When looking at recent data, it is hard to escape the conclusion that although India has enjoyed high economic growth this has largely been jobless economic growth. It is imperative for there to be a big push in the areas of education and employment in India. This is the most significant policy challenge facing the Indian economy.
In 2012, India’s population was 1.23 billion of which 65% was of working age. India already has a smaller ratio of old people to those of working age population than that of China. Therefore, over time, if India’s youth is productively engaged, the country’s private financial savings and physical capital investment are likely to boom. In contrast to China, India’s population will continue to grow beyond 2025 and these trends are likely to persist well into the future. By this time, India can be a high-income or high middle-income country. Arguably, no country currently faces such fortuitous circumstances; indeed very few countries ever have.
Mass education of youth and their gainful employment in productive jobs is central for capitalizing on India’s demographic dividend. But India’s performance with regard to both education and employment has been disappointing. Except for the duration of compulsory education and hours of instruction for pupils aged 9, India’s performance in primary education is lackluster.
Data from WDI2013 reveal that in 1999 only 63% of male students and 60% of female students who had begun grade 1 reached grade 5. This is a lower rate than for lower middle-income countries. The WDI data also indicates low rates of labor participation by youth (particularly women) and high rates of unpaid family work.
Much of the new job creation must come from areas other than the farm sector. Average farm yields in India are low. In 2012, they were on average 2.3 tons per hectare largely because of the small size of farms. A nuanced policy of creating 115 million non-farm jobs along with large scale investment in agricultural infrastructure could help raise yields to 4 tons per hectare by 2022.
Most of the new jobs will need to be created in states that have poor initial educational and infrastructural conditions. This will require large increases in public and private investment, a supportive reform program and be centered on manufacturing and construction. Here are some suggestions:
1. Design an integrated approach to India’s infrastructure/construction needs as one of the key initiatives of Niti Ayog – the organization that has replaced the Planning Commission.
2. The plethora of labor and product market regulations (for large and small businesses) must be reduced. They inhibit labor mobility and adaptation to domestic and global market requirements and, more broadly, increase the administrative cost of doing business.
3. One stop clearances for projects and a strong culture of e-governance need to be cultivated.
4. Tax distortions must be reduced and a well harmonized Goods and Services Tax introduced.
5. Other product market distortions that impede cross-state flow of goods and services must also be reduced.
A critical input into such job creation would be the rapid skilling of India’s youth. Apart from a substantial revamping of school level education, this would require sharply redesigned and expanded national apprenticeship programs. While a large part of these would be established through regular classroom contact, there would be a significant role for remote learning through, for instance, the newly formulated Digital India initiative.
The investment needs for such large scale job creation cannot be fulfilled by the private sector alone. A program of fiscal prudence would lower the fiscal deficit and – at the margin – switch public expenditure from current subsidies to investment. This would facilitate private investment and FDI so that the investment rate can be edged closer to 40%. This is the rate of investment that is required to sustain high rates of growth and employment creation. The savings rate must commensurately climb to ensure that there is no instability from a large current account deficit.
Perhaps the most significant change required among policymakers is attitudinal – both in the public and private sectors. The current fixation with growth and poverty is understandable. However, India’s development philosophy must realize that that neither high, medium-term growth, nor sustained poverty reduction, are possible without a paradigm change in India’s approach to the education and employment of youth. The consequences of failure could be grave.