Will unemployment fall in India?

back 1/19/2018

Broad economy

India has high growth rates, constant employment rates and robust economic structures. The high level of national debt remains problematic and extensive reform measures are still necessary to increase productivity and overall social prosperity.

Well-trained workers are in demand in India's economy. Engineers in September 2017 in Noida, a suburb of New Delhi in Uttar Pradesh (& copy Udit Kulshrestha / Bloomberg via Getty Image)


India has become the fastest growing economy among the large developing countries in recent years, with growth rates of around 7.5 percent annually from 2014 to 2016, with a slight slowdown thereafter. That is a little less than before the global financial crisis of 2007/08, but enough to further reduce poverty in the country significantly, thereby significantly improving the social (education, health) and economic infrastructure, preventing unemployment from rising and - in the long run - to catch up with the leading industrial powers.

Compact economic data (& copy Germany Trade & Invest 2017)

In contrast to other heavyweights in the global south, all of this is taking place under relatively stable economic conditions (low current account deficit, moderate international debt, falling inflation). Adjusted for purchasing power, the country already ranks third among the largest economies in the world (sixth in current currency), and there is already speculation about when it will have overtaken the USA and China in terms of economic power and thus also in terms of global political weight. Some Indian observers are already speaking of the outbreak of a trilateral era in which only these three powers will play an essential role. The contrast to the first decades after independence, when the country showed very poor growth (a little more than three percent per year), often had balance of payments problems, was dependent on development aid and at times could not adequately supply its population with food, could not to be taller.

From self-sufficiency to opening up to the market economy

Contributions of economic sectors to the economic growth of India (& copy ADB)

These problems were to a large extent due to the strategy of extensive self-reliance that was chosen after independence, related to the trade-policy agreement with the world market, the hindrance of foreign investments and large domestic companies, the tight state control of economic sectors that were not the state were reserved, and the steering of bank loans into government-defined, priority areas.

Although this strategy was based on laudable motives - preventing the concentration of economic power and increasing social and regional disparities, rapid and broad industrialization - its results increasingly left much to be desired. With a high investment, progress was made less and less, the numerous state-owned companies led to increasing losses, the quality of Indian products remained quite modest, India's share of international trade fell dramatically, the dense network of state controls hindered private entrepreneurs and encouraged corruption.

However, it must not be forgotten that India financed its development largely from its own resources: development aid for the country fell sharply and (relatively) never was particularly high, self-sufficiency was in fact achieved and, more importantly, the creation of a broad-based one Industry as well as the training of a considerable number of scientific and technical specialists.

In the mid-1980s, the Rajiv Gandhi government initiated a cautious change of course and initially liberalized the internal market. The reforms were motivated firstly by the fact that competing states such as China in particular had introduced reforms earlier and bypassed India economically (with dubious security consequences). Second, there was dissatisfaction of the growing middle class with the choice and quality of consumer goods on offer, and third, pressure from new business groups in advanced sectors that needed foreign technology.

The first wave of liberalization brought about a dismantling of state company regulation and made it easier to import capital goods, but soon stranded due to growing current account deficits for a variety of reasons (such as the collapse of trade with the Eastern bloc, rise in oil prices) and made what was perceived as humiliating Borrowing from the International Monetary Fund inevitable in early 1991. From the perspective of the reform-induced dynamism, the crisis should later be viewed positively, as it politically weakened those forces that have benefited from the previous economic course, i.e. above all the bureaucrats and the entrepreneurs and workers in the areas protected from competition.

