Employment Unlocking the demographic dividend. Business Economics Banking, YES Global Institute, YES BANK

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3 TITLE Employment Unlocking the demographic dividend YEAR February, 2018 AUTHOR COPYRIGHT Business Economics Banking, YES Global Institute, YES BANK No part of this publication may be reproduced in any form by photo, photoprint, microfilm or any other means without the written permission of YES BANK Ltd. This report is the publication of YES Global Institute, the practicing think tank at YES BANK Limited ( YES BANK ) and so YES BANK have editorial control over the content, including opinions, advice, Statements, services, offers etc. that is represented in this report. However, YES BANK will not be liable for any loss or damage caused by the reader s reliance on information obtained through this report. This report may contain third party contents and third-party resources. YES BANK take no responsibility for third party content, advertisements or third party applications that are printed on or through this report, nor does it take any responsibility for the goods or services provided by its advertisers or for any error, omission, deletion, defect, theft or destruction or unauthorized access to, or alteration of, any user communication. DISCLAIMER Further, YES BANK do not assume any responsibility or liability for any loss or damage, including personal injury or death, resulting from use of this report or from any content for communications or materials available on this report. The contents are provided for your reference only. The reader/ buyer understands that except for the information, products and services clearly identified as being supplied by YES BANK, it does not operate, control or endorse any information, products, or services appearing in the report in any way. All other information, products and services offered through the report are offered by third parties, which are not affiliated in any manner to YES BANK. The reader/ buyer hereby disclaims and waives any right and/ or claim, they may have against YES BANK with respect to third party products and services. All materials provided in the report is provided on As is basis and YES BANK make no representation or warranty, express or implied, including, but not limited to, warranties of merchantability, fitness for a particular purpose, title or non infringement. As to documents, content, graphics published in the report, YES BANK make no representation or warranty that the contents of such documents, articles are free from error or suitable for any purpose; nor that the implementation of such contents will not infringe any third party patents, copyrights, trademarks or other rights. In no event shall YES BANK or its content providers be liable for any damages whatsoever, whether direct, indirect, special, consequential and/or incidental, including without limitation, damages arising from loss of data or information, loss of profits, business interruption, or arising from the access and/or use or inability to access and/or use content and/or any service available in this report, even if YES BANK are advised of the possibility of such loss. YES BANK Ltd. Registered Office YES BANK Corporate Office YES Global Institute CONTACTS th Nehru Centre, 9 Floor, Discovery of India, Worli, Mumbai T : YES BANK Ltd, YES BANK Tower IFC 2, Elphinstone (W) Senapati Bapat Marg Mumbai T : Nyaya Marg, Chanakyapuri New Delhi T :

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5 Foreword India is emerging as the fastest growing economy in the world and making investments in human capital which are critical to fuel and sustain its economic momentum. Human resource, or labour, is the most critical among all factors of production it is the very nature of the interaction of labour with land or capital that generates economic output amidst various layers of technological development and entrepreneurship. Indeed, India s young population is a key differentiating factor against the backdrop of a slowly ageing global economy. Over the next decade, India is estimated to account for 25% of the rise in the world s working age population, adding 116 million people to the global work force. This incomparable Demographic Dividend represents an untapped potential for our Nation. Currently, allocation of labour remains skewed, with majority of the nation s labour force employed in agriculture (generating 15% GDP), while 30% is employed in the services sector (generating 54% GDP). However, with investment in education, skill development, progress on labor reforms and policy nurturing for labor intensive industries and several progressive policy initiatives such as the National Policy for Skill Development & Entrepreneurship, Pradhan Mantri Kaushal Vikas Yojana (PMKVY) and Digital India, India can effectively utilize untapped resources on the demographic front, bridge existing skill gaps by leveraging technology and generate a significant multiplier effect for sustainable economic growth. Developing a vibrant skill ecosystem which will equip our youth with future-ready new age skills is a key enabler for India to become a globally competitive economy and emerge as the skill capital of the world. The FY19 Union Budget has made a great beginning to unlock India s demographic dividend by choosing to invest and develop human capital in critical areas. This in my opinion will reap rich economic dividends in the years to come. In this spirit, YES Global Institute has undertaken an in-depth analysis of the various facets of India s labour market and I am confident that this report will provide a timely macroeconomic overview of the labour and skills landscape in India and provide insights for policymakers. YES BANK and YES Global Institute remain fully committed to working with the Government and all key stakeholders towards development of a robust skilling ecosystem in India. Thank you. Sincerely, Rana Kapoor Managing Director & CEO Chairman

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7 Contents i ii iii iv v vi Measuring Employment Labour Market - Micro Trends Link between Growth and Employment Creation Policy Perspective - Improving Employment Generating Capacity of Growth Automation Threat or Hype Conclusion

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9 What is demographic dividend? India s demographic dividend is the rising share of working age population which is estimated to rise until 2040 (UN estimates). Over the next 10 years alone, India will be the single largest contributor to the world's working age population (between the ages of 15 to 64 years) adding 116 million people, accounting for 25% of the total increase. The effective utilization of India s abundant labour resources has the potential to give significant boost to GDP growth, by improving labour productivity (output per worker) which currently lags other Asian countries. To unlock this demographic dividend, India s labour resource needs to be not only employed but also employed productively in sectors which have the maximum potential to grow. Currently, agriculture which accounts for 15% share in GVA, employs 44% of the workforce, while services with 54% Gross Value Added (GVA) share, employs only 30%. Measurement of employment: We look at a wide array of employment statistics consisting of conventional sources, such as employment surveys and unconventional sources such as employee strength of listed companies, National Pension Scheme (NPS), Employees' Provident Fund Organisation (EPFO) subscriber base etc. Employment surveys (available on a continuous basis till FY15) indicate that the economic growth has resulted in job creation, however it has been lower than what is required to absorb the expansion in labour force. More recent trend in employment creation is gauged from unconventional sources which have a more limited coverage, indicate a mixed trend of employment creation in FY17. Employment Unlocking the demographic dividend 1

