Why NITI Aayog’s Job Creation Plan Can’t Ignore Robotisation

While NITI Aayog’s Action Agenda lays out a plan for creating jobs, it hasn’t factored in threats from automation.

Creating good jobs for India’s rapidly growing working age population has always been a challenge.

According to the Labour Bureau’s employment survey results mentioned in the latest Economic Survey, India was able to add only 1,35,000 jobs in 2015 in the eight labour-intensive or export-oriented sectors surveyed (IT/BPOs, textiles and apparel, metals, gems and jewellery, handloom/powerloom, leather, automobiles and transport).

At the same time, the number of working age people actually working or looking for jobs grew by over 10 million. Employment grew less than half as fast as the working age population during the period 2004-12.

Not Enough Jobs in Labour-Intensive Sectors

Recently, the NITI Aayog came out with its Three-Year Action Agenda, which will be followed by a Seven-Year Strategy and a Fifteen-Year Vision. The 200-page Action Agenda (AA) is detailed, thorough and ambitious. It makes clear the need for rapid and sustained economic growth to get everyone out of poverty.

The AA stresses on both moving resources into labour-intensive sectors as well as making individual sectors more efficient in every way possible, including increasing the scale of production and improving technology.

The AA attempts to counter the claim by many commentators that India’s recent growth has been “jobless”. It argues that the unemployment rate has remained between 5 and 8 percent, even when using “the most demanding definition of employment”.

Thus, according to the AA, “unemployment is the lesser of India’s problems” and that “underemployment” (too few hours of work per week available for an average employed person), along with low wages, is the real problem.

However, while acknowledging the severity of the problem of underemployment and low wages, I do not think we can ignore India’s poor performance in employment growth, especially in the labour-intensive sectors.

In addition, in India, currently only half of the working age population actually works or looks for jobs, compared to about 61 percent a little over a decade ago. This proportion is around 70 percent in Brazil, China and Indonesia and 62 percent in Bangladesh.

Thus, the unemployment rate, traditionally calculated using the population working or looking for jobs as the base, ignores discouraged workers who are unable to find jobs and drop out of the labor force (they stop looking for jobs). Therefore, India’s unemployment rate is a poor measure of “joblessness”.

Formal vs Informal Sector

While stressing on the need for improvement in the quality of jobs, the AA lists a few important empirical facts.

Firstly, agriculture employs half of India’s work force but generates less than a fifth of the national income.

Second, small firms (those with 20 or fewer workers) together employ nearly three quarters of all workers within manufacturing but produce a little more than a tenth of the total manufacturing output.

Furthermore, the largest services sector firms, while together producing almost 40 percent of the sector’s output, employ only 2 percent of its workers.

And, finally, the average wage of a formal-sector worker is six times the average wage in the informal sector (the sector consisting of small, low-productivity, unregistered firms, to which many stringent labour regulations do not apply).

These facts together imply that formal manufacturing clearly will have to expand employment relative to agriculture and informal manufacturing will have to pick up in terms of efficiency.

Also Read: India Should Learn From China’s E-Commerce Boom for Creating Jobs

Exports Key to Job Growth

The AA rightly believes that exports will have to be an important part of the jobs strategy. To facilitate an expansion in exports, there need to be important reforms in India’s labour laws.

Currently, these laws come in the way of adjusting employment in response to changing demand or firing workers even in the case of incompetence. The existing labour laws also make reassigning a worker from one task to another quite difficult. Thus many firms choose to remain small and informal, to which labour regulations do not apply.

With Chinese manufacturing employment concentrated in large enterprises of over 1000 workers each, as opposed to India’s in under-20 worker firms (according to research by Rana Hasan and Karl Jandoc at the Asian Development Bank), it makes it difficult for India to compete in the export market for labour-intensive products.

NITI Aayog Suggests Labour Reforms

Along the lines and scale of China’s Special Economic Zones (SEZs), the AA is recommending setting up Coastal Employment Zones (CEZs) in India, with relatively flexible rules to move land into manufacturing, liberal labour laws, and tax incentives to attract multinationals who might now be finding Chinese wages too high (some of them have already migrated to Vietnam, Bangladesh and Malaysia as a result). In addition, their proximity to ports will be useful.

The AA is pushing for labour law reforms at the state level, as it seems to recognise the political difficulties in carrying them out at the Centre.

Recent examples of states initiating labour reforms are Rajasthan and Madhya Pradesh. Interestingly, the AA is also recommending a more liberal definition of “start-ups” so that more firms can be included in this category, where there is more flexibility in labour regulations.

The document also makes more targeted recommendations for stimulating job creation in specific sectors, mainly labour-intensive ones. These sectors include apparel, electronics, food processing, gems and jewellery, financial services, and tourism.

Threat from Automation

What is missing from the discussion in the AA is the threat of automation or robotisation (substituting human workers with robots). Recent research by Daron Acemoglu of MIT and Pasqual Restrepo of Boston University shows that one industrial robot can replace six workers.

Robotisation, which is taking place at a very rapid pace, is, therefore, a serious threat to jobs everywhere in the world. Rising Chinese wages, which initially led to firms moving to lower-wage countries such as Vietnam, Malaysia etc, are now being countered internally in China by robotisation in a massive way.

China is now the world’s biggest buyer of industrial robots, with hundreds of billions of dollars in subsidies poured into automation by their various provincial governments as well as the Chinese federal government. President Xi Jinping has openly come out in favour of automation. The aim, of course, is to capture foreign markets and to be the world’s most dominant economic power. This is what India will be competing against and its jobs strategy needs to factor in this reality.

Also Read: India is World’s Fastest Growing Economy, But Where Are the Jobs?

Countering Robotisation

A lot of automation is taking place in electronics, and, unless Indian firms are ready to go that route, they might not be able to compete successfully in the world electronics market. However, even in an industry like electronics, only a certain fraction of the tasks can be automated.

While robots and computers act as substitutes for labour in tasks that are amenable to automation, they increase the efficiency of workers employed in the remaining tasks. In footwear and apparel, a number of tasks require fine motor skills, which is clearly illustrated by the fact that there is only one highly automated footwear factory in the world so far (an Adidas factory in Germany).

Thus, in devising industrialisation strategies, we need to carefully consider robotisation or automation possibilities and threats. And in this context, the role of education and training in dealing with automation-related uncertainty will be vital. A comprehensive chapter in the AA is devoted to education, though the issue of automation has not been discussed in that context either.

Only time will tell whether these recommendations by NITI Aayog are politically and economically viable, and whether or not they will get translated into actual policies and, subsequently, economic outcomes.

Also Read: Beyond Hype Over ‘Make in India’, Where Are the Jobs & Investment?

(Devashish Mitra is Professor of Economics and Gerald B and Daphna Cramer Professor of Global Affairs at Syracuse University, New York. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)