India is likely to be characterised by an excess labour supply of ~70mn persons in FY20. From a sectoral perspective, even as the Agricultural and Industrial sectors deal with excess labour supply, the Services sector will be characterised by a shortage of adequately skilled workers.
Even if we assume that India’s real GDP continues to grow at a CAGR of 6.6% p.a. from FY17 until FY20, the supply of labour in India in FY20 at ~500mn persons is likely to exceed the number of jobs that the Indian economy can create at ~430mn. The mismatch in fact is the result of a surprisingly simple mathematical fact.
The Services sector accounts for over 50% of India’s GDP. It is likely to maintain a growth rate which is higher than the overall GDP growth rate but the sectors labour productivity is high and is rising. For instance in FY12, a worker in the Services sector on an average generated Rs312,000 of real GDP whilst a worker in the Agricultural sector generated an abysmal Rs64,000. This already high level of worker productivity in the Services sector furthermore has been growing. This means that even as the Services sector creates more GDP, it will need fewer and fewer people to generate one unit of GDP.
The Skill Mismatch – The unemployment challenge could be larger than what is indicated by the ~70mn number because the labour demanded and the labour supplied may have varying skill levels.
The regional mismatch: The majority of excess supply of labour in India is likely to be concentrated in India’s northern belt (whereas the jobs will be concentrated in the south and the west).
Unless the Modi Government policies were to change drastically, India will not be able to provide employment to a large part of its population and the work force employed in the Agricultural and Industrial sectors will have to bank on the Government’s support programmes to provide downside protection to its wage growth and hence purchasing power.