10 Labour Market Micro Trends We list a few key micro trends in the labour market over the last few years: Sectoral Shift While agriculture remains the mainstay of employment with 44% share, there has been a consistent shift in employment from agriculture, towards sectors such as construction and services. Informal vs. Formal Sector Informal workers account for dominant share in the workforce, with the highest concentration in sectors such as agriculture (nonfarm), wholesale and retail trade. Flexibility Labour market flexibility is impacted by the multiplicity of labour laws 44 labour acts by central Government and 150 state labour laws, which govern hiring, retrenchment, safety regulation etc. Employability Availability of skilled labour force is a key constraint facing employment creation, with only 23% of the population literate at secondary school or above and 5% of working age population receiving formal vocational training. Productivity Labour productivity has improved over the last 10 years, however the gap with other Asian countries persists. Cost India holds an edge as a low cost producer with hourly compensation in manufacturing sector 50% that of China, however it s limited by low productivity levels. 2 Employment Unlocking the demographic dividend

11 Linkage between Economic Growth and Employment High levels of GDP growth does not ensure employment generation, as the latter depends on the employment elasticity of growth. Indeed, there have been phases of low GDP growth which were associated with a robust pace of employment creation and vice-versa. Policy focus should be on improving employment elasticity by focusing on labour intensive sectors such as MSMEs. Chart 1: Addition to Global Working Age Population Chart 2: GDP Share vs. Employment Share Net increase in working age population over the next 10 years ( million) % India 7% Nigeria Share in world increase in working age population 6% 4% 4% 4% 4% 3% 3% 2% Pakistan Ethiopia Indonesia Congo Bangladesh Tanzania Egypt Mexico 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 30% Services 14% Construction 12% Manufacturing Mining 44% Agriculture Share employment 54% 8% 18% 3% 15% GVA share Source: UN Population Database; YES BANK Limited Source: UN Population Database; YES BANK Limited Employment Unlocking the demographic dividend 3

12 4 Employment Unlocking the demographic dividend

13 Measuring Employment i Employment is one of the key yardsticks on which the performance of an economy is measured. However, in India the lack of dependable employment data has made this area a black box for policymakers with no real time feedback of impact of policies on labour market. We endeavor to shed some light on the state of employment creation using employment surveys as well as other proxy measures such as employment growth of listed companies, NPS etc. Employment Surveys The key source of employment information is the NSSO survey which usually is released once in 5 years and the labour bureau survey which has an annual frequency. Both these surveys have limitations lack of availability of more recent data (NSSO survey s latest is FY12 and Labour Bureau latest is FY16) and revisions in methodology which makes comparison across time periods difficult. We briefly list various types of surveys household and enterprise based and their recent trend in the exhibit 1 on page 8. To assess the overall employment trend we use India KLEMS database version 2016 (project by RBI, Indian Council for Research on International Economic Relations and Delhi School of Economics) which creates an annual time series of employment till FY15 using NSSO surveys, covering 27 sectors. Based on this database employment growth over FY11 to FY15 has been robust, averaging at 6.5 million per year. To assess if the pace of employment growth is adequate, we estimate how many people entered the labour force (defined as employed plus people looking for jobs) during this period. Required Employment Creation Over the five year period till FY15, India added 14.6 million people per year (avg.) to the working age population. Based on labour force participation rate from Labour Bureau annual survey, only 52.4% will be looking for jobs, hence the required number of jobs is 7.7 million per year. Employment Unlocking the demographic dividend 5

14 The claims of jobless g r o w t h m i g h t b e overdone as the pace o f e m p l o y m e n t creation at 6.5 million per year comes near the required rate of 7.7 million per year. Assessing Recent Employment Trends Employment surveys are available only till FY15 on a continuous basis. To assess more recent employment trends we look at other sources which have a much smaller coverage than employment surveys. Banks Complete set of data from RBI handbook of statistics is available till FY16, which showed normalization in employment growth since FY13 to an avg. growth of 2.6% from steep jump of 12.5% (avg.) seen in FY10 to FY12. More limited sample set based on 34 PSBs and private sector banks show continued moderation in employment growth in FY17. Public Sector Central Public Sector Enterprises (CPSE) employment has been declining since FY13 based on the complete set of data available from Public Enterprise Survey till FY16. Based on a relatively limited set of 19 key CPSEs, employment has continued to decline in FY17. In contrast, Central Government employees grew by a robust pace of 7.7% in FY17 vs. a decline of 0.6% in FY16. In FY18, Central Government employee strength is expected to grow by 0.8%based on Union Budget estimates. Non Financial Listed Companies Based on a limited sample set of 192 companies, employment in FY17 grew by 1.6% in FY17 and 5.0% in FY16 vs. 5 year avg. of 2.8%. Sector-wise, employment growth was supported by services sector in FY17 and FY16, while manufacturing saw declines. National Pension Scheme (NPS) NPS subscriber base which captures organized sector employment, grew by 8.4% and 11.5% in FY16 and FY17 respectively vs. 34.5% in FY15. It s important to note that the trend would be impacted by policy changes made to make the scheme more widely available and more attractive through tax benefits. In FY18 till December, subscriber base had grown by 6.4%. 6 Employment Unlocking the demographic dividend

15 The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) This is the main employment generation scheme of the Government, benefitting 21.9% of all households (FY16 Labour Bureau annual employment report). Employment generated by the scheme grew by 6% in FY17 and 16% in FY16, measured in terms of total individuals worked. The lower dependence on the scheme in FY17 indicates that rural employment growth would have improved. Employees Provident Fund Organization (EPFO) The number of active members of Employees Provident Fund Organization increased by 3.1% in FY16 vs. a decline of 0.4% in FY15. Till May 2017, active members rose by 8.2% to 45.8 million, partly due to the Employee Enrolment Campaign 2017, under which employers can voluntarily provide details of employees who were not provided social security benefits under EPFO with a nominal fine. Employment Unlocking the demographic dividend 7