The 1991 reform and its effects

The economic reforms in the years from 1991 onwards were not themselves revolutionary, but included the usual economically liberal mix:
  • The Indian rupee was devalued right from the start.
  • Almost all industrial sectors were liberalized and opened up to domestic and foreign private investment (exceptions today: armaments sector and railways).
  • The once highly restrictive foreign trade and currency regime has been relaxed. The average tariff fell from 87 to twelve percent. The forced foreign exchange economy was lifted, the Indian rupee has been fully convertible in foreign trade since 1993, and controls for capital movements have been gradually relaxed.
  • The financial sector was cautiously opened to domestic and foreign private banks. To strengthen the financial strength of the banks, international capitalization standards have been introduced and a relevant monitoring authority has been set up. A separate authority was established to develop and monitor the stock market, transactions were facilitated and facilities for electronic trading were created. Most interest rate controls no longer apply, and foreign investment funds now have (limited) access to the Indian stock market. The insurance sector was later opened to foreign participation.
  • The tax system has been significantly simplified and tax rates have been reduced significantly. After a long lead-time, a nationwide VAT was introduced for the first time in 2017, which is intended to create a fairly uniform economic area.
  • In terms of scope, these reforms were no different or more drastic than elsewhere, but they unleashed considerable economic dynamism. India became not only one of the fastest growing economies, but also one whose growth was largely driven by the more efficient use of the factors of production, especially in sectors that were already ahead. Growing import competition thus had a disciplinary effect.
    The economic structural change accelerated, the share of agriculture in the gross domestic product has now fallen to 17 percent (1990: 29 percent), that of industry rose to 30 percent (1990: 26.5 percent), although the finished goods sector stagnated (2015 : 16.3 percent), the share of the service sector is
    53 percent (1990: 45 percent). In the service sector, it was mainly banks, IT and business-related services and telecommunications that expanded. Overall, the capital-intensive sectors and those that employ a comparatively well-trained workforce are flourishing in industry. This also applies to the services. Therefore, the employment effects of the reforms have been relatively modest.

    Foreign trade (goods) (& copy Germany Trade & Invest 2017)

    Foreign trade increased rapidly after the reforms, exports soon rose by 20 percent per year and in 2015 to 20 percent of the gross domestic product (1990: 6.9 percent). In the wake of the global economic slowdown, it fell somewhat until 2015, but is already rising again. Communication and business-related services in particular show high growth.
    In addition, India has succeeded in significantly diversifying its range of exports and the buyers of its exports. In particular, the proportion of neighboring Asian countries increased, also supported by free trade agreements that were already agreed or planned. In addition to services, the chemical and pharmaceutical sectors, the textile industry and mechanical engineering are particularly dynamic export sectors. Textile exports benefit from the reduction in import quotas in the industrialized countries, which were set out in the framework of the World Textile Agreement, which expired in 2005, while service exports benefited from the continued outsourcing of corresponding company activities.

    Foreign direct and portfolio investment has increased from a negligible pre-reform volume to $ 44 billion in 2015. Together with the remittances from Indians living abroad, they easily finance the foreign trade deficit, i.e. the difference between imports and exports. However, the capital inflow is only part of the amount that flows into the People's Republic of China. Foreign investments only account for just under six percent of capital formation; they are also concentrated on technology and capital-intensive sectors as well as the service sector and are more domestic market-related than export-oriented.
    However, together with rising exports, they have led to a significant improvement in the current account and a reduction in external debt: Earlier, massive deficits have recently been greatly reduced or temporarily turned into a small surplus. India now has foreign exchange reserves of 360 billion US dollars, a sufficient buffer against possible external shocks and speculative attacks on the currency. External debt is manageable and the proportion of short-term loans that could plunge the country into turmoil if recovered quickly is irrelevant. Today there is no party of national importance, not even the Communists, that would - at least in principle - deny the benefits of a market economy orientation. The main reasons for the comparatively broad market economy consensus are that
    • the government implemented the relevant reforms gradually and without sharp breaks;
    • the electorate was also distracted by other issues, in particular the controversy over the secular nature of the state;
    • The reforms paid off materially, but initially primarily for the dynamic regions and urban / educated groups. Since large sections of the population initially benefited only to a limited extent from the reforms, the particularly market-friendly BJP government has meanwhile been punished at the ballot box (2004).


    In concrete terms, for example in the case of the privatization of state-owned companies, the further opening up to private direct investment and the adjustment of prices for state services, resistance sometimes forms on the part of the parties - especially when they are not in charge of the government themselves. With the extensive elimination of investment control, individual state governments must now and do this - with varying degrees of success - for private direct investments and the improvement of their local conditions.

