INDUSTRIALISATION AND JOBLESS GROWTH: GROWTH RECESSION IN INDIA

Aaheli Maity
Gokhale Memorial girls’ college
Economics Honours, 2nd year
+91 8902262894
aahelimaity@gmail.com
Shruti Choubey
Gokhale Memorial girls’ college
Economics Honours, 2nd year
+91 6291398594
vijayshankar98306@gmail.com
ABSTRACT

Since the last decade, India remained one of the fastest growing economies in the world. The
future growth of India largely depends on the skilled and capable labor force pertaining to the
increasing share of youth population. The impact of industrialization on any economic growth is
immense, creating the main source of the employment. Although the recent studies cite a
different fact compatible with the growing unemployment rate in India that can be termed as
‘jobless growth’. Despite being the 6th most powerful economy, India facing a significant
slowdown in growth from last few quarters. This could be viewed as possible growth recession
in presence of the prevailing trade war between US-China and the Brexit. The worst growth
recession that the country may face in a decade. Using Okun’s law we analyze the quarterly
change in the growth rate of GDP to the unemployment which creates the paradox within the
Philips curve. Lastly, we analyze the bond yield curve of the present Indian economy to review
the present situation of the economy. This paper is to investigate the impact of industrialization
and jobless growth that may reflect whether India will be heading towards the growth recession.
JEL-classification: F13, J01, J23, J64, O11, O14, O19, O40
KEYWORDS: Growth, Growth recession, Industrialization, jobless growth, trade war,
unemployment
Introduction:
Since the 2000, India has been growing strongly at an average rate of 7% and remained one of
the fastest growing country of all in the post-Lehman era (2009-17). But recently India is facing
slowdown in the growth of the economy with increasing unemployment and inadequate job
creation which raises the question whether India is facing a growth recession.
We made our analysis a decade long from 2009 to 2019. The Great Recession was the period of
general economic decline observed in world markets during the late 2000s and early 2010s. It
was the most severe economic and financial meltdown since the Great Depression and often
regarded as the second worst downturn of all time. The impact of it was crucial along with the
other countries worldwide. Economic growth fell sequentially in the three quarters from June
2008, or the second quarter of fiscal year 2009. Though during the 2008-2009 financial crisis,
India was relatively resilient as compared to the largest economy of Asia, China.
A common criticism is that it has been jobless growth in India and has not generated significant
employment. But this is both an unfair and fair criticism: Economic growth has created jobs but
just not enough or of the right quality. From recent survey of PLS, unemployment rate has been
quoted as 6.1% which is all time high. India’s employment rate is significantly below other
countries with similar income per capita. To catch up with these countries, India would need to
create 13.5 million jobs a year—significantly higher than the current job creation rate and
requiring an unfeasible 18% gross domestic product (GDP) growth rate.
Three out of four components of GDP are currently going down on the run. The consumer
demand has been in a tight leash for last two years. Slowdown in investment and consumer
demand grew just 0.6% which are key to Industrialization. Production in different industries is
decreasing due to lose consumer demand as well as private investment. Though the salaries are
projected to increase, huge job cuts from automobile industry to real estate is affecting the
overall demand. Again, due to US-China trade war and Brexit, India’s exports also dropped. In
financial year 2018-19, the trade deficit is maximum of 176 billion US dollars in this decade.
India’s share in world GDP increased from an average of 4.8 per cent during 2001-07 to 7.5 per
cent in 2017 in purchasing power terms. Recent slowdown, a broad-based cyclical downturn is
underway in several sectors—manufacturing, trade, hotels, transport, communication and
broadcasting, construction, and agriculture. It’s facing a sharp loss in its momentum of growth
and now standing with the lowest growth rate of last 6 years.
A recession as three consecutive quarters of contraction, economic growth slips into negative
territory. The growth recession is different from an ordinary recession. The economy does not
contract. It continues to expand, but at a sequentially slower pace.
The Unemployment Paradox: Growth recession in the eyes of Jobless growth
To understand the significance of the term “Jobless growth”, first it needs to be understood what
growth or economic growth is. Economic growth is defined by the increase in the inflation-
adjusted market value of the goods and services produced by an economy over time. There are
two types of growth: short run and long run. The short-run variation of economic growth is
termed as business cycle. The changes in the business cycle are attributed to the fluctuations to
the aggregate demand. In contrast, economic growth is concerned with the long-run trend in
production due to technological growth and factor accumulation. labor productivity has been the
most important source of economic growth. Increases in productivity lower the real cost of
goods. Its determinants are human capital and technological change.
But why economic growth is important? It can potentially play the central role in human
development, poverty reduction and improves quality of living up to a point crucial for any
developing countries such as India.
The modern viewpoint suggests that in the presence of credit market imperfections, inequality
predominantly results in under investment in human capital and lower economic growth. The
unified theory of inequality and growth says that the effect of inequality on the growth process
has been reversed as human capital has replaced physical capital. In the initial phases of
industrialization, when physical capital accumulation was the dominating source of economic
growth, inequality boosted the development process. However, later, as human capital become
the main engine of economic growth, more equal distribution of income stimulated investment in
human capital and economic growth. As of November 2016, India is the second most unequal
country in the world after Russia. The richest 1% of Indians own 58.4% of wealth. The theory
gets justified as India ranks 115 in World Bank human capital index due to poor investment in it.
In the light of economic growth, unemployment and human capital accumulation are related to
large extend. Escalation of human capital is most encouraging for reduction of unemployment
level in the country.
India is the home of 1.3 billion people inherits diversity in its people as well as the working
classes. Given the country’s vast size and geographical assortments, the heterogeneous labour
market constantly face challenges. From last decade India’s growth have been impressive,
however, the labour market has lagged economic performance. A net increase in employment is
of just 1.1 million from 2004-5 to 2009-10. This was clear evidence of “jobless growth”.
However, in contrast to the period 2004-05 to 2009-10, the National Sample Survey (NSS) data
(68th Round) revealed that employment grew strongly over the subsequent two-year period from
459 million in 2009-10 to 472.9 million in 2011-12. Thus, compared to the increase of just 1.1
million over a five-year period, employment rose, in net terms, by almost 13 million in just two
years. But if we consider the recent data of PLS (2017-18), unemployment is shown as 6.1%
which is highest ever recorded.
Going through the labour participation rates from 2009-2010 to 2017-2018, there is an overall
decrease.