16 Exhibit1: Employment Surveys India s labour statistics pose a serious limitation in trying to assess employment trends as they are available with a significant delay or /and may not be comparable across time periods due to methodological revisions: National Sample Survey Office (NSSO) Employment and Unemployment Survey H a s t h e m o s t comprehensive coverage with a sample size of 102k households and the survey is carried out over an entire year and hence t a k e s i n t o a c c o u n t s e a s o n a l v a r i a t i o n s. However, the survey is not timely as it is usually carried-out once in five years and the latest survey round is as of FY12. Recent trend: As p e r t h e s u r v e y, employment grew by 1.5% (CAGR) between FY12 and FY10, roughly 6.8 million per annum jobs were created. Labour Bureau Employment - Unemployment Survey Slightly better coverage than the NSSO survey at 156K households, and is more timely available at an annual frequency with the most recent survey as of FY16. However it underwent significant methodological revisions due to which the FY16 survey isn t strictly comparable to the previous available survey for FY14 (no survey for FY15 is available). To illustrate this, as per the FY14 survey India s workforce is 484 million but the latest FY16 survey estimate is significantly lower at 474 million. To add to this, the survey is only carriedout for a part of the year and might not fully capture seasonal trends and does not cover the entire population. It is limited to the population above the age of 15 years. Recent trend: Based on the old series, employment grew by 7% in FY14 vs. a decline of 3% in FY13. Annual Survey of Industries It is an enterprise based survey which is timely and has a long history since FY82, comparable across time periods. However the survey is only available till FY15 and has a very limited c o v e r a g e o f manufacturing firms in the formal sector, employing more than 10 workers. Due to the l a r g e p r e s e n c e o f informal sector and prevalence of small f i r m s, t h e s u r v e y captures only 1.4% of non-agri enterprises. Recent trend: As per the survey, employment grew by 3% in FY15 vs. 5% in FY14. 8 Employment Unlocking the demographic dividend

17 Labour Bureau s Quick Employment Survey (QES) The key benefit of this survey is that it is available on a quarterly frequency, however it suffers from the twin issue of limited coverage (eight formal sectors) and has also undergone significant change due to which the old series till Sep-15 can not be compared with the new series which extends from Jul-16 to Mar-17. Recent trend: The new series is showing an improvement in employment generation on a quarterly basis, rising by 185K in Q4FY17 from 77K in Q1FY17. Informal Sector Surveys Due to the large presence of informal sector in the economy, employment and firm level surveys capturing this segment are crucial for getting a comprehensive picture. While, both NSSO and Labour Bureau survey cover informal sector, they suffer from the significant issues mention earlier. Other sources of information include NSSO s key indicators of unincorporated non-agriculture enterprises, which only covers informal sector and is also a key source of information. However, the survey suffers from the following issues: 1) not conducted at a regular frequency, 2) does not cover agriculture sector 3) the survey is carried out over a short time span of 30 days preceding the date of the survey. Economic census is another key source but it covers only nonagri enterprises (formal and informal) and regular updates are not available. Employment Unlocking the demographic dividend 9

18 Comparison Between Employment Surveys Survey Frequency Coverage Sample size NSSO Employment and Unemployment Situation in India Labour Bureau Report on Employment & Unemployment Survey Annual Survey of Industries Quinquential Total population 102K households Annual Total population 156K households Annual Manufacturing industries which employ more than 10 workers Economic Census Irregular Non agriculture establishments Labour Bureau Quarterly 8 sectors: Quarterly Report Manufacturing, on Employment Construction, Scenario Trade, Transport, Education, Health, Accommodation & Restaurants and (IT)/(BPO), Enterprises with more than 10 workers factories 10K enterprises Latest round FY12 FY16 FY15 FY14 Q4FY17 Issue Regular updates not available Survey methodology revisions makes comparison difficult Covers less than 1.4% of non-agri enterprises Regular updates not available Limited coverage (15% of total employment) and methodological revision making comparison across time periods difficult NSSO Key Indicators of Unincorporated Non Agriculture Enterprises (excluding Construction) Irregular Unincorporated non-agriculture enterprises enterprises FY16 Regular updates not available Source: Various employment surveys; YES BANK Limited 10 Employment Unlocking the demographic dividend

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21 Labour Market - Micro Trends ii For creating effective policy measures to boost employment, the unique features of India s labour market need to be taken into consideration. In this section, we take a closer look at micro trends in the labour market ranging from sectoral composition change, prevalence of informal sector, labour productivity and cost trends. Sectoral Trends Shift from agriculture and the rise of construction and services sector Sectoral employment patterns have undergone a significant change with reduction in the share of agriculture and the rise in share of construction and services sector. The following are the key sectoral trends over the last 10 years (based on KLEMS database): AGRICULTURE CONSTRUCTION SERVICES MANUFACTURING While the sector remains the mainstay of employment, its share has been reducing steadily, representing a gradual reduction in over employment. Over the last 10 years the share of agriculture has reduced from 57% to 44% in FY15. Over the last 10 years the sector has seen the largest increase in employment share, rising from 6% to 14% in FY15, partly absorbing the workers shifting out of agriculture. Over the last 10 years the sector has seen a steady increase in employment share, second only to construction, rising to 30% from 25%. Within services, the sectors which saw a rise in employment were trade, transportation, business services and education. Over the last 10 years the share of manufacturing has remained steady at 12%. Indeed, even over a longer timeframe, manufacturing share in employment has risen marginally from 10% in FY81. Employment Unlocking the demographic dividend 13

22 Informal vs. Formal Sector: Majority of India working in Informal Sector Statistics on informal sector employment are limited with key sources of information from NSSO survey on 'Informal Sector and Conditions of Employment' and NSSO s Survey on 'Unincorporated Non- Agricultural Enterprises (Excluding Construction)'. As per International Labour Organisation ILO, which calculates informal sector workers based on NSSO surveys, 92% of non-farm workforce in India are informal workers, these consists of informal sector workers (82.2%) plus informal workers in the formal sector (ILO India Labour Market Update, July 2017). These workers have no employment security or employer provided social security. Sectors which have more than 90% of workers in the informal sector are agriculture (excluding farm), wholesale & retail trade, accommodation and food services and real estate (NSSO EU FY12 survey). Manufacturing sector has around 80% workers in informal sector. Sectors which have informal sector employment proportion at 30% or less were electricity, finance and education. There is ambiguity on the extent of informal employees as the Economic Survey estimates informal employment at 69% of non-agri employment in terms of lack of access to social security schemes EPFO and Employees State Insurance Corporation (ESIC). The comparable figure from ILO is 82.2% which is the share of informal sector workers and does not include informal workers who work in the formal sector. The likely reasons for difference in estimates are twofold: Economic Survey estimate is based on enterprise level data and not on household level data, hence the coverage would be smaller. Indeed, the Economic Survey estimates non-agriculture workforce at 240 million, while IKLEMS database which uses NSSO survey (household survey based) estimates it at 277 million. The Economic Survey uses the latest enrolment numbers from EPFO and ESIC. The ILO estimate is based on the FY12NSSO survey and would be more dated. 14 Employment Unlocking the demographic dividend