    Economic future prospects

    The future growth prospects for India are relatively favorable. Firstly, in contrast to China, the country has a labor pool that will continue to grow until around 2040 and thus a "demographic dividend". Second, there is still scope for increasing economic productivity, for example by withdrawing workers from agriculture, further urbanization or by increasing efficiency within individual sectors. Thirdly, the economic weight of the goods-producing industry is still very low; an expected economic structural change would be just as stimulating as the increase in intra-regional trade, which has been weak up to now. In addition, India has relatively good economic, legal and political institutions for its level of development: the country's democratic and federal constitution can contain economically destabilizing conflicts. China has yet to make this transition.

    But neither should one paint the future in too rosy colors; the Indian government estimates over-optimistic growth rates of eight to nine percent per year for the period up to 2030 or even 2040. So far, only China and South Korea have managed to keep up this pace for so long because, as experience shows, after the harvest of the relatively fast-growing The first fruits of reform and the initial reduction in the productivity gap vis-à-vis competitors, growth will almost inevitably slow down, especially if further structural reforms fail to materialize. There are still a number of unanswered questions in this regard.

    Reform deficits

    One of the reform deficits is the urgent restructuring of the state budget. The deficit in this regard has now fallen to 6.5 percent of GDP, but the debt service for the debt taken on still devours 25 percent of budget expenditure (a further 13 percent is accounted for by national defense) and makes it more difficult for the state to expand the infrastructure, which is urgently needed Education, health and social protection. Incidentally, the high level of debt also limits the credit leeway for private investments.

    The causes of these consistently high deficits are largely political in nature. Firstly, a considerable part of government spending goes on subsidies for food, water, fertilizers and energy, which either mainly benefit comparatively affluent households / farmers or only reach the poor with high wastage. Second, the pay of public service workers is not exactly meager and is topped up every five years by wage commissions. Thirdly, tax revenues are low compared to other democracies of the same level of development, because only a small proportion of the workforce (almost six percent) pays taxes, the maximum income or corporate tax rates have been lowered, but the tax loopholes have not been eliminated. After all, a legal obligation to reduce deficits at the federal and state levels was decided years ago (although this has been suspended in the meantime) and, from 2010, a significant reduction in energy subsidies.

    Indian energy transition

    [...] India is still a coal country. The roughly 600 power plants that burn the fossil raw material supply over 60 percent of the electricity used in the state with its 1.3 billion inhabitants. The Coal India group [largest coal producer in the country] produces around 80 percent of it. Last year it closed 15 mines. According to the Indian business paper "The Economic Times", 37 more production sites are to follow this year and another 60 in the next two to three years. The reason is the lack of profitability of the mines, which often also deliver poor quality coal. A 2015 study showed that only 15 of the 400 Coal India mines are very efficient and of the rest around 90 can be restructured to make them economical.

    [...] India is still a coal country. The roughly 600 power plants that burn the fossil fuel supply over 60 percent of the electricity used in the state with its 1.3 billion inhabitants. The Coal India group [largest coal producer in the country] produces around 80 percent of it. Last year it closed 15 mines. According to the Indian business paper "The Economic Times", 37 more production sites are to follow this year and another 60 in the next two to three years. The reason is the lack of profitability of the mines, which often also deliver poor quality coal. A 2015 study showed that only 15 of the 400 Coal India mines are very efficient and of the rest around 90 can be restructured to make them economical.
    Like China, the world's number one coal country, India has slashed its plans to build new fossil fuel power plants since the beginning of 2016. This was also a consequence of the Paris Climate Agreement signed in December 2015, which calls for a worldwide stop to the use of coal, crude oil and natural gas after 2050. New Delhi has committed to increasing the share of renewables in energy consumption to 40 percent by 2030.
    The fact that the government is massively pushing solar power generation plays a major role in the poor outlook in the coal sector. According to their plans, the installed photovoltaic capacities are to increase from the current 14,000 to 100,000 megawatts (MW) by 2020. For comparison: The output of the coal-fired power plants is currently around 194,000 MW. The results of the state-run tenders for photovoltaic power plants in the first half of 2016 show how cheap solar power is now in the sunny country.Here, companies were awarded the contract that had offered the kilowatt hour for only 2.44 rupees (equivalent to 3.1 cents). India's largest electricity company, National Thermal Power, sells coal-fired electricity for 3.2 rupees per kilowatt hour, according to the German eco-energy industry service IWR.
    In view of these developments, energy experts expect India to become the most important market for photovoltaic systems in the next few years. China is currently still dominating, with over 34,000 MW alone accounting for almost half of the global expansion in 2016. For comparison: Germany had 1500 MW. For India, Boston-based market research company Lux Research expects that an average of around 18,000 MW will be added annually by 2021, while China will fall behind due to falling tariff rates and grid connection problems.
    The Indian government caused a sensation with its plan to only register new electric vehicles from 2030. This is to curb the huge smog problems in the Indian metropolises.


