3. Growth and Employment

The relationship between economic growth and employment in India has been a subject of considerable debate. While India has achieved impressive GDP growth rates over the past two decades, the employment generation has not kept pace. This chapter examines the relationship between growth, productivity, and employment, and the structural characteristics of the Indian economy that shape this relationship.

Key questions addressed include: How has employment responded to GDP growth? What is the role of productivity in explaining the growth-employment relationship? Which sectors have been the main drivers of employment growth? And what are the implications for inclusive growth?

Gross Value Added (GVA) growth in India averaged 6.4% per year between 2000 and 2019, while employment growth was only 1.7% per year. This disparity indicates a significant growth-employment disconnect — economic growth has not translated proportionally into job creation.

Key findings:

• GVA-employment elasticity: The employment elasticity of GVA growth has been very low, around 0.15. This means a 1% increase in GVA led to only a 0.15% increase in employment.
• Sectoral divergence: The services sector, which accounts for over 55% of GDP, contributed disproportionately to growth but absorbed relatively fewer workers. The manufacturing sector's share of GDP remained stagnant at around 18%.
• Productivity-driven growth: Much of India's growth has been driven by productivity improvements rather than employment expansion, particularly in capital-intensive sectors like IT and finance.
• Regional variation: States with higher GVA growth did not necessarily have higher employment growth, indicating that growth patterns and employment generation are not uniformly linked.

Productivity growth has been the dominant driver of India's economic expansion. Labour productivity (output per worker) increased significantly, but this was partly due to the exit of low-productivity workers from the labour force rather than genuine productivity gains.

Important aspects:

• Labour productivity: Labour productivity in India grew at an average of 4.5% per year between 2000 and 2019, driven by capital deepening, technological change, and sectoral shifts.
• Total Factor Productivity (TFP): TFP growth, which captures efficiency gains beyond input accumulation, has been moderate. The contribution of TFP to overall growth has been lower than in other fast-growing economies.
• Productivity-employment trade-off: The focus on productivity-enhancing growth has often come at the expense of employment generation. Capital-intensive technologies and automation have reduced labour absorption in manufacturing.
• Informal sector productivity: The vast informal sector has very low productivity. The productivity gap between formal and informal sectors is substantial and has widened over time.

The sectoral composition of GVA and employment in India has undergone significant changes, but the pace of structural transformation has been slower than expected.

Sectoral trends:

• Agriculture: The share of agriculture in GVA declined from 23% in 2000 to 15% in 2022, but its share in employment remained high at around 45%. This indicates low productivity and disguised unemployment in agriculture.
• Manufacturing: The manufacturing sector's share in GVA remained stagnant at 16-18% over two decades — the so-called "missing manufacturing" phenomenon. Employment in manufacturing also stagnated at around 12% of total employment.
• Services: The services sector's share in GVA increased from 50% to over 55%, but its employment share grew more slowly, from 25% to 32%. High-productivity services (IT, finance) generated fewer jobs than traditional services.
• Construction: Construction was a major employment absorber, with its employment share rising from 5% to 12%. However, many construction jobs are informal, low-paid, and seasonal.

The interaction between sectoral growth, productivity, and employment reveals important patterns:

• Agriculture: GVA growth in agriculture was driven by productivity gains (mechanization, irrigation), but employment actually declined as workers moved out of the sector. The workers who left agriculture often ended up in low-productivity informal services or construction.
• Manufacturing: Manufacturing growth was capital-intensive and skill-biased, creating fewer jobs than in labour-intensive manufacturing economies like China or Vietnam. The "Make in India" initiative aimed to reverse this but had limited success.
• Services: Modern services (IT, finance, telecom) grew rapidly but are capital- and skill-intensive. Traditional services (trade, transport, personal services) absorbed more labour but with low productivity and wages.
• Construction: Construction was the most labour-intensive sector, but its boom was driven by real estate and infrastructure projects that were vulnerable to cyclical downturns and policy changes.

While overall employment growth was slow, certain sectors and activities emerged as significant employment generators:

• Micro and small enterprises: Informal micro and small enterprises remained the largest source of employment, particularly in trade, services, and manufacturing. However, these jobs are often low-quality and poorly paid.
• Platform and gig economy: The rapid growth of digital platforms (Uber, Ola, Swiggy, Zomato) created new employment opportunities, particularly in urban areas. These jobs offer flexibility but lack social protection and job security.
• Self-employment: A large share of the workforce is self-employed, often in low-productivity activities. The push for entrepreneurship and start-ups has created some new opportunities but remains limited in scale.
• Non-farm rural activities: Rural non-farm activities (agro-processing, rural manufacturing, services) have grown but remain constrained by limited infrastructure, market access, and skills.

The Employment Structure Index (ESI) captures the relative importance of sectors in employment generation. It is a composite measure that reflects the sectoral distribution of employment and its evolution over time.

Key findings from the ESI analysis:

• Slow structural shift: The shift of employment from agriculture to non-agriculture has been slower than in other countries at comparable stages of development. The pace of structural transformation was particularly slow after 2012.
• Quality of structural shift: The workers who moved out of agriculture often entered low-productivity informal activities rather than formal manufacturing or modern services. This represents a "lateral" rather than "upward" mobility.
• Regional diversity: States with faster structural transformation (Tamil Nadu, Gujarat, Maharashtra) had better employment outcomes than states with slower transformation (Bihar, Uttar Pradesh, Jharkhand).
• Policy implications: The ESI suggests that policies need to focus not just on growth but on the composition of growth — promoting labour-intensive manufacturing, modern services, and rural non-farm activities.

The relationship between growth and employment in India is characterized by a paradox: the economy has grown rapidly but employment generation has been slow and of poor quality. The growth has been capital-intensive, productivity-driven, and concentrated in sectors that generate few jobs.

Key takeaways:

• The employment elasticity of growth is very low, indicating that GDP growth alone is not sufficient for job creation.
• The manufacturing sector has failed to become an engine of employment growth, unlike in East Asian economies.
• The services sector has driven growth but absorbed labour mainly in low-productivity informal activities.
• Agriculture continues to employ a large share of the workforce despite low productivity, indicating a lack of viable alternative employment opportunities.
• The structural transformation of the Indian economy has been incomplete and of poor quality, with many workers moving into low-productivity informal employment.