Fig:1, Labour force participation rate, taken from annual report of PLS 2017-18
The participation of male and female in urban area slightly increased. But both in rural area, the
participation rate decreased for both male and female from 55.6 to 54.9 and 26.5 to 18.2
respectively in 2009-2018.
Again, the worker population ratio decreased steadily from 2009 to 2018 in both rural and urban
areas. The WPR (in percent) for India have went down from 39.2 to 34.7.

Fig:2, Work Population Ratio, taken from annual report of PLS 2017-18
The most unemployment rates according to NSS (76th) shows significantly much higher at 2017-
18 than any previous rates during 2009-18.

Fig:3, Unemployment rates, taken from annual report of PLS 2017-18

In the usual status (ps+ss), unemployment rates were 5.8 per cent among males and 3.8 per cent
among females in rural areas, while the rates were 7.1 per cent among males and 10.8 per cent
among females in urban areas.

Fig:4, Unemployment rates during 2017 – 2018, taken from annual report of PLS 2017-18
In contrast to this, the growth rates have been steading increasing 2011-2016 according to the
World bank data.
 Year Real
Growth rate (real) Growth
12 rate
10 2009 8.5
8
2010 10.3
2011 6.6
6
2012 5.5
4
2013 6.4
2 2014 7.4
0 2015 8
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2016 8.2
2017 7.2
2018 7.1
Fig:4, Yearly Growth rate over the years 2009-2018
Other than these, public and private sectors faced a huge amount of simultaneous job cuts,
example, the auto sector lost almost 2.3 lakh jobs,
Despite growing at more than 7% for the last decade and a half, the economy could not generate
enough employment. Growth rate on annual employment fell drastically from 2.87% to less than
one percent over this period.
This clearly defies the Okun’s law. Okun's law is an empirically observed relationship between
unemployment and losses in a country's production. The "gap version" states that for every 1%
increase in the unemployment rate, a country's GDP will be roughly an additional 2% lower than
its potential GDP may imply lowering of economic growth. Here, we observe an increase in
growth yet significant decrease in employment through 2009-19.
Okun’s law is closely related to the Philips curve. Conventionally, the Phillips curve augmented
for expectations of inflation represents the tradeoff between inflation and unemployment in an
economy. There is a negative relationship between inflation and unemployment. On long term
data from the World bank, this relationship holds with the negative slope -4.77074 but very
weakly over the period 2009-2018. The regression coefficient is found to be -0.20931, which
means there is a very weak linear correlation.
 Year Inflation Unemployment
rate rate
2009 10.882 2.475 Inflation-unemployment
2010 11.989 2.444 relationship yearly
2011 8.858 2.519 15
2012 9.312 2.69
2013 10.908 2.823 10
2014 6.353 2.765
2015 5.872 2.782 5
2016 4.941 2.73
2017 2.491 2.557 0
2.4 2.5 2.6 2.7 2.8 2.9
2018 4.861 2.551
Fig.5, Negative relationship between inflation and unemployment from 2009-18, taken from
World Bank
Whereas monthly data retrieved from CMIC surveys completely contrasts the negative relation
between inflation and unemployment. In short run, the results show that It is also possible to
have a rise in both
inflation and unemployment. There has been a positive correlation of 0.062647.
Month monthly monthly
Inflation-unemployment unemployment inflation
relationship monthly rate rate
3.3 Sep-18 6.47 3.7
Oct-18 6.83 3.38
3.2
Nov- 6.65 2.33
3.1 18
3 Dec-18 7.02 2.11
Jan-19 6.86 1.97
2.9
Feb-19 7.2 2.57
2.8 Mar-19 6.65 2.86
6.5 7 7.5 8
Apr-19 7.35 2.99
Series1 Series2 Linear (Series1) May- 7.03 3.05
19
Jun-19 7.87 3.18
Jul-19 7.34 3.15

