India’s employment crisis: Jobless growth, threat of automation, and impact of climate change on productivity

Unemployment and underemployment have always been important issues in post-Independence India. We have always been a primarily agrarian, labour-surplus economy with low capital stock that has manifested in low industrial productivity and a largely non-remunerative, monsoon-dependent agricultural sector. Key metrics for measuring the health of the job market are the labour force participation rate (LFPR) and the unemployment rate. The former is the fraction of the country’s working-age population that is either working or seeking work. It is indicative of the size of the potential labour force or the aggregate labour supply. On the other end, the unemployment rate or the “open” unemployment rate is the proportion of individuals who are seeking work but are not employed. Notice that these aggregative measures are not precise metrics and are often open to interpretation owing to specific inclusion criteria for those who are “working” and “seeking” work. An unfortunate corollary to this definitional vagueness is disguised unemployment or underemployment that may get missed and give us a more optimistic idea regarding the level of employment in a country.

Using a weekly status definition of unemployment—that is, an individual is deemed unemployed if he or she has not done any economic activity in the previous week—National Sample Survey (NSS) employment reports from 1972 to 1987 peg the unemployment rate between 4 and 5 per cent, with urban unemployment being higher than that in the rural sector. The LFPR is reported to be quite stable at approximately 58 per cent of people aged 15-59 in 1983 and 1993, dropping marginally to 56 per cent in 1999-2000, and thereafter to 50 and 55 per cent respectively in 2019 and 2022.

It is worth mentioning that though employment generation was and is a priority in India’s economy pre and post liberalisation, over 90 per cent of the employed are without tenure, that is, in the informal sector, and less than 20 per cent are engaged in regular wage or salaried occupations.

In 1991, our newly liberalised economy allowed for partial privatisation of state-owned enterprises and foreign direct investment (FDI) in manufacturing, and this led to some demand for factory labour. However, it was mostly of the contractual variety in special economic zones (SEZ), which had poor working conditions and displaced farmers from farm and non-farm livelihoods in rural India for typically a small number of jobs. Mining in this era also provided a few informal jobs under adverse conditions and often led to land acquisition related disputes, some of which remain contested to this day. Ancillary services industries such as transport picked up from its dismal days in the 1980s, and overall industrialisation and economic growth in the 1990s were not significantly labour displacing in the aggregate. FDI brought with it more capital-intensive production than ever before in the history of independent India.

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However, unemployment rates actually fell under 3 per cent towards the latter half of the 1990-2000 decade before climbing back up to between 3 and 4 per cent in the early 2000s. The unemployment rate spiked at 5.8 per cent in 2019 before settling down to under 4 per cent in 2022. The early 2000s saw the services boom, with the glory days of Indian information technology (IT) companies such as Infosys, Tata Consultancy Services, and Wipro, which hired thousands of engineering graduates to write code for large-scale applications that were commissioned by governments and companies all over the world to facilitate cellular communications, computer-aided manufacturing, and payroll and accounting departments. Added to this was IT-enabled services (ITeS), where thousands of Indian men and women were groomed to acquire foreign accents in order to service customers of engineering and technology firms from the Global North.

Problem of youth unemployment

From 2000 to 2008, high demand for business process outsourcing (BPO) functions led to the rapid growth of Indian “tech hubs” in Bengaluru, Hyderabad, and Pune. Unfortunately, the tech boom only weakly enhanced labour even though a boom in the IT and ITeS led to the growth of supporting industries such as logistics, hospitality, construction, and private education which expanded rapidly in this era. Growth rates for the GDP were particularly impressive from 2003 to 2010, when Indian GDP grew above 7.8 per cent in seven out of these eight years (Figure 1). However, labour productivity has increased more or less in proportion to the increase in per capita output since 1990 and limited the impact of output growth on employment (Figure 2).

Furthermore, comparing NSS data over a decade shows a low growth rate of jobs at just above 2 per cent from 2000 to 2012. In fact, this trend of relatively low employment creation at approximately 2 per cent has persisted now for most of the past two decades. If this is not boosted to 4-5 per cent, India will find it impossible in the medium term to absorb its surplus labour at the current labour force growth rate of 1.69 per cent a year.

Related to this phenomenon of limited job creation over this millennium is the worrying trend of youth unemployment which poses a significant challenge to India in leveraging its demographic dividend. According to the International Labour Organization’s (ILO) India Employment Report 2024, youth (15-29) unemployment rate has been rising over the past several decades: from 5.6 per cent in 2000 to 6.2 per cent in 2012, and then increasing threefold, to nearly 18 per cent in 2019, and then dropping to around 15.1 per cent in 2020 (Figure 3). In 2022, the LFPR of young men (at 61.2 per cent) was almost three times higher than that of young women (at 21.7 per cent), and the gender gap was similar in both rural and urban areas. According to the ILO, the youth unemployment rate increased with the level of education, with the highest among graduates and higher among women than men.

From Figure 4 we see that over the last two decades, the educated unemployment rate increased, albeit with a sharp decline between 2019 and 2022. In 2022, the unemployment rate among youth was six times greater for those who had completed secondary education or higher (18.4 per cent), and nine times higher for graduates. In fact, India’s youth account for almost 83 per cent of the unemployed workforce, and the share of young individuals with secondary or higher education in the total unemployed youth has almost doubled from 35.2 per cent in 2000 to 65.7 per cent in 2022. Furthermore, though the overall (open) unemployment rate appears low and stable, it hides a significant degree of underemployment, that is, individuals willing and able to work additional hours in a reference week. Underemployment was 8.1 per cent in 2012 and rose to 9.1 per cent in 2019 before declining to 7.5 per cent in 2022.

