India’s missing jobs — and where the next government can find them

Where are the jobs? The answer requires reconsidering India’s original bet against the Asian formula for development: Conduct land reform, move excess labour from farms to factories, manufacture stuff with that abundant labour force, sell to the world. Instead, India’s bet was on services.

In exporting services, it graduated from the 1990s call centres to the early 2000s outsourced IT and back-office services to a fuller menu of technology-enabled services offerings today, employing 5.4 million people. Former RBI governor, Raghuram Rajan, and his co-author, Rohit Lamba, have argued for leaning even further in this direction in their recent book. They recommend building up the skills to double down on higher-end services, such as design, R&D, conceptualisation, which, in turn, gives rise to more demand for lower-skilled services.

It’s useful to remind ourselves that the working-age population is about 950 million strong. Jobs in high-end services require workers with requisite skills; however, the 2023 India Skills Report points to a massive skills deficit with only half of young Indians employable currently. This means that for the foreseeable future, low-skilled services remain the default labour absorbers: Construction, street hawking, home repair, kids doing tea runs for a notary’s cramped office, where one person is a scribe, a second person holds a stamp pad, a third sorts through stamps in a plastic bag. Bad as it looks, there are reasons to expect worse.

The jewel in the services crown, the IT sector, shrank for the first time in 25 years. As automation and artificial intelligence pick up pace, many jobs in IT will become redundant. The slowdown is showing in cutbacks and slow hiring. As for the rest of those “employed” in low-skilled services, earnings are so low that after the long march back home to the villages during the Covid lockdown, many preferred to remain there. Sixty million more people are in agriculture than they were four years ago. If India was planning to write its unique development story countering conventional wisdom of moving from farms to factories, it has certainly torn up that playbook with a vengeance.

With an employment picture this grim, the government that comes to power after these elections needs to make job creation its job number one. It also needs to re-think the de facto singular bet strategy — manufacturing’s share has shrunk to 13 per cent of GDP with all hopes riding on services. Even Rajan, no ally of the present administration, believes the manufacturing train has passed.

I would argue that given the number of people who need employment, multiple job-creation vectors are essential. They need policy support, co-investment — especially in education, skill-building and jobs-preparedness — and tax and regulatory incentives to employers.

Consider several promising vectors.

First, in high-end services exports, there’s potential in Global Capability Centres (GCCs) — offshore units of MNCs that provide services to the parent that range from finance, legal and HR to high-tech innovation clusters in cyber, analytics and AI. There are already over 1,500 GCCs employing 1.6 million people, expected to grow to 4.5 million by 2030. Services out of such centres could become one of India’s biggest exports, generating incomes and demand for even more services from lower-skilled tiers.

Second, there is unrealised potential in India’s tech startups. If they can scale up, they employ many people directly and indirectly. Back in 2021, hot money was seeking refuge from an unfriendly China and India provided a convenient destination. Early investors drew in others who feared they were missing out. Successive investors were pressed to overvalue a company to get in on the deal, often ignoring market fundamentals, regulatory uncertainties and talent shortages. Fast forward to now: Many high-flyers — Paytm, Byju’s, Oyo — have crash-landed and investments in Indian startups have fallen to their lowest levels since 2015, while write-downs have surged.

Consider this a second chance — with fresh lessons — for Indian startups. There are growing needs in AI, SaaS, defence and greentech – solid industries that play to India’s strengths. But founders have to be mindful of their seemingly reflexive capacity for hubris at the first signs of success and not assume that regulations will bend for them. As these startups grow, they will hire more people; creating a skilled talent pool is essential.

Third, consider India’s urgent need for a green transition. As the third-largest energy-consuming nation, it is already fourth in the world in renewable energy installed capacity. It plans to install 500 gigawatts of renewable energy capacity, producing 5 million tonnes of green hydrogen annually, cutting emissions by 45 per cent by 2030. The World Economic Forum projects 50 million net new “green economy” jobs in India.

Fourth, given the size of the jobs deficit, we cannot afford to slam the door on manufacturing. We must look beyond the high-profile plans for manufacturing iPhones, Teslas and semiconductors and enable small-and-medium manufacturers, who are likely to be less automation-intensive and more reliable labour absorbers. India’s digital public infrastructure — possibly using the Open Network for Digital Commerce that connects market players on a single protocol — can be leveraged for access to credit, resources, logistics, warehousing and customers. This can help small-and-medium manufacturers replicate the benefits of larger players.

The writer is Dean of Global Business at The Fletcher School at Tufts University