Fig.6. Positive relationship between inflation and unemployment from 2009-18, taken from
CMIC
Looking closely, there have been a slowdown in the growth rates for last few quarters of
financial year 2018-19.
 Year Growth Growth Growth Growth
Quarterly Growth rate Rates of Rates of Rates of Rates of
10
GDP at GDP at GDP at GDP at
Constant Constant Constant Constant
8
prices prices prices prices
6 (%) - Q1 (%) - Q2 (%) - Q3 (%) - Q4
4 2015- 7.7 8.2 7.3 9.3
2 16
0 2016- 8.1 7.6 6.8 6.1
1 2 3 4 17
2015-16 2016-17 2017-18
2017- 5.6 6.3 7 7.7
18

Fig.5, Quarterly growth rates, taken from CMIE

A growth recession is that an economy that is growing at such a slow pace that more jobs are
being lost than are being added. an economy that is growing but expanding more slowly than its
long-term sustainable growth rate may feel like a recession, or growth recession Along with
increasing unemployment, sharp loss in economic growth of India can be most important
indicator of possible growth recession.
Causes and impact of economic slowdown:
The India’s economy grew its slowest pace in last four quarters; there has been much to worry
about the four components of GDP- consumption, investment, government expenditure and trade
deficit.
Consumption, the backbone of growth, is falling across a large range of products. It collapsed to
an 18-quarter low of 3.1% from 10.6%. The automobile has declined sharply in recent month
forcing cut back in production and jobs. Since demonetization, two-wheeler sales volume growth
fell to the lowest. Weak rural demand also affected the sales of automobiles. The real estate
markets have been considerably down and now the stock market as well. Consumers are feeling
that they have lost net worth and seem to be ease on consumption. Major fast-moving consumer
goods (FMCG) companies are suffering the impact. Sales growth of basic products have
declined. Even though the large companies delivered flexible performance, the environment
continues to be challenging with headwinds in commodity prices and softer consumer demand.
The sluggishness in the private consumption can be explained by factors as income decline, cost
increases and an overall dent in consumer sentiment. The household have been dipping into their
savings. This underlies constrained spending abilities. Lower rural income has also hit consumer
spending. Much of the slowdown affected large income generating sectors, suggesting income
growth has suffered.
Investment is expenditure on capital goods like new plants, machineries, new technologies etc.
Investment influences capital stock accumulation and economy’s productivity. It is an essential
component and plays a very important role in aggregate demand, hence growth. As a developing
country, India’s industrialization went through a structural transformation from labour-intensive
to capital-intensive. With increasing wage ratio and technological advance fetching low cost, this
transformation seems most profitable during industrialization process. Up to a point increases in
the amount of capital per worker are an important cause of economic output growth. India has
leapfrogged into a high-productivity regime without the broad expansion of labour-intensive
production. Forces of international competition have generated pressures to adopt more capital-
intensive techniques of production. A longer-term challenge is the fact that manufacturing has
become relatively capital and skill intensive, which poses uncertainty about the extent to which
the sector can absorb more workers over the coming years.
India’s labour-intensive industries are languishing. exports of these industries, industrial
production data also shows tepid growth. Whereas, imports of labour-intensive products are
increasing. Exports of India’s labour-intensive industries such as gems and jewellery, textiles and
leather goods are suffering. sectors such as leather, textiles, handicrafts, sports goods, furniture
and other manufacturing items contracted sharply. It decelerated due to the shock of the
introduction of ‘demonetization’ in 2016 and ‘goods and service tax (GST)’ in 2017.
One of the most important factors influencing the investment is interest rates. Firms invest to
meet future demand; if demand falls the firms will cut back their production and so investment.
A one percentage point fall in investment rate is expected to dent growth by 0.4-0.7 percentage
points. High interest rates make investment more expensive and hence RBI is decreasing it from
2016 onwards to make room for fresh investments. despite the RBI's repo rate cuts 35 basis
points, the interest rate on banks' outstanding loans has climbed, rather than falling. Reports say
that this is due to slow transmission rates and may come effective soon as the issue gets fixed.
The economic slowdown has been hurting demand in Asia’s 3rd economy with weakened
domestic investment. Fall in investment is mainly due to the decline in private investment. A
sharp slowdown in private consumption has observed; the low domestic and global demand set
off to negligible growth in manufacturing. In manufacturing linked sectors, increasing employee
cost has mirrored showing sales growth.
One last component of GDP is trade deficit. Trade deficit is given by,
𝑇𝑟𝑎𝑑𝑒 𝐷𝑒𝑓𝑖𝑐𝑖𝑡 = 𝐸𝑥𝑝𝑜𝑟𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑐𝑜𝑢𝑛𝑡𝑟𝑦 − 𝐼𝑚𝑝𝑜𝑟𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑐𝑜𝑢𝑛𝑡𝑟𝑦 …(1)