23 New data from GST network: Data from the GST network provides a fresh source of timely enterprise level information, with ~10 million registrants. The Economic Survey has highlighted that the share of f o r m a l s e c t o r i n n o n - f a r m employment might be higher based on GST data. As per survey estimates, if formal sector is defined as being part of the GST net, formal sector share is as high as 54% vs. social security defined formal sector at 31%. Despite the ambiguity on the estimates for informal workforce, its prevalence cannot be overlooked with a large share of employees without access to social security schemes. The key factors behind the large share of informal sector are low levels of education and high regulatory compliance burden which act as a deterrent for firms to register as a part of the formal Chart 3: Informal Sector Dominance in Employment Wholesale & retail trade Accom. & food service Real estate Manufacturing Entertainment Transportation Construction Professional activities Administrative service Water supply, sewerage Chart 4: Informal Sector's Share in Output Proportion of workers in informal sector Employment Unlocking the demographic dividend Source: NSSO EUS FY12; YES BANK Limited 20% 15% 10% 5% 0% FY16 Share in overall GVA of non-agri unincorporated enterprises 10% 13% 13% 20% Other Services Manufacturing Total Trade Source: NSSO Unincorporated Non-Agri Enterprises FY16; YES BANK Limited 15

24 sector. The Government has been trying to address the large presence of informal sector through the following measures (for details see annex 1): Expanding social security net through programs such as pension scheme for unorganized workers (Atal Pension Yojana) and expanding the insurance net (through PM Suraksha Bima & Jyoti Jeevan Yojana). Promoting formalization of the economy through the following reform measures: 1. overhaul of indirect tax architecture with the implementation of GST, which will incentivize each stage of the production process to be tax compliant, 2. Demonetization which promoted expansion of the tax base and movement of cash into the banking system, 3. Aadhaar which gives a unique identity number to each resident, making all financial transactions traceable, 4. Real Estate (Regulation and Development) Act or RERA which promotes transparency in the cash heavy real estate sector and 5. e x t e n d i n g G o v e r n m e n t s contribution of 12% to EPF for new employees for three years to all sectors in FY19 Union Budget. Flexibility of Labour Market Labour is part of the concurrent list w h e r e b o t h C e n t r e a n d S t a t e Governments can enact legislation. There are around 44 labour acts at the Centre level and over 150 state labour laws which govern hiring, retrenchment, compensation and safety of employees etc. The myriad of labour laws is partly responsible for firms not scaling-up in a bid to avoid regulation, resulting in 95.5% of the enterprises (ex. crop production) employing up to 5 workers (Economic Census FY14). Labour laws both at Centre and State become applicable at a firm level after a certain threshold of employment. The Centre has taken the initial steps to simplify compliance by rationalizing 44 labour acts into 4 labour codes on wages, industrial relations, social security and occupational safety, health and working conditions. Other reforms include - not forcing employers to submit hard copies of registers, allowing firms with 10 or more workers to operate for 365 days without restrictions on timing, letting women employees work during night shift (Model Shops and Establishments Bill which has been circulated among states for implementation) etc. Another key policy measure undertaken by the Centre is extending fixed term employment to all sectors, announced in the FY19 Union Budget. This facility will provide much needed flexibility to employers as well as protect contract workers. Indeed as per the draft proposal of the labour ministry, wages and benefits of the contract worker will be same as a permanent work, and the draft proposal provides flexibility to employer on termination of contract. This measure addresses the trend of rising share of contract and casual workers in the workforce from 31% in FY12 to 36.6% in FY16 (Labour Bureau annual survey). 16 Employment Unlocking the demographic dividend

25 State Governments have taken the lead on labour reforms front by focusing on reducing regulatory compliance burden with measures such as raising the threshold of firm size above which permission is needed for retrenchment of workers, raising the threshold above which regulation such as Factories Act, Contract Labour act etc is applicable. For more detail please see annex 1 Employability of the Labour Force Availability of jobs is only a necessary condition for employment and the availability of skilled labour forces are equally important. The extent of mismatch between jobs and available skill set can be gauged by the fact that 60% of unemployed graduates / post graduates are due to mismatch between skill / experience and available jobs (as per the Labour Bureau Annual Employment- Unemployment Survey). The low level of education among the population makes the task of finding skilled labour force for companies difficult, with only 23% of population literate at secondary school or above (NSSO EU FY12 survey). Compounding the above issue is the limited reach of vocational training with only ~5% of India s workforce having received formal vocational training (Ministry of Skill Development and Entrepreneurship). As per Government s estimate, number of people who will require training over 2017 to 2022 is 127 million, concentrated in sectors such as construction (25% share), retail (8%), beauty & wellness (6%) and road transport & highways (5%). Employment Unlocking the demographic dividend 17

26 Productivity Trends of Labour Force India s labour productivity measured in terms of real GDP per worker (constant prices USD terms, source: ILO) has improved around two times what it was 10 years back. However, compared to the world labour productivity levels, India s output per worker is only 21% that of world output per worker. Even if we compare with Asia and pacific region, India s performance is relatively weaker with output per worker at 35%. India s poor labour productivity levels are a result of a combination of factors at play skewed workforce distribution across sectors, low level of investment (including technology), lack of scale of firms and limited or no skill training: Distribution of Workforce 44% of workforce is employed in agriculture which accounts for 15% of Gross Value Added (GVA) (GDP by Industry). While services which account for ~54% share in GVA employs only 30% of the workforce. Due to the significant level of over employment in agriculture, labour productivity levels in the sector get depressed and high levels underemployment is reported (defined as proportion of people who did not work regularly throughout the year) estimated at 22% for rural females and 17% for rural males ( N S S O E m p l o y m e n t a n d Unemployment Survey FY12). Lack of Access to New Technology Labour productivity is also impacted by limited access to new technology among smaller firms due to resource constraints which account for majority share of employment and are mostly in informal sector. To illustrate this we compare investment levels between formal manufacturing firms (captured by ASI) and informal manufacturing firms (captured by NSSO Key Indicators of Unincorporated Non-agriculture enterprises). Formal sector manufacturing firms are usually larger in size than their informal sector counterparts with GVA per firm 451 times that of an informal sector firm. As a result of the larger size, formal sector firms are able to invest more with fixed investment per firm around 800 times that of informal sector firm. Even after adjusting for differences in output, formal sector investment per firm is ~2 times informal sector firms. 18 Employment Unlocking the demographic dividend

