Inclusive growth: Why is it indispensable for India?

Context

To achieve inclusive growth in India, there is a need to shift the workers from informal employment to formal employment.

What is informal employment?

• The informal economy is the diversified set of economic activities, enterprises, jobs, and workers that are not regulated or protected by the state.
• Some of the characteristic features of informal employment are lack of protection in the event of non-payment of wages, compulsory overtime or extra shifts, lay-offs without notice or compensation, unsafe working conditions and the absence of social benefits such as pensions, sick pay and health insurance.

What Is a Jobless Growth Economy?

• In a jobless growth economy, unemployment remains high even as the economy grows.
• This tends to happen when a relatively large number of people have lost their jobs and the ensuing recovery is insufficient to absorb the unemployed, under-employed and new members entering the work force.
• Without sufficient economic growth, people looking for work will be unable to find it. In any economic condition, it is the individual workers possessing employable skills that will find work first.
• If the supply of jobs is plentiful, then more opportunities open up for those with less attractive skill sets.

What are the reasons behind the jobless growth in India?

• Labour –intensive manufacturing sector did not become the engine of growth in India.
• Stagnation in manufacturing output and employment and contraction of labour-intensive segment of the formal manufacturing sector.
• In India, growth is attributed to service sector, whereby both employment and wages have seen a rise. But as figures say, the biggest employing sector in India is the Agriculture sector, employing 45% of the population but contributing 15% to the GDP, whereas Service sector is the biggest contributor to the GDP but employs less than 30%.
• Impediments to entrepreneurial growth in small firms (such as high costs of formalisation) along with a long history of small scale reservation policy which has prohibited the entry of large scale units in labour intensive industries.
• Sluggish process in education and skill levels of workers.

How is India’s economic performance in recent years?

• India’s economic performance in recent years has been outstanding in relation to the global economy.
• Between 2010 and 2016, the annual real gross domestic product (GDP) growth in India averaged 6.7% despite a relatively weak post-crisis global economy that averaged only 2.7% annual gains.
• Yet the economic optimism in recent years is tempered by growing deficiencies in the economy and if not effectively addressed, could undermine future growth.

Indian economy and jobless growth

• Job growth averaged only approximately 2% a year in the formal sector.
• Such growth is basically flat when adjusted for the growing population.
• In the coming decades, some 12-15 million Indians will enter the labour force each year, and if the current job growth trends persist, fewer than half of them will be able to secure formal employment of any kind.
• For those who fail to find formal employment, their only option is to work in the informal economy.

Informal Economy in India

• About 80% of India’s labor force works in the informal economy.
• Jobs in the informal economy are typically insecure, with neither employment contracts nor regular pay, and very often workers are engaged on a day-to-day basis.
• The working conditions in the informal economy therefore resemble a low-productivity trap.
• Employers have no incentives to invest in training workers who are seen as transient and interchangeable or to invest in better tools and equipment for them.
• Without some assurance of future income, workers find it difficult to plan for the long term, let alone find the means to invest in learning new skills.
• The informal economy thus embodies the exact opposite of inclusive growth: workers are effectively excluded from accessing many of the resources they need to make them more productive and thereby improve their life chances.

What is inclusive growth?

• Inclusive growth infers an impartial allocation of resources with benefits incurred to every section of the society.
• It lessens the fast growth rate of poverty in a country and upsurges the participation of people into the development of the country.
• Rapid growth is necessary to reduce poverty but for this growth to be sustainable in the long run, it should be broad-based across sectors, and inclusive of the large part of the country’s labor force.

Why is inclusive growth important for India?

• Advancing inclusive growth is so important in India today. At the most basic level, economic growth results from labour force growth and productivity growth of workers.
• With 80% of the labour force stuck in low-productivity activities in informal employment, it is not surprising that the Indian economy is performing far below its true potential.
• For the Indian economy to reach its growth potential, ways and means must be found to move workers from informal to formal employment.
• Ultimately, the economy can reach its full potential only when the hundreds of millions of Indian workers can escape the trap of low productivity.

What are the recent reform initiatives by government for greater inclusion?

• The biometric-based unique identification system, Aadhaar, now ensures that the poor are no longer invisible and, therefore, more empowered.
• A bank account for every adult now ensures universal access to financial services, at least in principle.
• When combined with Aadhaar, such access will accelerate financial inclusion.
• The shock of demonetisation and the introduction of the new national goods and services tax will gradually expand India’s tax base and eliminate incentives for businesses to operate in the shadow of the formal economy.

How reducing the size of the informal economy is important for inclusive growth?

• Reducing the size of the informal economy is pivotal to inclusive growth.
• It allows India to reach its growth potential and deliver broadly shared prosperity for the vast majority.
• Sustaining a real GDP growth rate of 7% each year until 2040 will quintuple per capita GDP to $28,000 on a purchasing power parity basis.
• By 2040, India will also reach its maximum share of the working-age population.
• This is a glittering prize, endowing its youth bulge with meaningful, well-compensated and rewarding formal employment in a society where prosperity is broadly shared and absolute poverty has become a thing of the past.

What are the positive aspects of inclusive growth?

• Lower incidence of poverty.
• Broad-based and significant improvement in health outcomes.
• Universal access for children to school.
• Increased access to higher education and improved standards of education, including skill development.
• Better opportunities for both wage employment and livelihood.
• Improvement in provision of basic amenities like water, electricity, roads, sanitation and housing.

What are the challenges behind lack of inclusive growth in India?

Despite the high growth over the past two decades, concerns have been raised over the growth not being equally distributed. Following are the challenges:

• The country remains shackled in dishonesty, red tape, traditional social hurdles and a bewildering lack of transparency.
• It is witnessed that growth is not uniform across sectors and large cross-sections of the population remain outside its purview.
• Indian society has to seriously introspect major issues such as eradication of child labour, women empowerment, removal of caste barriers and an improvement in work culture.
• Inclusive growth being a long term process necessarily originates from the inclusive nature of socio-economic development across regions and people.
• There will be no inclusive growth unless it takes satisfactory care of women and children.
• Literacy levels have to rise to provide the skilled workforce required for higher inclusive growth.

Conclusion

India needs to democratize productivity through inclusive growth to finally reach its full economic potential.