    Joachim Wille, "India flips the switch", in: Frankfurter Rundschau of 23 August 2017 © All rights reserved Frankfurter Rundschau GmbH, Frankfurt

    Power supply

    Share of electricity capacity (& copy Mercom Capital Group, C. Inton, April 12, 2017)

    The rapid Indian economic growth since the reforms were initiated brought to light or exacerbated the deficiencies in the infrastructure. They are less relevant for company-related or IT services that do not require a lot of infrastructure, but are particularly important in traditional industrial sectors. Economic experts agree that government infrastructure spending must at least double if the government's targeted growth rate is to be achieved in the long term.

    The main deficit is the power supply, which is expensive, insufficient and unreliable for companies. In India, for example, electricity is cut off more frequently, so companies have to buy generators and suffer losses due to equipment damage. The cause of these problems is that the mostly state-owned electricity distribution groups are prohibited from demanding cost-covering tariffs from private customers, especially farmers who are important in terms of electoral politics - the tariffs for industrial customers are correspondingly high -, from suspending the power supply to defaulting customers, or from clandestinely drawing electricity only to be punished. Accordingly, they lack the means to invest in expanding the grid or to buy enough electricity.

    Indian governments have responded to the electricity crisis, which has been worsening for years, with a whole series of rule changes since 1991, which should primarily interest private investors in electricity generation, the division of the EU-state electricity companies into the generation, transport and distribution of electricity and regulatory authorities to set electricity tariffs. So far, these measures have shown only moderate success because the earnings situation of the electricity distribution companies has changed little due to insufficient tariff increases and limited prevention of record-high transmission losses. A restructuring program for the electricity distribution companies was recently presented again, which promises them debt relief with verifiable improvements in performance.

    Transportation

    The transport system and the port infrastructure are also still in need of improvement. After all, the BJP-led government launched an extensive program from 1999 to build highways between the Indian metropolises and another to expand rural connecting roads. The railways were initially neglected, with the result that freight traffic shifted further to the roads. Rail freight transport also suffers from the snail's pace and the fact that it is comparatively expensive because of the cross-subsidization of passenger transport. With the 2014/15 budget, an extensive program to improve and accelerate rail transport was announced. At the same time, the ports in which the lay times (and thus costs) are not very competitive are to be expanded.
    Recently, however, two initiatives by the Indian government can be reported which are intended to fundamentally improve the country's infrastructural deficits. Firstly, the expansion / construction of 100 so-called smart cities was decided in 2015, meaning the renovation of existing or the construction of new cities on the greenfield with reliable water and electricity supplies, first-class transport connections and equipment with educational institutions. This is to be implemented with the help of private (including foreign) capital. Second, a state fund was set up to finance infrastructure, which is to raise funds in the capital markets and lend them to private infrastructure companies.