The lowering of employment opportunities at higher levels of education is a global phenomenon today. Governments and corporations are hiring fewer young people as far fewer individuals are needed for administration and governance today compared with even a decade ago. The rise in inequality all over the world has lowered effective demand for goods and services, leading to a shrinking of production. Moreover, increased workplace automation, including the use of artificial intelligence (AI), has raised the marginal productivity of semi-skilled and skilled workers, requiring a far smaller workforce to perform similar operations as before. Such forms of structural unemployment have ripple effects over the economy as more skilled workers unable to obtain jobs commensurate with their level of formal education apply for employment where they are overqualified.

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This process dampens the prospects of less educated individuals, who are now deemed to be less qualified for employment. Although the youth are best poised to take advantage of these emerging technologies, without significant upskilling, even the highest educated among them may not be viable for employment in the years to come. India has largely seen jobless growth over the last two decades, which has contributed to soaring inequality in this millennium. A recent article co-authored by Thomas Piketty put income and wealth share of the top 1 per cent of the population at 22.6 and 40.1 per cent, respectively, in 2022-23. Thus, without the redistribution of income and wealth, upskilling may be a distant dream for middle-class job seekers struggling to pay for conventional education.

Threat of automation

Although the deployment of automation and AI is likely to be uneven, it has the potential to be labour displacing in numerous sectors of the economy. In manufacturing, high-tech export-oriented industries such as automobile and telecom are more likely to adopt advanced automation, including 3D printing, that can reduce the need for human supervision along assembly lines and vastly reduce transportation, logistics, and warehousing costs.

Services, particularly finance, software development, and ITeS, might have to bear the brunt of automation, mainly due to having repetitive tasks that can employ techniques augmented by machine learning algorithms. In its 2018 report on emergent technologies in India, the ILO identified 6,40,000 low-skilled service jobs in the IT sector as at risk from automation, while only 1,60,000 mid- to high-skilled positions would be created in the IT and ITeS sectors.

A Zomato delivery agent waits to collect an order from a KFC restaurant in Mumbai, in July 2021. Gig work is casual and likely to be unstable depending on the effective demand for these services.
| Photo Credit:
DHIRAJ SINGH/ Bloomberg

Examples of new organisations that are said to have been created with the help of AI include those that serve workers and consumers in the “aggregator”, “gig”, or “platform” economy such as Uber, Ola, Zomato, Swiggy, Dunzo, Urban Company. All of these provide individualised transport, delivery, and cleaning services and connect independent providers of services to clients. The employment numbers that have been projected for this sector in the long term in a report of the Boston Consulting Group and Dell Foundation in 2021 are 24 million jobs. However, this form of employment is casual and likely to be unstable, depending on the effective demand for these services.

The quick, contractual nature of this form of employment may often not give workers access to health insurance, retirement plans, leave, and unemployment benefits. These make gig economy workers vulnerable to financial instability, especially during illness or market downturns. Furthermore, gig economy workers who function on a commission basis with low or no fixed wages are often overworked by platforms, leading to health costs that increase their out-of-pocket expenses.

On the other hand, more traditionally organised industries such as textile, apparel, leather, and footwear are less likely to adopt automation as it would not be cost-effective to purchase capital in a labour surplus economy such as India. Finally, agriculture is one traditional sector that has seen automation with the rise of agribusiness in the Global North.

However, in India with the persistence of labour surplus, low yield, small holding, rain-dependent agriculture, capital investments to adopt automation are unaffordable for most farmers, who live in abject poverty. Although there is an emerging trend of agricultural start-ups that are more mechanised, it is unlikely that this sector will see heavy deployment of automation or AI.

Rising heat

An important concern for the labour force of the future is climate change. According to a report of the G20 sustainability group in 2018, the increasing frequency and intensity of various environment-related hazards have already reduced human productivity. Between 2000 and 2015, 23 million working-life years were lost annually at the global level as a result of hazardous workplace environments.

Among the members of the G20, China, Brazil, and India were the most affected countries, with respectively 8.7, 3.2, and 1.5 working-life years lost per person per year in the period 2008-15. Projected temperature increases in 2030 will exacerbate heat stress in the future, potentially reducing the total number of work hours in the G20 countries and India by 1.9 per cent and 5.2 per cent respectively (Figure 5). Heat stress is seen to have a greater effect on agricultural workers and on workers in emerging economies.

Given the challenges of generating and sustaining employment in a future that looks significantly less inviting for humans, future governments of a developing country such as India would do well to remember some key takeaways from the discussion above.

First, deep-rooted inequality, leading to demand for goods and services tapering off in the long run, needs to be tackled on a war footing. The emergence of dollar billionaires may be a feather in our civilisational cap, but a handful of high net worth individuals will not create the effective demand required to fuel mass production in the future, leading to unemployment and inequality spiralling higher.

Second, education, reskilling, and upskilling individuals to meet the requirements of a globalised economy require not just some elite institutions of eminence but an overhaul of our education system, which currently sees huge learning disparities at all levels between the rich and the poor, and the urban and rural sectors.

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The inevitable march towards higher automation coupled with lower effective demand possesses the grave danger of creating a “useless class” that is structurally unemployable, in the words of the historian Yuval Noah Harari. The creation of a safety net for these individuals through schemes of universal basic income needs to be urgently discussed if we are to have functioning markets for goods and services in the future.

Finally, countries of the Global South, including India, need to rapidly move to carbon-displacing sustainable technologies that may help us combat the hazardously high temperatures and air and water pollution that prevail currently. Climate-related effects that disproportionately affect the health of poorer workers increase out-of-pocket medical expenses and put enormous financial strain on both private and public healthcare systems.

Sujoy Chakravarty is Professor of Economics, Centre for Economic Studies and Planning, at School of Social Sciences, Jawaharlal Nehru University.

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