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Growth alone can't lead to more jobs, admits World Bank: At current rate, India would "require" 18% GDP growth

By Our Representative
Even as recognizing that “India’s economy has bottomed out from the deceleration caused by one-time policy events such as demonetization and GST introduction”, and the GDP growth has “accelerated to 6.5 and 7.2 percent in Q2 and Q3 FY17/18, with private consumption remaining its main driver”, the World Bank has warned, “Growth alone will not be sufficient for employment rates to catch-up with those of comparable countries.”
Over a 20-year transition period, the number of new jobs needed every year would be gigantic, up to 13 million per year, the World Bank report, “South Asia Economic Focus Spring 2018: Jobless Growth?”, says. It insists, “Assuming the same job creation per percentage point of growth as before, growth rates should reach 18% in India.” As of today, it estimates, India creates between 540,000 and 750,000 jobs per percentage point of GDP growth.
The report says, “These rates are implausibly high, implying that rapid growth alone will not be enough”, adding, if India is “serious about increasing employment rates, more jobs will need to be created for every percentage point of growth”. However, ironically, it does not out what should be done at the policy level for to achieve a higher employment rate.
In fact, according to the World Bank, while the share of the working-age group in the total population increased by around 0.5% per annum in the decade from 2005 to 2015, “The employment rate decreased on average more than 1.5% per year in India.”
The World Bank recalls, “The relationship between economic growth and jobs is often interpreted in connection with Okun’s Law, which posits that when growth accelerates above potential the unemployment rate falls below its ‘natural’ level.” It adds, “The intuition is straightforward: if growth accelerates, the demand for labor increases and, given that the labor force is stable in the short term, the unemployment rate must decline.”
Pointing out that this empirical regularity was first identified by Arthur Melvin Okun in the early 1960s for the US (Okun, 1962), the report says, “Okun’s Law is central to modern macroeconomic analysis and is a key tool for policymaking.”
Suggesting that this has not worked as far as India is concerned, which has seen a deceleration in jobs creation, the report says, “As economies develop, it is expected that individuals will move out of agriculture into more productive, non-agricultural employment.” It adds, “Such transformation … was slower in India”, with manufacturing employment not increasing.
Providing a mixed picture of the state of the economy, the report regrets, while investment growth picked up in India “and grew at 12% year-on-year in Q3 FY17/18, investment rates remain below levels. Services accelerated during FY17/18, with sectoral value-added growing at 7.7 percent in Q3 FY17/18.”
It adds, “In contrast, agricultural growth decelerated to 2.7 percent growth during the summer, driven by uneven rainfall and a high base effect. Growth in manufacturing and construction, most affected by GST and demonetization, accelerated to 8.1 and 6.8 percent growth during Q3 FY17/18.”
The report says, “Growth has bottomed out and is expected to stabilize at 7.5 percent in the medium-term. GDP growth is projected at 6.7 percent during FY17/18. A further acceleration to 7.5 percent by FY19/20 is dependent on a sustained recovery in private investments, which is expected to be supported by policy measures that improve the investment climate.”
Against this backdrop, the report says, “Two crucial engines of growth have underperformed. First, private investment has been low compared to pre-crisis levels, driven by factors that constrain credit supply and investment opportunities. Second, exports have slowed and India’s share in world trade has stagnated.”
“With lackluster export performance and rapidly growing imports, trade deficits are gradually widening. India’s monthly trade deficit increased by roughly one third in recent months, from USD 19 billion in September 2016 to USD 25 billion in January 2018”, the report says, adding, “In India, on the other hand, only imports are expected to increase, while exports are seen as stable.”

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