    The two-wheeler as a symbol of ascent

    […] The two-wheeler is a much more widespread means of transport in India than in the West. More than five million scooters and over ten million motorcycles are sold here every year. For 2016 and 2017, the industry expects sales to grow by nine to ten percent. Two-wheelers are not only used by young people, but also by employees who drive to the office. It transports entire families, sometimes you see five people from three generations squeezed into one saddle. Not the car, which remains unaffordable for most Indians, but the scooter and motorcycle are the first step towards modern mobility. They pave the way to new opportunities in life: Those who are motorized can take a job that would otherwise be too far away. Girls and women become independent of buses and auto rickshaws, in which they are often exposed to the intrusion of men.

    […] The two-wheeler is a much more widespread means of transport in India than in the West. More than five million scooters and over ten million motorcycles are sold here every year. For 2016 and 2017, the industry expects sales to grow by nine to ten percent. Two-wheelers are not only used by young people, but also by employees who drive to the office. It transports whole families, sometimes you see five people from three generations squeezed into one saddle. Not the car, which remains unaffordable for most Indians, but the scooter and motorcycle are the first step towards modern mobility. They pave the way to new opportunities in life: those who are motorized can take a job that would otherwise be too far away. Girls and women become independent of buses and auto rickshaws, in which they are often exposed to the intrusion of men.
    […] No other product, apart from the mobile phone, embodies the upheaval and dynamism in the broad masses of the Indian billionaire society as much as the two-wheeler. The motorcycle is the vehicle and the distinguishing mark of the aspirational class, which marketing experts, politicians and sociologists alike are considered to be the key to the future of the country: those people who are far from belonging to the wealthy middle class, but who already have a bit of money and a lot of dreams. [...] Modernity is coming to India - on two wheels.
    Teacher [Jaldhir] Singh bought his motorcycle a few years ago for the equivalent of around 500 euros. With his salary he could afford to pay the sum in cash. As a teacher, he is at the upper end of the social and income pyramid in the two-wheeled world, and he is even in the process of outgrowing this segment of society: in a few months he wants to buy a car. Such big leaps are unimaginable for most two-wheeler customers, many have to finance their purchase with a loan. The price of petrol, on the other hand, does not play a major role for Indian two-wheelers: the most economical motorcycles can cover more than a hundred kilometers with one liter of fuel.
    In India, the two-wheeler stands for the expansion of consumer society beyond the well-to-do bourgeoisie. And it stands for another border crossing: for the increasingly blurred dividing line between town and country. [...] Instead of the old, clear distinction between an urban and a rural India, a hitherto unknown mixed reality is emerging in the 21st century: "urban" India. The future is neither rural nor urban, it is both. And the two-wheeler is their vehicle.


    Jan Roß, "Ascent on two wheels", in: DIE ZEIT No. 45 of October 27, 2016



    Employment Law

    Indian labor law was and is an important brake on investment. It is regulated by 54 individual, partly antiquated laws. The colonial Trade Unions Act allowed the trouble-free establishment of trade unions, which therefore multiplied and tried to outbid one another, although the once frequent strike activity has now declined significantly. The Industrial Disputes Act of 1948 limits layoffs, transfers, and the use of new technology. Firms with more than 100 employees must obtain state permits for layoffs, which are seldom granted. In addition, there are high severance payments for approved redundancies, hindrances to temporary work and numerous other requirements.

    It was alleged that labor laws encouraged capital-intensive growth and prevented employment because companies were afraid of losing their workforce by not hiring workers in the first place. Labor laws, however, can hardly represent a significant obstacle to employment, because the majority of the workforce (almost 90 percent) is not employed in the formal and thus in the solely controlled economic sector, several areas (e.g. the Special Economic Zones = export platforms) are excluded from this, affected entrepreneurs Either failed to register, hired contract workers or partially outsourced production to companies in the informal sector. Some EU states have also increased the approval of collective redundancies or made temporary agency work more generous. The occupational safety regime has already become quite pitted.

