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Unemployment is a function of state policies

We must take this debate beyond national statistics and scrutinise the local business climate across states in India

analysis Updated: May 10, 2019 19:33 IST
Shamika Ravi
Shamika Ravi
Unemployment Rate
The strong variations across states implies that unemployment is a function of state economic policies and we need to take this debate beyond national statistics and scrutinise local business climate across states in India(Anshuman Poyrekar/HT)

Unemployment is not only a political issue but also a social and economic phenomenon that begs immediate and appropriate policy responses. In recent months, opposition parties in India have rallied to make employment central to the political debate. Discussions have been mostly based on journalistic analysis of a leaked government report. Without access to the authentic report and, more importantly, the unit level data, it will be speculative to assess whether unemployment has worsened or improved in the past five years.

The escalation of the political debate, however, calls for an analysis of the most recent data on employment and unemployment in India. This is the survey of 7,81,793 members of 1,56,563 households, conducted by the ministry of labour and employment, Government of India, in 2015-16. Our analysis yields some empirical facts on India’s employment situation which are important to move the current data-free discourse in the country. The data clearly shows that the jobs story in India is fundamentally unfolding at the local, state-level with remarkable noteworthy peculiarities.

This survey provides accurate estimates of the structure and composition of India’s labour force, but is not comparable to the National Sample Survey (NSS). The NSS is collected from July to June, whereas this survey was conducted from April to December. Besides serious problems of seasonality, measures of disguised unemployment are required to analyse changes over time. In this analysis, therefore, we focus on the current status of unemployment in India. First, it is critical to note that the labour force participation rate (LFPR) in India is peculiarly low at 50%. That is, only half of the working age population is actively engaged in the labour market — by either working or seeking employment. The developed Organisation for Economic Co-operation and Development nationshave an average of 72% LFPR, while China reported 75% LFPR from 1990-2017. India’s LFPR is significantly low even in comparison to other emerging Asian economies like Vietnam (77%), Indonesia (70%), Thailand (69%) and Bangladesh (57%).

Let us now study the unemployment rate —the proportion of population that sought work but did not find any. This is estimated for a reference period of one year before the survey was conducted. Focusing on the Usual Principal Status Approach, we calculate the unemployment rates across India to be 5%. What is striking, however, is the variation across states within India. The states of Tripura, Sikkim and Kerala have extremely high unemployment rates of 19.7%, 18% and 12.5%, respectively. At the same time, states such as Chhattisgarh, Karnataka and Gujarat have significantly lower unemployment rates of 1.9%, 1.5% and 0.9% respectively. The staggering variations across states shows how state-level local policies have a significant impact on job creation in the Indian economy.

The best job creators are the states that have ranked highest in reforming their ease of doing business environment. Over the last several years, Gujarat, Karnataka and Chhattisgarh have consistently ranked high (“top achievers”) in the Ease of Doing Business (EoDB) rankings. At the same time, states such as Kerala and Tripura have lagged significantly behind in reforming their business friendliness and have gained the euphemism of “aspirers” for years in their EoDB ranking. Hence, promoting reforms that ease the regulatory burden at the state-level and hence the creation of a supportive environment for doing business can help strengthen the ability of businesses to create jobs and offer opportunities for the economy and its residents to prosper.

To understand the nature of unemployment, it is also important to disaggregate across rural-urban areas in the population. First of all, unemployment rates for urban India (4.9%) and rural India (5.1%) are very similar. And at an overall level, we find that states that are generating jobs seem to be distributing them across their rural and urban areas. States like Gujarat and Karnataka have low unemployment rates in their rural and urban areas alike, whereas states like Kerala and Tripura have consistently high unemployment rates in both their rural and urban areas. This is largely consistent across states except a few places like Goa and Himachal Pradesh where unemployment is concentrated in rural areas whereas in states like Meghalaya and Chhattisgarh, unemployment is largely an urban problem. This highlights that targeted local state-level policies are required to address unemployment in different states of India.

The strong variations across states implies that unemployment is a function of state economic policies and we need to take this debate beyond national statistics and scrutinise the local business climate across states in India. The dynamic states, which are actively improving their business environment, have also generated most jobs for their people, while states that have resisted reforms and easing of the regulatory burdens have lagged behind. Enterprise development is a fundamental requirement for job creation in any economy. The enormous differences across states have shown us that states of India are no exception to that.

Shamika Ravi is research director and a senior fellow at Brookings India, and a member of Economic Advisory Council to the Prime Minister

The views expressed are personal

First Published: May 10, 2019 19:33 IST