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Don’t Count Your Chickens

Reports and official figures paint a rosy ­picture of service sector jobs growth, but how real is it?

Don’t Count Your Chickens
Photograph by Nilotpal Baruah
Don’t Count Your Chickens
outlookindia.com
2018-05-12T11:04:37+0530

What’s the real jobs situation in India? The government’s planning and policy body NITI Aayog says 6.22 million jobs were created in 2017. The Prime Minister’s Eco­nomic Advisory Council puts it at more than double that number—it says 15 million jobs were created last year. The prime minister himself put the figure at 7 million in a speech early this year. And now amid the ensuing controversy over the robustness of government data on employment generation, an ind­ustry-based survey, the Nikkei India Services Purchasing Managers Index (PMI) report, claims that in April the country saw the “best round of job creation since March 2011”.

As the survey by Nikkei, a media organisation, is based on feedback from purchasing executives at 400 private service sector companies, can it be said to reflect the true state of the economy, considering that the organised sector acc­ounts for less than 20 per cent of total employment in the country? Also, how much credence do economists give to Nikkei’s PMI rep­ort? Rupa Chanda, head, United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) subregional office for South and South-West Asia, states. “The PMI survey is only a gauge of perceptions about the economic outlook. I would not put a very big emphasis on it. The numbers are not to be taken as seriously as GVA (gross value added) or credit growth, etc., which are more tangible indicators of economic performance.”

With vital services including finance, banking, insurance and trade still lagging, it is only a few activities in the service economy that are looking up.

The survey report states that the Nikkei India Composite PMI Output Index rose from 50.8 to a three-month high of 51.9 in April, driven by faster output growth in both the manufacturing and service sectors. N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy, describes the report as a “perception survey”. He feels the performance of the PMI in tracking prospects is much better than other indexes, “so one can expect other indicators to show near-similar patterns of growth. But to talk about mid–to–long–term prospects based on a PMI is risky as the index is very volatile.” R. Nagaraj of the Indira Gandhi Institute of Development Research (IGIDR) does not place much faith in the report as “no inf­ormation is publicly available to assess the representativeness of the sample firms and the reliability of the underlying ­estimation methodology.”

Where have these jobs come from? The latest monthly report by IHS Markit, a London-based global consulting firm, states: “India’s service sector continued to improve at the start of the quarter, with business activity rising at a faster pace, supported by new order growth. Reflecting improvements in demand conditions, job creation accelerated to the sharpest since March 2011.” Considering that the service sector’s share in the economy has grown from 41 per cent in 1990–91 to around 63 per cent in 2010–11, that is where job growth lies. But in the wake of demonetisation in November 2016, the service sector was the worst affected due to the withdrawal of high-value currencies from circulation. Now, a year and a half later, the sector seems to have got back on track

Bhanumurthy points out that the ­service sector includes public administration. “If at all the service sector is opening up, it must be the wholesale and retail trade, and to some extent transport and communications due to some clarity on GST including refunds,” he states, adding that the impact of GST on growth and emp­loyment is still “a work in ­progress”, with the GST Council having brought in more changes recently. There are still many micro issues in GST implementation that lack clarity.

With some vital services including fin­ance, banking, insurance and trade still lagging, it is only a few activities in the service economy that are looking up, feel economists. D.K. Srivastava, chief policy advisor, EY India, describes the Nikkei report as “an important piece of information as it relies on various sub-indicators. It is based on a survey of relevant service providers and industry units, and as such it is very useful. However, it does not give much sectoral information.” He does see a use for the monthly survey when the government implements a budget, particularly when providing a stimulus to boost demand for services like health, transport, infrastructure, construction, etc. “These are services where government has given fiscal emphasis as these in turn will generate demand for financial services. These are sectors where we exp­ect pickup,” says Srivastava. He feels it will take a few more quarters before GST shows a positive impact as the tax reform needs to settle and be further tweaked to enhance its operation and impact.

While so far there is no consensus on the jobs generated over the last couple of years, economists are in agreement when they underline that the potential of services to generate employment has been underutilised. “Jobs are linked to economic growth, particularly in the service sector, which remains a job-intensive sector. Which is why we need to explore more opportunities in that sector,” says Srivastava. Chanda too feels that services are still not creating jobs commensurate with their share in GDP but the potential remains huge. “Whether jobs have ­actually been created to the extent shown in some studies is still a debatable question, as some have pointed out. Without better quality data on the quality and ­nature of jobs, it is hard to answer.”

Pointing to the fallout of GST, Nag­araj says that recent news reports show that while the IT sector registered strong revenue growth, there was a decline in employment growth. “The airline industry seems to be doing well. This is probably true also of e-commerce and the organised retail industry, though we do not have firm data to verify these informed guesses,” he adds. “Many news reports suggest adverse effects of GST on output and employment growth. Its implementation is still being fine-tuned. A clear picture is yet to emerge.”

Claims of a formal sector employment boom must be put in context—the sector accounts for at best 19 per cent of the workforce. As economist R. Nagaraj says, “The tail cannot wag the dog.”

Emphasising the need to look at individual service segments to get a clearer picture of sector growth, Chanda points to news reports about construction growth and the liberalisation of some services as part of the explanation for greater bus­iness optimism. The contribution of value added services to manufacturing may also be a factor as manufacturing revives and investment picks up. The adj­ustment of the economy post GST and demoneti­sation is also being reflected in both manufacturing and services recovery, says Chanda, who was formerly RBI chair in economics at IIM Bangalore.

On the jobs front, Nagaraj emphasises that India’s formal sector accounts for at best 19 per cent of the workforce, as per the latest International Labour Org­anisation (ILO) report. “So, the tail (formal sector employment growth) cannot wag the dog (the informal sector)! More seriously, recent claims of a formal sector employment boom based on a selective combination of survey results with adm­inistrative data from the Employees’ Provident Fund Organisation (EPFO) are flawed, as many commentators have demonstrated,” says Nagaraj. “The EPF data, available monthly for the last 6 months (September 2017 to February 2018), has many known limitations for using it as an indicator of employment growth in the formal sector. An increase in EPF accounts could simply be on acc­ount of an expansion of the coverage of social security measures, not of an expansion of employment as officially claimed.”

Hopefully, the proposed improvements in labour force surveys will help bring forth a better picture of the employment scene even as the government pushes to bring more people into the organised sector to help them get into the social sec­urity network. The Markit report may have lifted spirits at the start of the 2018–19 fiscal year, but the real challenge for the government lies in ensuring that business optimism prevails. On it hinges the prospects of more job creation.

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