    Tenancy, real estate, land and bankruptcy law

    Tenancy, real estate and land law is in great need of reform. Due to inadequate records, unclear title makes the transfer more difficult and reduces the availability of developable areas. Outdated and inflexible land use plans freeze unused space - for example by bankrupt companies - unrealistically low rents have led to a shortage of supply, while prices skyrocket on the "free" market. In addition, there are sometimes massive "stamp fees" for the purchase of land.
    The deficits in insolvency law are much more serious: reorganization, bankruptcy and liquidation are regulated in India by different sets of laws. The liquidation of insolvent companies is also a legally difficult undertaking and encounters government agencies trying to delay bankruptcy in order to protect the workforce, as well as completely overloaded liquidation tribunals. A company liquidation takes an average of 4.3 years (1.7 years in China) and only brings in a quarter of their claims for the creditors. A law of 2002 at least allowed banks to take over the pledged collateral more quickly; To further protect them, a new code was finally presented in 2016, which provides for the liquidation of the company if outstanding debts are not paid within six months.

    Dispute over water

    On September 12th everything was suddenly different. The metropolis of Bangalore, otherwise known all over the world as the figurehead of Indian innovation, suddenly showed a terrifying face. Anger raged on the streets of the high-tech location, which otherwise produces images of an inventive and peaceful upswing. Rioters set cars and buses on fire, and two people died in the chaos. [...]

    On September 12th everything was suddenly different. The metropolis of Bangalore, otherwise known all over the world as the figurehead of Indian innovation, suddenly showed a terrifying face. Anger raged on the streets of the high-tech location, which otherwise produces images of an inventive and peaceful upswing. Rioters set cars and buses on fire, and two people died in the chaos. [...]
    The anger that turned into violence had sprung from a very existential need: the need for water. In the south of India there is fear that it will soon no longer be enough. The state of Karnataka with its capital Bangalore is in a dispute with its neighbor Tamil Nadu, both complain that they are each granted too little water from the Kaveri River. The river has its source in the mountain range of the Western Ghats and winds over 760 kilometers in a south-easterly direction through Karnataka and Tamil Nadu, where the river finally flows into a delta into the Bay of Bengal. The Kaveri is one of the great lifelines of India. Two large states hang on the drip of the river, in which as many people live as in Germany and France combined: 140 million Indians. [...]
    The uprising was triggered by a decision by the Indian Supreme Court. According to this, Karnataka is obliged to let 340,000 liters of water flow into Tamil Nadu every second. Far too much, protested the people on the upper reaches of the Kaveri. Far too little, complained the people on its lower reaches. In both states, farmers worry about their rice, which will not thrive without adequate irrigation.
    Is the crisis a foretaste of something that could now shake India more frequently and more violently - revolts or even wars over water shortages? At least one can see that the tensions are increasing. The sociologist Venni Krishna comes to the conclusion in a study that more than 200 conflicts in India can be traced back to environmental problems, 59 of which are rooted in inadequate water management. [...]
    The demand for water has increased in recent years. On the one hand, farmers are intensifying agriculture. "In Tamil Nadu, farmers only harvested rice once a year, now there are two harvests because of the irrigation options," says [environmental expert Sunita] Narain [from the Center for Science and Environment in Delhi]. And in Karnataka, in addition to rice, they now also grow a lot of sugar cane, which requires a lot of water. In addition, the growing cities are using more river water than before, and Bangalore gets 80 percent of its needs from the kaveri. This means that the necessary buffer is now missing to meet everyone's needs in the event of fluctuating rainfall.
    Nevertheless, expert Narain believes it is wrong to open up the simple equation according to which more and more people everywhere in India have less and less water available. The distribution is very uneven and often difficult to predict: Extreme weather situations such as drought, storms and floods are increasing, the water balance in the high mountains is changing because of the melting glaciers - scientists attribute all of these developments to climate change. [...]
    "We need far better water management," says the environmental activist. "We need to find ways to be more careful with this resource and to reduce waste." The possibilities for saving water are far from exhausted. [...]
    However, because the economy continues to grow, so too does consumption: In Bangalore alone, it is expected to skyrocket by 71 percent in the next nine years. Which face the city will show in the future also depends on whether this need can be met.