Imports of goods and services constitute around 42% of GDP of India. From 2015, both imports
and exports fell even though the trade deficit gap contracted.
 Imports and Exports Trade Deficit
600 0
500 2009 2010 2011 2012 2013 2014 2015 2016 2017
-50
400
300
-100
200
100 -150
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 -200

Imports Exports -250

Fig.6, Import-exports and trade deficit in India 2009-18, taken from Wikipedia
Despite exports and imports growing at the same rate of 9 per cent, India’s trade deficit reached a
record high of $176 billion in 2018-19. The exports were $331 billion whereas the imports were
soaring high of $507.44 billion. In July of 2018, the monthly trade deficit was $18.63 billion
which shrunk in March of 2019 as $ 10.89 billion, rose to $13.43 billion in July this year. during
April-July 2019, exports dipped 0.37% to $107.41 billion, while imports were contracted by
3.63% to $166.8 billion. The possible reason behind this is could be the US-China trade war and
Brexit. Oil imports declined 22.15% to $9.6 billion, and non-oil slipped by 5.92% to $30.16
billion Gold imports dipped 42.2% to $1.71 billion in July.
From above assessment, three components of GDP which represents the growth have facing a
slowdown in last few quarters and elaborates the reasons behind gives sufficient evidence to
growth recession.
Bond yield curve analysis:
A yield curve is a graph of interest rate on all government bonds ranging from the short-term
debt to long-term debt having an upward slope. the short-term bond has lower interest rate
compared with the long-term. When the short-term interest rate is higher than the long term, the
yield curve looks inverted. in times of higher inflation, investors ask the yield for longer tenure
to compensate for inflation risk.

Fig. 7, India government bonds yield curve, taken from worldgovernmentbonds.com

On August 14, the yield on a 10-year US Treasury bond fell below the yield on a two-year bond,
creating an inverted yield curve scenario for the first time since 2007, before recovering slightly.

Fig. 8, Inverted yield curve of US treasury, taken from CNBC.com

The inverted yield curve has been a fairly accurate predictor of a slowdown. An inversion has
accurately forecast a recession nine times and only once was followed by a slowdown. This may
impact India and feed to its growth recession.
Conclusion:
economic growth alone is not sufficient to bring about a sustainable increase in well-being, but it
has a deep connection with development. Thus, slowdown in growth is vital for developing
countries. Labour productivity growth in India has been a double-edged phenomenon that has
hurt employment growth even as it has remained a critical factor in the expansion of output.
However, it can seem this way even if the economy is not actually dipping below zero. This is
because growth is so weak that unemployment rises and incomes fall, thus creating conditions
that feel like a recession.
Question is whether the ongoing slowdown is structural or cyclical. A cyclical slowdown is a
period of lean economic activity that occurs at regular intervals. Such slowdowns last over the
short-to-medium term and are based on the changes in the business cycle. A structural
slowdown, on the other hand, is a more deep-rooted phenomenon that occurs due to a one-off
shift from an existing paradigm. The changes, which last over a long-term, are driven by
disruptive technologies, changing demographics, and/or change in consumer behavior.
Based on the analysis throughout the paper, this can be concluded that there is a strong
possibility India may be heading towards or probably already under a worse growth recession.
Due to the ongoing uncertainty around the process of structural transformation in India, policies
to support workers and their families will remain important. Continued weak credit growth to the
micro and small sector and negative export credit growth for more than two years will require
special government interventions. The policy response to a structural slowdown is through
economic reforms that ease supply constraints. And a cyclical slowdown must be tackled with
measures to stimulate demand. If not, appropriate steps taken, this can be similar as the 2008-9
financial crisis or can be worse.
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