Ever wondered why as India hits all these big goals, and is racing ahead to achieve even higher goals, not all seems perfect? The number one sore point is, why aren’t there enough jobs being created? Maybe even, why are the masses not feeling richer than they should?
Well, the answer to this question, and perhaps many more, can be found in a simple economic ratio, and how it has changed over time.
Let’s dig into it.
What would an economy with surplus labour and scarce capital look for? More bang for the buck? Or, in this case, more employment per unit of capital? Right?
Unfortunately, real world data, and in this case data for India, tells a very different story.
Number of workers engaged per crore of invested capital (called WC ratio, hereon) for Indian economy has fallen sharply from 8.7 to 2.4 between 2004-05 and 2022-23 as per RBI’s handbook of statistics for Indian states. While invested capital grew at a rate of 12.3% CAGR during this period, total workers engaged rose by less than half, at only 4.5% CAGR, leading to the sharp decline.
As per the data, number of workers engaged increased from 66 lakhs in FY05 to 1.46 crore by FY23, whereas invested capital rose from Rs 7.6 lakh crore to Rs 61.4 lakh crore. Note that the figures refer only to industries and does not include services or agriculture sector.
What does this tell us? Well, we are putting more capital to work than people. And that’s not the best for a country that has a lot of young people looking for jobs.
Let’s see if this is a uniform pattern across the country, or there are variances across states.
Among the states (with at least Rs 1 lakh crore of invested capital in FY23), Tamil Nadu and Telangana are doing better with WC ratio of 4.3 and 4.1. However, the ratio has come down sharply for them also; from a high of 13.6 for Tamil Nadu and 15.1 for the undivided Andhra Pradesh which included Telangana. (Growth figures given in chart are for FY13-23 for Telangana and Andhra Pradesh).
On the other hand, Odisha and Madhya Pradesh have the lowest WC ratio at only 0.7 and 1.4, down from 5.9 and 6.7, the sharpest decline among all states. While Odisha has recorded the second highest growth in invested capital at 18.2% with its share in total investment capital increasing from 2.6% to 6.6% during the period, the share in total workers engaged has barely moved from 1.8% to 1.9%.
Incremental workers to capital ratio
Now, let’s look at another version of this same ratio.
The “incremental” workers to capital ratio (IWCR) during FY05-23 stood at 1.49, meaning each crore of fresh investment absorbed only 1.49 additional worker for operations.
The decline happened across two distinct phases; the first during FY05-FY13, when invested capital grew sharply by 19.4% CAGR but number of workers grew by only 5.4%, leading to IWCR of 1.45. During the second phase of FY13-23, while capital growth fell to 6.9% CAGR, growth in number of workers engaged declined less sharply to 3.8% CAGR with IWCR rising marginally to 1.52 during FY13-23.
The case of most industrialised states
It would be pertinent to look at the figures for Gujarat and Maharashtra, the two most industrialised state accounting for 19% and 13% of total domestic investment in FY23.
While invested capital grew at 13.2% and 10% in Gujarat and Maharashtra respectively during FY05-23, workers growth was only 6.2% and 4.3%. Gujarat is the fourth most capital inefficient state with WC ratio of 1.57, although for Maharashtra, the ratio is quite close to national average at 2.15. The sharp variation calls for a rethink and re-look at the incentivizing measures to be given to capital efficient states.
What does this tell us?
First, we need to remind ourselves that this data is limited to the industrial sector and does not include data for services and agri sectors.
Now, what can we take away from this? We are putting in more capital to work, which is good, as there are a lot of advantages that come out of it. Industries are more efficient, they have new technology, and perhaps they are more competitive.
In a sense, this is what is driving India.
But then this is happening at the cost of potentially higher employment. And therefore, limiting opportunities for Indians.
A policy suitably designed to incentivize industries to focus on labour intensive industries such as textiles, apparel, food processing etc is the need of the hour. Food processing sector could be a low hanging fruit considering the significant amount of waste in the supply chain and changing life style, increasing the demand for processed foods items.
An Employment Linked Incentive scheme focussing on exports, similar to the production linked incentives which has transformed India’s electronic goods manufacturing eco-system, could be the answer to India’s job scarcity woes.
Ashish Agrawal author of the book “Indian Economy & Business – Overview of Recent Trends & events”
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