    Arne Perras, "Dangerously dry", in: Süddeutsche Zeitung of September 20, 2016

    Agriculture

    For a long time reforms in the agricultural sector, in which almost 50 percent of the Indian workforce are still employed, have been completely neglected. Overall agricultural growth has been quite weak in recent years, with productivity growth falling to extremely modest levels. This is due to the fact that the previously pursued agricultural strategy (food self-sufficiency through price support for the farmers, expansion of artificial irrigation, subsidies for fertilizer, electricity and water as well as strict regulation of the markets) and the earlier, massive increase in production through the cultivation of high-yielding varieties within the framework of the so-called Green Revolution have increasingly lost momentum and are reaching their ecological limits. Producer subsidies displaced expenditure on rural infrastructure, agricultural advice and research as well as the maintenance of previous investments; They also have a regressive distributive effect - the bulk is skimmed off by rich farmers and union states.
    The Indian government has so far not been able to bring itself to major reforms because of the strong peasant lobby and its electoral weight, but at the same time is demanding that others dismantle export subsidies. After all, after 2004, the government under Prime Minister Singh decided on ambitious programs for rural housing and road construction, electrification and the revitalization of the rural credit system. These have already been partially implemented. The aim is also to diversify agriculture in the direction of higher-quality products such as fruit and vegetables and - because the state cannot create the necessary infrastructure on its own - more space for direct connections between farmers and private processing companies.

    bureaucracy

    A further clear reduction of bureaucracy in the country is seen by many experts as necessary. Significant improvements in the purification of the once Byzantine licensing system are already apparent under the Modi government. In the final stage of the reforms, operating permits are to be processed through a single point of contact and largely electronically and on the basis of information provided by the applicants. This would mean that numerous bodies would no longer have the opportunity to take advantage, which does not necessarily make these reform approaches popular in the bureaucracy. The first successes seem to be emerging: India has recently moved up significantly in the relevant World Bank index (from 142nd place out of 185 countries in 2015 to 100th place out of 190). In terms of improving the investment climate, it has risen to the ranks of the top 10 for the first time, and has made up ground primarily through leaner application procedures and a new insolvency procedure.


    Banking and credit

    The depth of the Indian financial market is still too shallow for the rapidly growing economy. Banks are forced to invest a high, albeit declining, share of their assets (currently 21.5 percent) in government bonds and reserve 40 percent of the rest for priority issues (such as agriculture). This depresses the credit leeway of the rest of the economy, especially small and medium-sized enterprises. The companies finance themselves to a large extent through relatively short-term bank loans, but not through bonds, which make up a good part of the capital raised elsewhere. As a result, companies' indebtedness has increased significantly due to short-term bank loans.
    The capital cover of these banks is sufficient in itself, but they are sitting on a growing mountain of "bad" loans, on which no interest has been paid for over 90 days. Electricity distribution companies and parastatal infrastructure programs are among the major defaulting debtors. In the past, bankrupt companies were kept alive for a long time at the expense of the creditors (to keep jobs). Since 2016, a new bankruptcy law has allowed creditors to initiate insolvency proceedings more quickly in the event of default in interest.
    After all, the proportion of citizens with their own bank account has increased significantly as a result of a new program launched in 2014. This will make it possible - together with the creation of new bank branches or mobile bank representatives, the recording of the Indian population by identification cards and the almost widespread use of mobile phones - to allow state transfers to be made directly to all citizens, i.e. to exclude middlemen and the previous material subsidies (e.g. for energy and food) to be replaced by direct payments, undoubtedly a considerable step forward.


    Employment situation

    More important than the listed need for reform in individual areas is the fact that the economic dynamism of the country has only had a comparatively limited broad impact. This applies above all to the employment situation: every year around twelve million new workers enter the labor market, but the employment intensity of growth (i.e. how many more workers are hired at a certain growth rate) has fallen so much after the reforms that a permanent increase economic output by eight to ten percent would be necessary in order not to let unemployment rise.
    India's growth is highly capital-intensive and, in the formal sector, primarily absorbs well-trained workers in industry and services, but not the bulk of the unskilled and semi-skilled. As a result, too many workers remain in underproductive agriculture and that growth has not led to a more significant reduction in absolute poverty. The majority of new jobs in industry and in the service sector were created in the informal sector; However, this offers comparatively poor pay and little job security (increase in temporary work) or means bogus self-employment.
    If this development continues, India threatens a permanent split in the labor market (into privileged workers and the rest) with all the social tensions that this creates. There are only two ways out of this dilemma: Either one tries to significantly broaden the basis of labor-intensive industrial production, or a true training revolution is taking place in India that is raising the level of competence there so far that the country is also internationally broader in terms of technologically sophisticated goods and services can compete. The current government is trying to gain ground in both ways.