27 Lack of Scale Majority of factories in India are small with ~95% employing only up to 5 workers. As mentioned earlier, this is partly driven by firms trying to avoid numerous labour laws resulting in a multiplicity of small firms, which cannot take advantage of enhanced efficiencies from economies of scale. Lack of Skill Training As mentioned earlier only 5% of the population have received formal employment training which combined with low levels of education, limits the ability of workforce to adopt new technology. Formal vs. Informal Sector Productivity The wide difference in level of investment and scale between formal and informal sector firms results in a striking difference between productivity in informal and formal sector. Indeed, formal manufacturing sector firms gross value added per worker is 15 times that for a worker in informal sector. Chart 5: Mismatch between Jobs & Available Skills Others Personal issues Inadequate remuneration Mismatch between jobs and education/skill/experience Unemployed post graduates Reasons for unemployment Unemployed graduates Source: Labour Bureau EUS FY16; YES BANK Limited Chart 6: India vs. Other Countries Productivity Output per worker (GDP constant 2005 US $) India China Philippines Source: ILO, ILO; YES BANK Limited Employment Unlocking the demographic dividend 19

28 Labour Cost: India holds an Edge as a Low Cost Producer but it is Limited by Low Productivity Levels India holds an edge as a low cost producer with its relatively lower labour cost with hourly compensation in manufacturing sector being 50% that of China as per Conference Board data. Philippines is the only country which comes close to India and is 30% higher. However, both these countries hold an edge in productivity terms (measured as real GDP per worker, constant prices USD), with China being more productive by 2.5x vs. India and Philippines is more productive by 1.3x based in ILO estimates. Interestingly India s labour productivity gap with China has widened over time rising from 1.5x in 2000 to 2.5x in Ease of doing business is another key factor which determines where companies set-up their production, with relatively higher cost producers such as China ranking at 78 in the World Bank Ease of Doing Business survey and Turkey and Mexico ranking at 60 and 49 respectively, outperforming India which is ranked 100. Recent reforms implemented by the Government such as faster resolution of insolvencies, simplifying electronic payment of tax, single window approvals etc, have resulted in India s rank jumping by 30 spots to 100 this year. Implementation of G S T a n d f u r t h e r e f f e c t i v e implementation of recent reforms such as RERA and Insolvency and Bankruptcy Code, are expected to further improve India s performance. Rise in Productivity vs. Rise in Wage Costs We assess the productivity and wage trend in formal manufacturing sector as time series data is available from ASI surveys, which are comparable across time periods and don t suffer from major methodological revisions. Over the last 10 years, labour productivity measured as gross value added per worker or measured in terms of output per worker has risen by 1.6 times, while wages per worker (in real terms) also rose but at a relatively slower pace resulting a widening gap between the two series (chart 8). 20 Employment Unlocking the demographic dividend

29 Employment Unlocking the demographic dividend 21

30 22 Employment Unlocking the demographic dividend

31 Link between Growth and Employment Creation iii In this section, we look at the linkage between GDP growth and employment by assessing whether high level of GDP growth would ensure employment creation. We subsequently drill a little deeper at the sectoral level, to see which sectors have the capacity to provide jobs in the future. Does high GDP growth = Employment Creation? From an employment generating perspective, employment elasticity of growth (measured as change in employment with 1ppt change in GDP growth) is more important than the level of GDP growth, as there have been periods in the past when high level of GDP growth did not translate into job creation. To illustrate this we identify two distinct employment phases: High GDP Growth, Low Employment During FY06 to FY10, average real GDP grew by 8.1%, however employment generation was anemic at 0.8 million per year, as agriculture began to a see a reduction in jobs at an avg. net pace of 3.9 million per year. Low GDP Growth, High Employment During FY01 to FY05, employment generation was at its peak averaging 11.4 million per year, but it was associated with a muted pace of growth at 5.7% (avg.). The robust pace of growth during this period was due to agriculture which added on an average 3.5 million jobs on a net basis per year. The strong pick-up in agri employment is puzzling as agri GVA growth was uneven during this period due to unfavourable monsoon. Employment Unlocking the demographic dividend 23

32 Chart 7: Production Cost vs. Ease of Doing Business India Hourly compensation cost (2012, USD)~lhs WB Ease of Doing Business Rank (2017) Philippines China Turkey Mexico Poland Hungary Taiwan Estonia Brazil Chart 8: Formal Manufacturing: Productivity vs. Wages FY01 Output per Person Engaged Wages per Worker Gross value added per workers FY02 Manufacturing sector covered by ASI, FY01=100 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Source: The Conference Board, World Bank; YES BANK Limited Source: ASI, CEIC; YES BANK Limited As a consequence of the shifting sector dynamics, employment elasticity of growth tends to vary, making the pace of GDP growth less important. Indeed, employment elasticity for India has reduced over time, from ~0.6% over FY73 to FY78 to ~0.2% in FY94 to FY12 (See RBI's Estimating Employment Elasticity of Growth for the Indian Economy, 2014). The reduction has been due to a combination of factors: Technological advances resulting in the use of less labour intensive production processes. Employment elasticity turning negative in agriculture which has seen significant levels of over employment. 24 Employment Unlocking the demographic dividend

33 Assessing Required Pace of GDP Growth As discussed earlier, a high level of GDP growth will not be enough to ensure employment generation, however it might be instructive to assess how much GDP growth is needed to generate required employment. This will provide a yardstick to judge if the current rate of growth is adequate or not. To estimate this, we measure the amount of employment required to be absorbed over the next 10 years and then calculate the required GDP growth rate using employment elasticity: Jobs Required over the Next 10 Years India will be adding around 12 million people every year to the working age group (15 to 64 years) for the next 10 years. Out of which only 6.1 million per year will be entering the labour force (assuming labour force participation rate of 52%), which is the required rate of jobs. Employment Elasticity We need to assume employment elasticity which will hold for the next 10 years. RBI has estimated India s employment elasticity at 0.2 for the period FY94 to FY12 (see RBI's Estimating Employment Elasticity of Growth for the Indian Economy, 2014). As mentioned earlier, elasticity tends to reduce with time. To account for this we assume elasticity is marginally lower at We estimate that the required rate of real GDP growth to generate 6.1 million jobs per year will be ~ 7.5%, putting to rest the criticism that India will need to grow at a much faster pace to generate the required rate of jobs. The required level of GDP growth is very achievable in context of India s historical performance, averaging 8% plus growth between FY04 to FY11. Employment Unlocking the demographic dividend 25

