By Dr. Gyan Pathak
There is a pressing need to create quality jobs for India’s growing population, and advancing difficult factor and product market reforms, complemented by continuing efforts to streamline regulations and address skill mismatches could reinvigorate private investment and increase formal employment, says International Monetary Fund (IMF).
In the recent Staff report for Article IV Consultation, it has pointed out the aberrations that has cropped in the labour market. It says much of the increase in the labour force participation rate (LFPR) has been driven by own-account and unpaid family workers. An observed increase in agricultural employment since COVID-19 period diverges from traditional development paths, whereby workers tend to relocate from agriculture to industry and service, and India’s own historical experience. There is high degree of informality in the job market.
On structural reforms, IMF not only recommends a holistic horizontal reforms, which it says needed to stimulate private investment, raise potential growth, and create quality jobs, but also notes India’s ambition of becoming an advanced economy by 2047 that requires a significant and sustained rise in potential growth. In this backdrop, one of its recommendations was that India’s near-term priorities should include implementation of the labour codes.
Steadfast implementation of the new labour codes, which require cooperation between centre and states, is needed to enhance labour market flexibility and ease constraints keeping firms inefficiently small, while providing adequate social protection for workers. Advancing labour market reforms, including relaxing hiring and firing regulations, could generate an additional 44 million jobs by 2029/30, the report says. During the consultation Indian officials highlighted ongoing work with states to notify the new labour codes in the period ahead.
More flexible and targeted social safety nets facilitated by the use of technology can help support structural transformation and facilitate migration of workers from rural to urban areas, for example, through greater inter-state portability of benefits such as the “One Nation, One Ration Card”. Recent policy initiatives to enhance female labour force participation are welcome. Building on existing reforms to improve workplace safety, support female entrepreneurship, and improve access to childcare, priorities should include removing obstacles to female employment, ensuring that women can participate safely in the labour force, and further expanding support for childcare facilities. These reforms would help reduce inequality by creating more and better jobs.
Improving the quality of education, fostering skill development, and ensuring adequate health and nutrition are critical for building dynamic labour force in future, the report says. Raising human capital accumulation is essential for unlocking potential growth and fully harnessing India’s demographic dividend. Rapid advancements in AI are likely to transform the labour market, underscoring the need to continue improving the quality of education, health and nutrition, and skill development. While India’s education spending as a share of GDP is on par with peers, spending quality needs to improve through enhanced teacher training, further leveraging of technology to monitor teacher and student attendance and performance, continued promotion of early childhood development, and regular classroom observations to provide feedback and support to teachers. Skill development programs, such as industry-linked skilling programmes accompanied by facilitation of graduates’ placement can help reduce skill mismatches, while formal training and on-the-job learning are shown to raise earnings and the probability of employment. To this end, the revamp of industrial training institutes and the newly announced internship program under the authorities’ employment-linked incentives are welcome. Finally, promoting health and nutrition through interventions to reduce stunting and wasting, enhancing service delivery under the Integrated Child Development Services, and leveraging data on children’s nutritional status are also crucial.
IMF recommends enhancement of efforts to improve the ease of doing business, including policies to foster a stable environment and reduce corruption risks to boost private investment and increase efficiency. For this, its recommendation included providing strong policy framework, including in the areas of taxes, regulation and international trade; continuing and enhancing reforms to the insolvency and bankruptcy code; strengthening credit market by reducing the public sector footprints; streamlining business regulation by cutting bureaucratic procedures and administrative requirement; and continuing anti-corruption efforts. Furthermore, advancing agriculture and land reforms remains essential to increase efficiency and productivity to address market distortions.
IMF says that industrial policies cannot substituted for horizontal reforms, the Production Linked Incentives (PLIs), which reward in 14 selected industries, which successfully attracted investments and boosted production in a few industries such as electronics manufacturing. However, given the sheer number of new entrants into the labour market each year, the PLIs will not be sufficient to create the jobs needed to absorb the growing labour force. In addition, the fiscal costs per job created are substantial.PSL could promote access to credit and financial inclusion but also have opportunity costs with less than fully efficient allocation of capital. Moreover, increasing import tariffs is unlikely to deliver competitive producers that can efficiently add value and create jobs.
The report notes the need for green transition, and resultant displacement of workers, such as from coal-dependent power sector. To minimise potential displacement of workers in conventional energy sectors over the longer term, social safety nets can be strengthened, with targeted reskilling schemes to support labour market flexibility.
IMF has noted that India’s policies have largely been aligned with its recommendations, though challenged remains. It says that some of the initiatives can support well-functioning land market despite limited progress in broader land reforms. However, there has been limited progress on agricultural and labour market reforms, and privatization efforts, including of Public Sector Banks, have stalled.
Labour’s contribution to growth in India, while increasing, remains small relative to peers, IMF says, adding that it highlights an opportunity for the country to leverage its workforce more effectively, which could unlock more inclusive and sustainable growth. It also noted that India’s labour share in manufacturing is relatively low. Labour share could rise if it becomes harder or costlier to substituted labour with capital, or if product and labour markets become less concentrated.
IMF bats for implementing the new labour codes, which it says in addition to creating 44 million jobs by 2030, can remove disincentives against hiring more regular workers and improve incentives to invest in human capital. Companies are unlikely to invest significantly in training for contractual or informal staff, who are less likely to stay long-term. Therefore, there is a premium on implementing the new labour codes that facilitate formal employment arrangements.
As for the impact of AI, IMF says that with around 43 percent of its labor force in agriculture, India may be less exposed to AI disruptions than countries further advanced in the transition from agriculture to manufacturing and services. Nonetheless, about 26 percent of Indian workers are in occupations with high AI exposure, with 14 percent in jobs where AI may turn out largely complementary, raising labour productivity and earnings, whereas 12 percent are in occupations that are at a higher risk of being displaced.
If the workforce is not adequately prepared for the expected shift in the labour market, this could exacerbate the challenge of creating sufficient jobs for India’s growing young population. That said, India’s youthful demography presents a unique opportunity for upskilling and reskilling, as young Indians, being more adaptable, can be trained in high-skill, AI-related fields where demand is expected to rise. India’s service sector, which has been a robust source of growth and exports, in particularly exposed to AI, the IMF report says. (IPA Service)
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