    12 million looking for work

    […] Every year twelve million young people enter the labor market. Only ten percent find a job in (public and private) industry. The vast majority work in the informal service sector. Informal is a euphemism for the fact that people are mostly underemployed casual workers and have an occupation on their own, even if it is to remove the lard from the ears of passers-by on the sidewalk.

    […] Every year twelve million young people enter the labor market. Only ten percent find a job in (public and private) industry. The vast majority work in the informal service sector. Informal is a euphemism for the fact that people are mostly underemployed casual workers and have a job on their own, even if it is to remove the lard from the ears of passers-by on the sidewalk.
    These millions of people are mostly invisible because they do not even fall through state safety nets and so do not appear in the regular unemployment statistics. The official unemployment figures should actually be extremely high, since of the twelve million newcomers to the labor market every year, only around 1.5 million get a permanent job. The opposite is the case. The official unemployment figures in 2014 were around six percent. There is a defining trick behind this: Only those who have previously worked for a wage are unemployed - and very few have that. In addition, most of the poor cannot afford to be unemployed. "In India, unemployment is a luxury," wrote the business newspaper "Mint", "because an officially unemployed person signals that he has enough money to live without wages for some time." [...]
    So far, politicians have always raved about India's demographic dividend: The large population basin of the young Indian population will provide the world with workable people for decades to come. While the population decline in the industrialized nations leads to the aging of the big nations, India's young population will grow from 757 million (2010) to 972 million in 2030, overtaking China's declining share of the world population. 25 percent of the working population worldwide will then be Indians.
    But the definition of "fit for work" only refers to the age of 19 to 59 year olds and not to their professional skills. Only around three percent have completed a vocational school. Even among university graduates, twelve million are unemployed today. Was it just bureaucracy and corruption that explained the foreign strategy of the Tatas and other corporate groups? Or was it also the lack of trained workers, technicians and engineers from your own country? [...]
    In any case, the falling labor productivity of Indian agriculture will no longer be able to feed the millions of unemployable youth with casual work. Today 150 million farmers produce as much food as six million Americans. This explains the emigration to the cities. But there, 85 percent of those willing to work have to struggle with odd jobs. Because they have nothing to show that would get them a job in the formal sector of factories, call centers, and government offices. It is work without social and health protection, without minimum wages, holidays and a pension fund. "Informal work," was the verdict of entrepreneur Manish Sabharwal, "is slavery of the 21st century." [...]


    Bernard Imhasly, India. A country portrait, 2., actual. Edition, Ch. Links Verlag Berlin 2016, pp. 125ff.

    Well-trained workers are in demand in India's economy. Engineers in September 2017 in Noida, a suburb of New Delhi in Uttar Pradesh

    (& copy Udit Kulshrestha / Bloomberg via Getty Image)

    Compact economic data

    (& copy Germany Trade & Invest 2017)

    Contributions of Economic Sectors to India's Economic Growth

    (& copy ADB)

    Foreign trade (goods)

    (& copy Germany Trade & Invest 2017)

    State subsidies
    Share of electricity capacity

    (& copy Mercom Capital Group, C. Inton, April 12, 2017)

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    Joachim Betz

    Joachim Betz

    Professor Dr. rer. soc. Joachim Betz, born in 1946, was a senior research fellow at the Institute for Asian Studies at the GIGA (German Institute of Global and Area Studies / Leibniz Institute for Global and Regional Studies) and is Prof. emeritus for Political Science at the University of Hamburg.
    His specialist areas of expertise are politics and economics in South Asia, debt, raw materials policy, globalization and development finance.


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