India’s biggest policy challenge 

News: Recently, the Periodic Labour Force Survey’s latest quarterly bulletin was released last week.  

Findings of PLFS

The unemployment rate for workers of 15 years or above in urban areas came down from 10.3% during October-December 2020 to 8.7% in October-December 2021.  

The labour force participation rate (LFPR) has also increased marginally from 46.9% in July–September 2020 to 47.3% in July–September 2021.  

However, the unemployment rate declined during the quarter under review still remains fairly high.  

Causes 

There was ebbing of the second wave of Covid-19, the impact of the third wave was relatively limited and economic activity recovered sharply during the aforesaid period. This has helped in creating jobs in the last quarter of 2021.  

The most restrictions have now been lifted, including in the contact-intensive sectors, 

What are the pressing policy challenges in front of the Indian policymakers? 

The global economic outlook has also worsened. The central banks are increasing interest rates due to higher inflation. Therefore, the tightening of global financial conditions and slower growth will have a bearing on the Indian economy.  

According to the Reserve Bank of India’s (RBI’s), India has been undergoing strong inflationary pressure in the first half of the current fiscal year.  

Further, India is going to have slower economic growth at around 4% in the second half of Fiscal Year 2021-22.  

The overall employment situation is likely to remain challenging in the foreseeable future due to current scenarios of high inflation and slower economic growth.  

India’s labour force participation rate (around 47.3%) is lower than other countries such as 61% in the US and 68% in China in 2021. In addition, the female LFPR is at about 20% which is even more worrying. This means numerous people in India are not joining the labour market because of lack of opportunities.  

The reasons for lower workforce participation in India is absence of a large manufacturing base. At present, the policies incentivise a small number of large firms. These large firms are unlikely to create employment at the large scale required.  

Way Forward 

The RBI has started increasing the policy rate to contain inflationary pressures, which could affect economic activity.  

India also needs to deal with a structural problem, which could actually worsen with slower growth. 

The employment creation depends significantly on the level of growth and expansion in economic activity. 

India needs a more comprehensive policy approach to deal with issues ranging from labour laws to tariffs. India needs to create a large manufacturing base to address the employment challenge. 

Source: The post is based on an article “India’s biggest policy challenge” published in the Business standard on 13th May 2022.