Context: India is facing a growing challenge in creating formal sector jobs despite a labour-abundant economy.
Relevance of the Topic: Mains: Amid shift towards capital-intensive production - need to focus on labour skilling and reforms.
Employment Trends in India
- Job Deficit: Since 2017-18, India's working-age population has increased by 9 crore, however, formal sector jobs have risen by 6 crore, leaving a deficit of 50 lakh jobs annually.
- Rise in Informal and Self-Employment: Most employment growth is from self-employment in rural areas and informal services, affecting both quality and quantity of work.
- Capital-intensive Production process: Production processes, including traditionally labour-intensive manufacturing and services industries, are becoming more capital-intensive (more investment in technology and equipment) and automated. The advent of Artificial Intelligence will further reduce the need for human labour.
Why is the capital intensity of production rising in a labour-abundant economy?
1. Demand-Side Factors (Industry & Market-Driven):
- Need for Higher Productivity & Cost Efficiency: Businesses adopt capital-intensive technologies to improve productivity and reduce long-term costs. Machines provide greater efficiency, precision, and output per unit of input compared to human labour.
- Global Competition & Quality Standards: Indian firms competing in global markets must meet high-quality standards, which often necessitate automation and capital-intensive methods.
- Falling Cost of Capital: With advancements in technology, the cost of machinery and automation has decreased, making capital investment more attractive than hiring and training labour.
- Economies of Scale: Large-scale production benefits from automation as it reduces per-unit costs, making capital-intensive production more viable.
2. Supply-Side Factors (Labour Market Issues):
- Low Availability of Skilled Labour: Less than 10% of India’s workforce has formal vocational training. Many educated individuals lack industry-relevant skills, making them less competitive against machines.
- Rigid & Costly Labour Regulations: Stringent labour laws, high compliance costs, and restrictions on hiring and firing discourage firms from hiring more workers, making automation a preferable alternative.
- High Labour Costs in the Formal Sector: Though India has an abundant workforce, formal sector wages, social security obligations, and compliance costs increase the effective cost of hiring labour.
- Uncertainty & Labour Unrest: Frequent labour strikes, job security demands, and union pressures lead industries to prefer mechanisation, which ensures uninterrupted production
Some Government Efforts:
1. Production linked Incentive Scheme:
- The government offers incentives of 4% to 6% on incremental/additional sales. For example, earlier a company was selling goods worth Rs. 1 lakh in a year and now its sales increased to Rs. 1.2 lakh. Then the company will get an incentive of 4% on Rs. 20,000= Rs. 800.
- Challenges:
- The current structure of the PLI scheme is primarily focused on expanding production of high-value products with backward linkages, which require high-skilled, specialised labour, and is relatively less focused on low- and middle-skilled labour-intensive sectors.
- Over 50% of the PLI budget is allocated for large-scale electronics, IT hardware and drone manufacturing. However, the highest number of jobs under the scheme has been created in the food processing and pharmaceutical industries.
2. Education-Employment Linked Internship (ELI) scheme:
- The central government incentivises the private sector to hire more labour while also skilling them, through the ELI and other internship programmes.
- Challenge: While this policy does reduce the cost of labour by shifting (the initial) burden on to the government, the period of the subsidy or transfers is short (about two to three years) The scheme does not sufficiently focus on upskilling workers, limiting future employability.
Way Forward
- Integrated Policy Framework: Establish coordination between ministries of production, labour, and skilling to align production-linked incentive (PLI) schemes with current and future labor market needs.
- Graded Incentive Structures: Modify PLI incentives from flat to graded, rewarding firms for certifying and upgrading workers' skills through on-the-job training.
- Strengthen Skill Ecosystem: Enhance training institutes like ITIs by linking their funding and rewards to employment and earnings outcomes based on projected industry demand.
- Flexible Labour Regulations: Encourage state governments to adopt flexible labor policies to reduce costs and promote labor-intensive technologies
Hence, there is a need to focus on both the quantity and quality of the workforce by investing in skill development programs that cater to high-value manufacturing sectors. India needs to develop dynamic frameworks that adapt to evolving industrial and technological demands, ensuring alignment with the vision of "Viksit Bharat."