Creation of 115 million non-farm jobs over next decade critical to sustaining growth, says McKinsey
Notwithstanding the scepticism over the new gross domestic product (GDP) numbers, India is likely to be the fastest-growing emerging economy till at least the end of the current decade.
McKinsey, in a new report, projects India to grow at 7.7 per cent between 2016 and 2020, significantly outpacing other emerging economies. China is expected to grow at 6.4 per cent over the period, while other emerging economies like Brazil and Turkey are likely to grow at 2.2 per cent and 3.3 per cent, respectively.
Rapid urbanisation - as McKinsey estimates India to be 41 per cent urbanised by 2030, up from 31 per cent in 2011 - means growth will be driven primarily by cities and satellite towns. According to estimates presented in the report, roughly 77 per cent of India’s economic growth between 2012 and 2025 will come from 49 clusters of districts with metropolitan cities at their nucleus.
Achieving these growth rates over a long stretch of time will radically change the size of the economy with some Indian cities reaching the size of the current middle-income countries. Mumbai, for example, will become equivalent to Malaysia of today, representing a massive market opportunity worth $245 billion.
Delhi’s economy will be equal to that of the Philippines. In fact, Delhi, Ahmedabad, Hyderabad and Bengaluru together will have an annual consumption of $80-$175 billion each by 2030.
But as has been pointed out, the report also mentions that sustaining this growth is largely predicated on the degree to which rising urbanisation creates non-farm employment for the ever-growing pool of workers. McKinsey estimates that India needs to create roughly 115 million non-farm jobs over the coming years.
Herein lies the problem. Despite the acceleration in growth in the last decade, job creation has been abysmal. Most jobs were created either in low-end construction jobs or in service sectors such as finance, which require a high level of skills. Job creation in the labour-intensive manufacturing sector was negligible.
Thus for the millions trapped in the low-productive agricultural sector, avenues to shift were simply not available.
Economists have repeatedly argued that with China moving up the value chain, India is well-positioned to grab a large share of the low end of manufacturing that the country is vacating. As these jobs require relatively low skills, creation of a labour-intensive manufacturing sector would facilitate the shift away from agriculture.
But so far, India has failed to take advantage of this with other countries, notably Bangladesh, Cambodia and Vietnam, grabbing a lion’s share of manufacturing that is shifting out of China.
Also, one must point out that despite rising labour costs, China isn’t really vacating low-end manufacturing. The most obvious example being textiles. In 2014, China exported $287 billion worth of textiles - hardly a sign of vacating territory. Add to this, the challenge of increased automation and premature de-industrialisation is a grim reality.
While some states - most notably Chhattisgarh, Gujarat, Himachal Pradesh and Jharkhand - have made significant strides in boosting manufacturing, others like Uttar Pradesh, Kerala, Bihar and West Bengal continue to lag. How much the NDA government’s Make in India campaign is able to boost domestic manufacturing remains to be seen.
But the creation of non-farm employment in itself is not enough to ensure that the millions living in grinding poverty are assured of a decent standard of living.
In addition to creating non-farm employment, McKinsey argues that improving nutrition, health and education outcomes, raising public spending on social services in areas such as health care, sanitation and drinking water and more than doubling agricultural growth from the historical average of two per cent to 5.5 per cent is central to helping more than half a billion people cross the threshold of consumption required for an economically empowered life by 2022.