growth

• Output with imported inputs- rise in productivity with low employment growth

• Wage bill rising faster than number of employment growth- white collar employment

• Export sector not employment displacing- Several evidences (RIS, 2006; Mohanty, 2015)

• Demand pattern of employment creation differs across RTAs

• Some RTAs can generate more employment than others at home

• Implications for trade negotiations 18

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Thank you