The primary and secondary sectors are the ones with significant potential for job creation. We have to recognise there are no short-term silver bullets. The impact of the long term will come when the virtuous cycle starts accelerating, said Dr Krishnamurthy Subramanian, Chief Economic Advisor at the Times Network India Economic Conclave 2021 in a Q&A with Tanvi Shukla. Edited excerpts:

A few years back, when India was the talk of the world in terms of the growth we were showing, even then jobs and employment opportunities were a concern. How big of a
challenge
is tackling unemployment and creating jobs in today’s context?
Before I answer that question, let me build on a few points. If you look at the change in the model for economic development that India is witnessing, we can think about that as a tripod that has three important legs to it. The first leg is exclusive focus on growth, together with efficient welfare which recognises that you need growth to generate those resources for efficient welfare. I think this government has already demonstrated capably the ability to do efficient welfare. That is the first leg of the tripod. The other two legs are about how to bring about that growth. The second leg is thinking about wealth creation as a boon, not a bane. Thereby enabling and empowering the private sector, the socialist era being given a burial and marrying the invisible hand of the market with the hand of ethical wealth creation. That is the second leg.

The third one is even more granular: how do we go about getting that growth? That is the specific question that you have asked, and I will elucidate on that. This is about a virtuous cycle that starts from private investment. From private investment it goes on to productivity and growth, which creates jobs and jobs put money in the hands of people. Aggregate demand increases in the economy, anticipating the increase in aggregate demand, investment goes up. That is where it is important to fit the conversation on employment in this tripod, in the vertex relating to the virtuous cycle.

Let us understand what has been the spirit of reforms that have been carried out. If you look at the focus there, the emphasis has been on enabling the primary and secondary sectors of the economy. Why? Because the secondary sector, which is manufacturing, is extremely critical for job creation. If look across the world, for instance the United States after the Second World War, it grew by creating a large middle class. Towns like Detroit, etc, actually grew from organised manufacturing. In fact, their decline has mirrored the moving away from organised manufacturing. What India needs today is significant number of jobs to be created in the manufacturing sector. At the same time also moving people away from agriculture into manufacturing. That is where the emphasis of reforms lie. Whether it is the PLI scheme, or the change in the MSME definition, economies of scale can be availed.

The phenomenon of dwarfism is one of the most important aspects that we need to focus on. The 2018-19 survey had shown that by the time a firm in the US becomes 30 year old from being 5 year old, the firm has created 7 times as many jobs. In India, that same firm by the time it is 30 year old has created only 40% more jobs, or 1.4 times. There you see the crux of the problem of job creation. This is not an issue to which there are short-term fixes. I think it is important to recognise that small firms that grow are the ones that really create a lot of formal sector jobs which are really important at the macroeconomic level to push aggregate demand. Therefore, the emphasis on reforms has been on enabling sectors that can deliver these jobs, which is your primary and secondary sectors. I think as the pieces of the puzzle have been put together especially over the last year, year and a half, and with the budget being the crescendo of that, I think you will start seeing these effect. What you have to recognise is that the virtuous cycle always starts from private investment and as we speak, the investment climate has already started going up very well. The other effects will come but will come with lags and I have no doubt about that.

The 40% number I am assuming would be pre-pandemic. What if we factor in the job losses or the pruning that many corporates would have done to ensure that the profits remain and operations continue?

Let us understand the evidence very clearly. This is an average five-year-old firm growing to be a 30-year-old firm, so this cannot be data that is interpreted one year before the pandemic. It is a long run phenomenon that is happening. Let us not interpret it in short term. We will make mistakes on that. The clear point that is being mentioned is that there has been a long-term problem of dwarfs in the economy, firms that age but do not grow and thereby do not create jobs. Reforms are being carried out to address that central problem.

Will it be fair to say that we are creating 10 jobs when there are 15 people looking for one, and that number perhaps in the last few years has gone to 20?


At the macroeconomic level, every variable, whether it is investment, growth or employment, are both cause and effect. I think this is extremely important to understand. What we had shown in the 2018-19 survey was by looking at countries that grew at least 5% in real terms for at least a decade. What was the trigger? The trigger was investment, and employment and growth are outcomes of that. If you think about growth as basically the investment rate in the country, times the ICOR — what is called the incremental capital output ratio –because of the public investment which crowds in private investment, your investment rate should go up. And because of asset monetisation and privatisation, and thereby assets moving into more productive hands, your ICOR will also improve. That is what will drive the improvements in growth and will bring jobs together with the emphasis on the sectors.

While I am talking about growth overall, the emphasis on primary and secondary sectors are the ones with significant potential for job creation. I think we have to recognise there are no short-term silver bullets. What you have is long term. The impact of that, mark my words, will come in when the virtuous cycle starts accelerating.

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