India faces the problem of jobless growth

New Delhi’s “Make in India” program has undoubtedly attracted top global players who once might have thought India wasn’t worth the effort. Companies like Samsung, Hyundai, Dell and Micron, as well as key suppliers to Apple, Foxconn, Pegatron and Wistron, have received grants under India’s Production-Linked Incentive (PLI) or similar programs.

The PLI will allocate around US$25 billion to companies that meet expanded production targets in 14 sectors. Apart from foreign investors, the main winners were leading local conglomerates Tata, Reliance and Adani. However, large investments do not always translate into job creation in quantities commensurate with India’s needs. Although estimates vary, the youth unemployment rate in India is estimated to be between 20% and 40%, depending on the criteria. This figure is alarmingly high by any measure. It is even more alarming when coupled with India’s low labour force participation rate (55%) and the fact that at least 40% of India’s workers are employed in the typically inefficient agricultural sector.

The politically inconvenient reality is that the world’s highest growth rate of 8% was disproportionately driven by services sectors, where demand for labour is lower.

While it is difficult to draw conclusions with much certainty in a country as heterogeneous as India, the results of the 2024 national elections seem to confirm the growing importance of unemployment in elections. Jobs have long been identified as potential clay feet for otherwise unassailable Prime Minister Narendra Modi.

The politically uncomfortable reality is that the world’s leading 8% growth rate has been disproportionately driven by less labor-intensive service sectors. Partly for this reason, the Modi government has been criticized for placing too much emphasis on driving investment in perceived higher-tech sectors such as electric vehicles, batteries, semiconductors and solar panels. These sectors are undoubtedly in fashion. Their strategic prestige has been boosted by the risk-reduction agenda of the G7 and partners. But they are unlikely to deliver the job growth that India needs.

Take the solar industry, for example. India has made some real progress as an alternative supplier of solar panels. In 2023, it would send 97% of its solar panel exports to the United States. Despite its global dominance, China’s vertically integrated and increasingly automated solar supply chain has added only 300,000 jobs since 2011.

The flip side of India’s high-tech “leapfrogging strategy” has been a relative decline in the export competitiveness of labor-intensive sectors such as textiles, apparel, leather, garments, and jewelry. In some of these sectors, India has actively ceded market share to Vietnam and Bangladesh. While they do not offer the same ribbon-cutting optics, industries such as textiles are much better placed to absorb large pools of semi-skilled labor. It is no coincidence that South Korea’s industrialization—perhaps the fastest in human history—first focused on sectors such as textiles and apparel before expanding into heavy industry.

The good news is that New Delhi is actively considering revamping the PLI to focus on more labour-intensive sectors, perhaps as early as the next budget in late July/early August. But India’s problems appear to be much more fundamental than the strategic orientation of subsidies.

In short, India is still struggling to put in place the necessary elements needed to create a more conducive business environment.

As for the foreign direct investment (FDI) figures, they contradict the Modi government’s propaganda. FDI as a percentage of GDP has fallen from 1.7% in 2016 to just over 0.5% now, according to the Reserve Bank of India. FDI is also falling in real terms, falling 37% from a year earlier to around $27 billion by 2023-24. This is not a problem specific to foreign companies, as private investment as a whole has been mediocre. Manufacturing’s contribution to GDP remains at around 13%, down from 17% in 2010 and well below the government’s 25% target.

In short, India has still struggled to put in place the foundations required for a more conducive business environment. It wasn’t always for lack of trying. The Modi government quickly accelerated existing efforts to build India’s infrastructure and signed the first (albeit limited in scope) free trade agreements in India in more than a decade. Modi has also implemented pro-business reforms, including ending retroactive taxation and cutting corporate tax, while also cutting the wings of the bureaucracy—which had played an infamously stifling role during the License Raj era.

Progress on deeper structural reforms, including liberalizing agricultural markets and streamlining India’s 24 labor codes and land acquisition laws, has proven largely elusive. These reforms have consistently been highly controversial politically, including among key elements of Modi’s electorate. To protect domestic producers, Modi has also added tariffs on thousands of categories of goods. While this may benefit individual companies, it is not without its negative macro-level implications.

None of this has escaped the government’s notice. Anticipating a strong election result, Modi had planned to revive India’s dead reform agenda. The question is whether a disciplined Modi now has the political capital (and the support of new coalition partners) to stay the course. A more fundamental question is whether, with the world’s robot density rising and China accumulating resources in both higher- and lower-value-added sectors, manufacturing can play the role in job creation that it once did.