34 Sectors Specific Employment Generating Capacity To gauge which sectors will continue to be employment generators in the future, we look at sector specific employment elasticity and future growth potential. Chart 9: Employment Creation vs. GDP Growth Construction is the most labour intensive in t e r m s o f s e c t o r s p e c i f i c employment elasticity, with RBI estimating that a 1% growth in the sector will result in 1.03% rise in employment. The sector s future growth potential will be supported by India s growing need for i n f r a s t r u c t u r e i n v e s t m e n t estimated at INR50 trillion (as per FY19 Union Budget). Support from Central Government expenditure is expected to continue with G o v e r n m e n t i n f r a s t r u c t u r e expenditure expected to rise by 21% to ~INR6 trillion in FY19 (Union Budget) Net employment change (million) GDP Growth ~rhs FY91 FY93 FY95 FY97 FY99 FY01 FY03 FY05 FY07 FY09 FY11 FY13 FY15 FY Source: CEIC, INDIA KLEMS database; YES BANK Limited Chart 10: Employment vs. Labour Force Addition million Net employment change (million) Addition to labour force FY01 FY03 FY05 FY07 FY09 FY11 FY13 FY15 FY17 FY19 FY21 FY23 FY25 FY27 Source: INDIA KLEMS database, LB EUS, UN; YES BANK Limited 26 Employment Unlocking the demographic dividend

35 Services Sector is relatively less labour intensive with a 1% rise in sector growth generating 0.3% rise in employment. However, the sector s strong growth performance avg. at ~9% (services GVA) over the last 10 years has resulted in a steady rise in share of total employment to 30%. Within services sector, trade is one of key employers, accounting for 10% share in overall employment and is expected to be supported by structural reforms such as GST which will make India a unified market and the presence of a large domestic market with a population of more than a billion people. Agriculture The employment elasticity of the sector has turned negative as per RBI estimate, which is a reflection of gradual reduction in over employment in the sector. While the scope to increase employment in farm sector might be limited due to small size of average landholdings and over employment, there is scope to improve employment in livestock, forestry and fishing which accounts for 40% share in total agri GVA. Manufacturing While manufacturing s performance has been comparable to services in terms of growth avg. at 8% over the last 10 years, its share in employment has remained unchanged at 12%. This is despite the fact that in terms of employment elasticity manufacturing is similar to services. The weak manufacturing sector employment performance is due to decline in employment (on net basis) between FY05 to FY10, which coincided with high growth phase for the sector with avg. real growth of 10% (GVA manufacturing). Reduction was seen in labour intensive sectors - food, textiles and wood manufacturing, and would have likely taken place in the informal sector as overall formal manufacturing sector employment (captured by ASI) grew at an average pace of 0.7 million per year. Indeed, the employment elasticity of organized manufacturing is relatively higher at ~0.6 as per RBI vs. overall manufacturing elasticity of 0.3. The sector s future growth potential is supported by India s relatively low labour cost, improvement in ease of doing business, structural reforms such as GST and insolvency resolution supporting capex cycle revival, global demand recovery and policy support from the Government s Make in India initiative. Employment Unlocking the demographic dividend 27

36 28 Employment Unlocking the demographic dividend

37 Policy Perspective - Improving Employment Generating Capacity of Growth iv The employment generating capacity of growth can be improved with targeted policy support to labour intensive sectors and improving ease of doing business. Resolution of Stalled Projects A low hanging fruit for the Government is resolving the overhang of stalled investment projects worth INR 13.2 trillion, accounting for 7.3% of projects under implementation, which could generate incremental GDP growth of ~ 2% (assuming an Incremental Capital Output Ratio of 4.2%), and translating into ~ 1.7 million jobs (assuming employment elasticity of 0.17%). As per CMIE, the key issues plaguing investment implementation are lack of environmental clearance, fuel and raw material supply and lack of funds. These three factors account for nearly 40% of the stalled projects and don t require big bang reforms but freeing-up stalled projects can deliver significant results. Employment Unlocking the demographic dividend 29

38 Chart 11: Employment. Shift from Agricultue to Construction & Services Chart 12: Within Services Sector Employment Trends 60% 50% 40% 55.9% Share in total employment 43.6% 12% 10% 8% 9.6% Share in total employment 10.0% 30% 20% 10% 0% 25.9% 30.2% 13.6% 11.2% 11.7% 6.2% FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 6% 4% 2% 0% 3.7% 2.5% 0.9% FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 4.3% 3.1% 2.0% FY14 FY15 Agriculture Manufacturing Construction Services Trade Transport and Storage Business Service Education Sourc: INDIA KLEMS database; YES BANK Limited Source: INDIA KLEMS database; YES BANK Limited Empowering MSMEs The MSME sector is the backbone of the economy accounting for 6% share in manufacturing GDP, 24.6% share in services GDP and 45% of exports. The labour intensive nature of the industry makes it a key source of employment with 117 million employees spread over informal and formal MSME. The recent measure of reducing corporate tax rate to 25% for companies with a turnover up to INR2.5bn in the FY19 Union Budget i s e x p e c t e d t o i m p r o v e profitability of the sector. 30 Employment Unlocking the demographic dividend

