ECONOMICS


UNEMPLOYMENT CRISIS

Unemployment is a great tragedy.The man who hopelessly seeks work in order to earn bread for his children is a living reproach to civilization :Carlos saavedra  lamos

The Indian economy is growing at a rate of more than 7% for last three years. Considering the economic slowdown worldwide it is a commendable growth rate  for a large major economy.If this growth rate can be maintained India is likely to become a thirty trillion economy by 2047.However the worrying factor is unemployment ,especially in young fresh graduates, where it is nearly 30percent.

Demographic dividend India  has entered a golden period lasting for a  few decades  called Demographic dividend, characterized by rapid GDP growth.In the life of nations this is a period when working age population is highest compared to dependants such as children and elderly.A nation gets a limited time opportunity to come out of poverty and become a developed economy during the period of demographic dividend.However economic growth is not principally due to increased labour supply.Rather the major effects are due to increased household savings and consequent per capita increase in capital investment. This increased saving occurs as less money is required by working population to spend on care of children and elderly. They can therefore save more.China had a meteoric effect of demographic dividend and it ended in 2020.The one child policy was extremely  effective in increasing rapidly ,working age population and savings. Western developed countries had a more gradual rise in working age population and could achieve a high per capita income by the time population started aging in 2012.

  Digital revolution and automation However increased saving will not automatically increase investment and growth. The entire working population should have high productive jobs. If productive jobs are not available output will not increase . The rise of demograpic dividend in China was accompanied by shifting of population from low productivity agricultural jobs to manufacturing in numerous newly built factories. This provided high productive jobs in plenty.However this has not happened in India due to two reasons. The digital revolution has led to automated factories. Today Suzuki car manufacturing takes place in robotic factories in India .Workers are required for assembly operations only. There is also an indirect effect of digital automation. Large corporate firms today use superior technology ,best talent available in the country and easily available capital to leave their smaller rivals far behind. In an economy it is the SME (small and medium enterprises)Industries ,(about 60million in India ) which provide majority of jobs.If there is a wage and profit depression in SME it affects overall demand in the entire economy. Thus even large firms produce below capacity and do not create investment and jobs as they cannot sell their product in the market.

 However this is not the entire effect of digitalization. Unlike in previous decades e-commerce has led to digitalization and rise of massive online retail(rise of Amazon and Flipkart )and marginalization of small retail shops numbering about 12million in India.This again leads to lesser profit margins and buying power in this segment which ultimately reduces total demand in economy and employment

Globalization The second major cause of unemployment is Globalization. Where as developed western countries use consumption to drive economic growth ,such is not the case for China. China depends on exports rather than consumption to drive growth.It has in the past used subsidies in land,bank loans,industrial research ,worker education to drive down the cost of its products for export.Morever it used a low profit model to create manufactured goods in contrast to the maximum profit model used by industrialists in India. For this however you require an educated workforce and laws forbidding manipulation by both organised labour and exploitative owners. Because of the absence of above conditions mass manufacturing and employment has eluded India.  Earlier China using mass employment generating firms used to export low end manufactured goods like toys and apparell.Now it  invested heavily in innovation and is exporting high end products like EV,semiconductors .Western countries  in a bid to save their own high end manufacturing is using high tariff barriers to Chinese exports. So ultimately China has to shift to consumption led growth as exports become increasingly difficult to grow. In the meantime due to overproduction of manufactured goods in world economy the profit margins in exports for India has become depressed. This thus rules out export led growth ,especially of manufactured goods ,at least in near future for India. China however used export led growth to increase number of manufacturing units and provide employment during its growth period.   

    It may be mentioned that those developed countries who have crossed their demographic dividend are facing a shrinking working age population and low GDP growth. Automation and digitalization will benefit them as it compensates for lower number of workers. However it cannot compensate for market power of large corporate firms in these nations ,led by automation.There is therefore unemployment and decreased effective demand here also as retail shops and SME s collapse.

   A possible solution to unemployment Efforts has been made in latest union budget of India 23-24,to introduce employment linked incentives to firms. Thus the initial Salary for one month as well as the providend fund contributions for fresh hiring is to be paid by government to provide subsidy to firms to hire more.By reducing labour inputs it will subsidize production. 

  Another method may be to counter the deleterious effects of digitalization   and automation on SME and small retail stores.Since digitalization they have become less productive as they do not have technical knowledge to obtain same. If somehow we can bring the vast majority of SME and retail stores to be digitally endowed their sales and profit will rise. The indirect effect of a general increase in income of the vast majority will be to increase effective demand. The large firms also can sell their products,increase investments and create jobs once effective demand rises.

  Today e-commerce giants predominantly cater to the metros . There is not much penetration in tier 2and3 cities as their business model in not effective in small towns with unorganized supply chains and low margins. The new startup’s in e-commerce have business models  which penetrates the tier 2and 3 cities. They have successfully created supply chains and payment systems to increase their reach to small retailers. Though still in their infancy they have the power to digitize small retail and increase their earnings. This should lead to revival in small retail.  

    SME revival  in manufacturing  is the  other challenge . Germany has a very competitive SME sector in manufacturing,. Their strong points are manufacturing super specialised products,highly trained workforce developed by close industry business partnership in interneeships and global marketing of its super specialised products. In the present budget a highly innovative interneeship programme has been introduced where one crore internees will be helped monetarily during interneeship in 500 top firms. Over a period of time the workforce will be industry ready. Another requirement of  B2B marketing for specialized products in national and global market can be done by new ecommerce firms.In fact the new startup’s in ecommerce are already providing support to the SME in their marketing of products .As far as financial constraints  is concerned the government is very alive to the problem and  has taken a number of steps to ensure SME s do not suffer from lack of capital.A innovative scheme is CIBIL which tracks the credit history of firms. It enables SME s to leverage a good credit history to obtain loans easily.

 A third way may be introduction of low profit mass manufacturing which is shifting globally from China to Mexico,Vietnam and other countries. An educated disciplined workforce and suitable labour and land acquisition laws may allow India to also enter this field. 

     

Ack:Seizing the demographic dividend in Economic survey 2012-13,The great demographic reversal,  The age of ageing,The elusive quest for growth : economists adventure and misadventure in the tropics,Dream factories -Why universities won’t solve the job crisis,Reviving jobs,Small and medium enterprises in India,Work of the future

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