Opinion In India, labour needs as much focus as capital

But why is the capital intensity of production rising in a labour-abundant economy? There can be two factors at play — one, demand-side factors, which make the adoption of capital-intensive techniques imperative for increasing productivity and value added at low cost, and two, supply-side factors, which impinge on the availability of complementary quality or skilled labour.

If the relative cost of capital or machinery falls, it incentivises producers to invest in more capital-intensive technology, even without any gains in productivity. Value added has increased the most in the services sector, which is reflected in the rising contribution of the services sector to GVA (Gross Value Added) and to GDP. However, the manufacturing sector’s contribution has been stagnant while agriculture’s contribution to GDP has declined. Although real wages have not risen significantly, the price of capital or new machine-based technology is falling rapidly with technological progress worldwide. At the same time, less than 10 per cent of our labour force has any formal technical or vocational training and evidence suggests that the majority of our educated youth do not possess skills that make them employment ready.

With the advent of new technologies that favour particular skills, there is likely to be devaluation or destruction of tasks that become redundant. This “skill-biased technological change” lowers the demand for labour by firms as they shift towards more productive and relatively cheaper machine-based technologies. It is, therefore, imperative to continuously equip and re-equip our labour force with skills that complement new technology and machinery. Given this scenario, what are the policies that need to be adopted to incentivise hiring more labour in the formal sector?

The central government has been following two, somewhat parallel, tracks to address the jobs deficit: On the one hand, it aims to increase production capacity, for instance through the PLI scheme, and on the other, incentivise the private sector to hire more labour while also skilling them, through the ELI and other internship programmes.

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. Specifically, over 50 per cent 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. Hence, there is a mismatch between the weight of the budgetary allocation and the potential for employment creation. The emphasis on high-end products is also constrained by the lack of adequate supply of labour with complementary skills, which could further stymie creation of new jobs. The majority of our current labour force possesses low or medium skills.

The ELI scheme, on the other hand, intends to create jobs in the formal sector, effectively through government cash transfers via the EPFO, and in relatively labour-intensive sectors, by bearing some of the risk of hiring untrained labour by private firms. 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). It is yet to be seen whether the scheme will be successful in creating durable employment. More importantly, data would be needed to follow interns over time to evaluate whether the scheme leads to sustainable skilling. It is, therefore, an open question how the ELI scheme can address the fundamental issue of encouraging employers to invest in not just initial skilling but also upskilling the workforce to complement new technologies.

Simply put, policymakers should consider linking the production and labour skilling strategies to create a comprehensive and cohesive agenda to not only expand production capacity but also ensure a pipeline of workers with requisite, complementary skills in these sectors. Such an approach would address both the demand- and supply-side factors that impinge on job creation, while also inducing the structural transformation of the economy towards high-value manufacturing.

Currently, each ministry focuses on utilisation of its own PLI budget with little (if any) coordination with the ministries of labour and skilling to map where the current and (expected) future supply of (skilled) labour will come from. The current structure of ELI incentives could also be amended from flat to graded, that is, transfers would increase with each level of skills that is certified to support both on-the-job training and upgrading of skills. The ELI scheme’s focus could also move further back into the skill supply chain — to re-haul and reward training institutes and programmes (such as ITIs) based on employment and earnings outcomes through skills that are linked to the projected future demand.

At the same time, we cannot ignore the long-standing issue of loosening our labour regulations that artificially inflate the cost of labour and encourage the adoption of capital intensive technologies. The onus of adopting flexible labour policies, however, lies with the state governments.

An agile and dynamic policy framework that focuses on creating a workforce for the future to advance the agenda of Viksit Bharat is critical. As we collectively move up the production value chain, we must simultaneously invest in both the quantity and the quality of our present and future workforce.

The writer is professor of Economics at the ISI (Delhi) and visiting professor at NCAER