39 Policy focus has to be on improving the competitiveness of MSMEs through more investment, technical infusion and greater formalization. The following are the key constraints facing the sector and possible policy solutions: Access to Credit A major constraint facing the sector is sources of financing which limits their ability to scaleup. Indeed 78% of non agriculture MSMEs are self-financed. The Government is addressing this through the Micro Units Development and Refinance Agency Ltd (MUDRA), which provides credit to MSMEs. Under the scheme, outstanding loans have grown by 26.5% in FY17 and loans to new entrepreneurs have grown by 16.6%. In the FY19 Union Budget, the Government has increased the lending target for MUDRA to Rs 3 trillion. To further improve credit penetration comprehensive data needs to be collected so that policies can be tailored to make credit access easier, along with special dispensation for MSME for credit compliance norms. Formalization 94%of MSMEs are unregistered and this is more prevalent in the case of services at 73.85% vs. manufacturing at 26.15%. This is due to high concentration of unregistered firms in retail trade services. Policy measures to promote formalization among MSMEs will be an imperative in increasing the reach of Government programs. This can be achieved by continuing to reduce compliance burden for the smaller firms in the formal sector. Public Policy Procurement The Central Government has mandated minimum procurement of up to 20% of total annual purchases from MSMEs. This can be extended to state-level procurement. Productivity A key factor hampering productivity of MSMEs is lack of investment which is highlighted by the fact that formal manufacturing sector which has more than 10 workers (covered under ASI survey) has fixed investment per enterprise 12 times that for a registered MSME (part of formal sector). This can be addressed by easier access to formal sources of credit, increased Government support for MSME clusters with higher resource allocation and better infrastructure facilities. Employment Unlocking the demographic dividend 31

40 Making it Easier to Start Companies India is essentially a country of entrepreneurs with 47% of workforce self employed (FY16 labour bureau annual employment report), only 16.2% salaried employees and the remainder mostly casual labourers. Similarly among enterprises (excluding crop production), 44% are own account establishments i.e. companies run without any hired workers (Economic census FY14). Against this backdrop, making it easier to start a business will go a long way in generating employment. As per World Bank Ease of Doing Business, it takes around 30 days to start a business in India (applies only for the formal sector) vs. 15 days in South Asia and half a day in the best performing country in this parameter New Zealand. Easier compliance norms will also incentivize enterprises to scale-up and not limit the number of workers to avoid labour laws. Chart 13: MSMEs mostly Self-Financed 1% 1% 2% 7% Source: Ministry of MSME; YES BANK Limited Chart 14: Large Share of Self Employed % 16.2 Sources of finance for MSMEs 78% Employed persons by category of employment (%) 47.2 Self-finance Financial Assistance from Govt Self employed Wage/salary Contract workers Casual labour Source: Labour Bureau EUS FY16; YES BANK Limited Borrowing from financial institutions Borrowing from non-institutions / money lenders Loan from self help group Donations / transfers from other agencies 32 Employment Unlocking the demographic dividend

41 Employment Unlocking the demographic dividend 33

42 34 Employment Unlocking the demographic dividend

43 Automation Threat or Hype v Given that nearly half of the workforce is employed in agriculture, majority of enterprises (95%) are small in size employing up to 5 workers and lower labour costs, automation is unlikely to be a nearterm threat for India as the cost to deploy automation might outweigh the benefits. However, in the medium to long-term automation has a potential to threaten 69% of the jobs in India as per World Bank estimates (The World Bank Group s Mission: To End Extreme Poverty, Oct 2016). The impact of automation is being felt in certain high skill sectors such as IT, e-commerce and financial services. Employment growth in IT sector based on the limited set of 10 large listed companies does show a slowdown over the last few years, which could be partly attributed to automation and rise of protectionist measures in DMs. At the same time, technology changes have also resulted in creation of new avenues of employment such as outsourcing, virtual reality, big data and mobile app developer etc. Indeed as per Nasscom, IT-BPM sector is expected to add million new jobs by But technological advancements will and have raised the skill bar, resulting in more specialized roles which will be out of reach for majority of the working age population, making more investment in education and vocational training an imperative. Employment Unlocking the demographic dividend 35

44

45 Conclusion India s young labour force is a key differentiating factor in an aging global economy, whose share of working age population is estimated to reduce to 62.8% by 2040 (world ex. India) from 65.2% in In contrast India will continue to benefit from a positive demographic dividend with the share of working age population estimated to rise to 68.4% by 2040 from 66.2% in The demographic dividend can be a boon or a curse depending on whether the economy is able to generate enough jobs and more importantly efficiently utilize its abundant labour resource. Indeed, the present utilization of labour resources is inefficient with 43% of the workforce which is employed in agriculture, only generating 15% of GVA. In our view the following steps will be critical in unlocking the demographic dividend: Increasing the allocation of the workforce towards higher growth potential sectors such as services and manufacturing. Incentivizing formalization of firms by easing compliance burden of the various labour laws. This will enable improvement in labour productivity as firms scale-up and invest more with better access to formal credit channels. MSMEs which are labour intensive due to their small scale limiting the level of mechanization possible, should be provided continued policy support through better access to formal sources of credit and infrastructure facilities. Policy support for labour intensive manufacturing sectors such as food products, textiles and leather, mineral and metal products which account for 60% of the employment share within manufacturing sector. Improving the employability of labour force through more investment in education and skill development as well as incentivizing private sector involvement. Development of labour statistics will also be important in our view, as it will give Government vital feedback on impact of policies on labour market. Development of high frequency labour statistics from sources such as GSTN, EPFO and NPS would give the Government a real time employment indicator which will enable more efficient policy changes. Employment Unlocking the demographic dividend 37

46 Annexure 1 Labour Reforms in India NREGA Labour law and social security measure that aims to guarantee right to work NREGA was introduced by the Government in 2005, with a primary objective of enhancing likelihood security in rural areas by providing at least 100 days of employment in a financial year to each household who are willing to provide unskilled labour. The secondary objective of the scheme is creating sustainable rural livelihoods through creation of sustainable assets in such as roads, canals, ponds, etc and augmenting productivity. Other objective of the scheme is to strengthen rural governance via decentralization and process of transparency and accountability The scheme has been generating employment exponentially since its inception. In , 905 million person days of employment was generated while, in , 2360 million person days of work was generated. So far in FY18, 1600 million person days of work has been generated and Government expected to exceed FY17 s achievement, as the demand for work accelerates in December Benefits accrued over years in addition to employment generation: Increase in minimum wages and wages earned per day due to increased bargaining power of labours, increase in earnings per household, financial inclusion, reduction in distress migration, improved agricultural productivity and livelihood diversification, among others. Reducing Compliance Burden As a part of labour law reforms, Government has taken initiative of simplifying, rationalizing and a m a l g a m a t i n g 4 4 l a b o u r a n d employment laws into 4 labour codes encompassing (i) Wages (ii) Industrial Relations (iii) Social Security & Welfare and (iv) Safety, health & working conditions. Amalgamating laws into codes will remove multiplicity of definitions and authorities, thus, leading to ease of compliance. 38 Employment Unlocking the demographic dividend

47 44 Labour and Employment Laws LABOUR LAWS IN INDIA Current Structure The Minimum Wages Act, 1948 The Payment of Wages Act, 1936 The Payment of Bonus Act, 1965 The Equal Remuneration Act, 1976 Industrial Dispute Act, 1947 Trade Unions Act, 1926 Industrial Employment (Standing Orders) Act, existing Central Labour Laws The Employees' Provident Fund & Miscelianeous Provisions Act, 1952 The Payment of Gratuity Act, 1972 The Employees' State Insurance Act, existing, laws that deal with working conditions and occupational safety and health Proposed Rationalisation Code on Wages Code on Industrial Relations Code on Social Security & welfare Code on occupational safety, health & working condiyions Minimum Wage Law The Wage Code Bill empowers the Centre to set a minimum wage across sectors with states mandated to maintain the level of wages set by the Centre. It aims to achieve multiple objectives of (i) Providing income security to workers via a minimum wage guarantee (ii) Creating a more effective, transparent and userfriendly labor-law system and (iii) Facilitating further ease of doing business in India. The minimum wage will be fixed taking into account factors such as skill, arduousness of work, and geographical locations among others. Further, it will be applicable to all workers in both the organized and unorganized sectors To ensure labor welfare, the Code mandates (i) fixation of number of hours of work on a normal working day (ii) provide a day of rest in every period of 7 days (iii) provide for payment for rest day at a rate not less than the overtime rate. The Government shall review or revise minimum rates of wages at an interval of five years, in accordance with the changes in cost of living index. Benefits It would bring transparency and accountability which would lead to more effective enforcement. Widening the scope of minimum wages to all workers would be a big step for equity Other reforms focusing on increasing women s participation and promoting social security Factories Bill Increases cap on overtime in factories to 100 hours and 125 hours (under exceptional cases) Maternity Benefits Enhances maternity leaves to 26 weeks from 12 weeks. Employee Compensation Mandates payment of compensation to employees and their dependents in case of death/injury caused by industrial accidents Employment Unlocking the demographic dividend 39

48 State level best Practices RAJASTHAN Industrial Dispute Act, 1947 Relaxes hiring and firing policy, stricter norms to form trade unions. Allows the organization employing 300 workers to lay off workers or close down without taking Government s prior approval. Under the old regime, the bar was 100 workers. Factories Act, 1948 Rises the threshold limit for companies under the Act, from 20 to 40 workers Contract Labour Act, 1970 Relaxing retrenchment policies for temporary workers GUJARAT JHARKHAND The Labour Law Introduces compromise as a dispute resolution mechanism between employers and workers. Ban of strike in public utility services Online compliance with labour regulations 40 Employment Unlocking the demographic dividend

49 REFERENCES 1. Jobs and Skills: The Imperative to reinvent and disrupt NASSCOM, May MSMEs in India The Road Ahead CII, Oct Fourth All India Census of MSMEs FY07 Ministry of MSMEs, Sep India Labour Market Update ILO, July NSSO 68th round Informal Sector and conditions of Employment in India FY12, July NSSO 68th Employment and Unemployment Situation in India FY12, Jan Report on Employment & Unemployment Survey FY16 - Labour Bureau 8. Skill India annual report FY17 Ministry of Skill Development 9. FY17 annual report Ministry of MSMEs 10. Estimating Employment Elasticity of Growth for the Indian Economy RBI, June Sixth Economic Census FY14, CSO, Sep Annual Survey of Industries FY15 CSO, Mar NSSO 73rd round Key Indicators of Unincorporated Non-Agriculture Enterprises (ex. Construction) in India FY16, June Measuring Productivity at the Industry Level THE INDIA KLEMS DATABASE 2016, Nov 2017 Employment Unlocking the demographic dividend 41

50 YES BANK, India s fourth largest private sector Bank, is the outcome of the professional & entrepreneurial commitment of its founder Rana Kapoor and his top management team, to establish a high quality, customer centric, service driven, private Indian Bank catering to the Future Businesses of India. YES BANK has adopted international best practices, the highest standards of service quality and operational excellence, and offers comprehensive banking and financial solutions to all its valued customers. YES BANK has a knowledge driven approach to banking, and a superior customer experience for its retail, corporate and commercial banking clients. YES BANK is steadily evolving as the Professionals Bank of India, with the unrelenting vision of INDIA s FINEST QUALITY LARGE BANK by YES Global Institute, the practicing think tank at YES BANK, has been instituted to create shared growth through innovative development models, stakeholder engagement and policy advocacy. YES Global Institute, through its well defined knowledge verticals, is driving highest quality research and policy recommendations in key areas of Innovation and Culture, Sustaining Livelihoods, Policy Development and Sustainability for India s development. As one of India s new age think-tanks, the Institute creates platforms to bring together new technologies, global best practices, business models and innovative approaches which can be applied to fast-track India on a double-digit GDP growth path. 42 Employment Unlocking the demographic dividend

51 Business Economics Banking Dr. Shubhada Rao Group President & Chief Economist She is responsible for Business Economics Banking providing macroeconomic research outlook at the Bank. Shubhada brings with her over 28 years of experience in academia and industry. She is an active member of the Economics Committees of Industry Associations and is currently a member of CII National Economic Policy Council, New Delhi and a member of the Monetary Policy Group Indian Banks Association (IBA). Under her guidance, the Business Economics Banking team has won the Reuters Most Accurate Forecaster Award for 2016 for the Indian economy. Earlier in 2013, they were ranked amongst top 3 forecasters for India by Bloomberg Markets Magazine and also the top currency forecaster. shubhada.rao@yesbank.in Vivek Kumar Senior Economist vivek.kumar1@yesbank.in Yuvika Oberoi Economist yuvika.oberoi@yesbank.in Prakriti Shukla Economist prakriti.shukla@yesbank.in Gaura Sengupta Economist gaura.sengupta@yesbank.in Sanket Tandon Economist sanket.tandon@yesbank.in Swati Arora Economist swati.arora1@yesbank.in Employment Unlocking the demographic dividend 43