Will Construction Sector Create Jobs that India Badly Needs?

India-Real-Estate-Market

Several estimates made by economists and analysts suggest that around one million Indians are entering the workforce every month.

That means around 1.2 crore individuals are entering the workforce every year. And it is expected that the trend is likely to continue over the next couple of decades. The number of jobs being created are nowhere near what is needed.

The government has tried to address this situation through doles. This has meant distributing food grains at a cheaper price, distributing kerosene at a cheaper price, distributing fertiliser at a cheaper price and even trying to create some work for citizens under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA).

The problem with these doles is that they are extremely leaky and on many occasions they do not reach those they are intended for. In the process, the government loses a lot of money. The leakages have other serious consequences as well (which I have talked about in the past and which I will keep talking about in the future).

Also, there is a fundamental problem with this approach—it doesn’t create the badly required jobs. Take the case of MGNREGA. The scheme is mandated to “provide at least 100 days of guaranteed wage employment in a financial year to every rural household whose adult members volunteer to do unskilled manual work.[1]

It is widely believed that MGNREGA pushed up rural farm wages, during the second term of the Manmohan Singh government. The idea behind this was that MGNREGA set a sort of a minimum wage, and if farmers wanted workers to work on their farms, they had to offer more money than the government was offering through MGNREGA.

In a research paper titled Rising Farm Wages in India: The ‘Pull’ and ‘Push’ Factors, published in April 2013, Ashok Gulati, Shweta Saini and Nidhi Satija point out that: “At all India level, the results reveal that a 10 percent increase in lagged GSDP (overall), GSDP (agri) and GSDP (construction) leads to 2.4 percent, 2.1 percent and 2.8 percent increase in farm wage rates respectively. This indicates that the growth in construction sector GDP has somewhat stronger influence on farm wages than the growth of overall GDP or even agri‐GDP. Impact of MGNREGA is also significant but is 4 to 6 times less effective than growth variables since 1990‐91.” (GSDP = Gross State Domestic Product).

What does this mean? It basically means that when the construction sector is doing well, the farm wages grow the fastest. In comparison, MGNREGA has a much smaller impact on farm wage growth. What this basically means that real economic activity leads to faster wage growth in comparison to the government trying to create some work through MGNREGA.

When the construction sector is doing well, a section of the farm workers drift towards jobs on offer, and this in turn pushes up wages for those who remain.

What also works in favour of construction is the fact that the jobs generated in the sector cater to India’s comparative advantage, which is the abundance of low-skilled labour. In fact, only 14.4 per cent of employees in the construction sector have secondary education.[2] As the Economic Survey of 2015-2016 points out: “Aggregate services employment grew faster than that in registered manufacturing and a number of service subsectors—transport, real estate and construction—registered substantially faster employment growth.”

This is not surprising given that the jobs in the construction sector cater to those with low-skills. In fact, it can continue to be a major creator of jobs in the days to come. A recent KPMG report titled Urban Indian Real Estate—Promising Opportunities expects the construction sector to be the largest employer in India by 2030. KPMG expects the sector to employ more than 7.5 crore Indians by then. The expectation is that at a size of one trillion dollars, the Indian construction sector will be the third largest in the world by 2030.

Like all reports put out by consultancies, this one also sounds good in theory. Nevertheless, many other things need to happen for India’s construction boom to take-off. Let me try and list a few here:

a) The mess that prevails in the area of land acquisition needs to be sorted out. Any construction happens only when there is some land. The Modi government (including the prime minister Narendra Modi) took a serious shot at this last year, but turned out to be unsuccessful. I don’t see the government spending more political capital on this any time soon.

b) One major factor that hinders the acquisition of land in this country is the lack of title records. This is something that needs to be addressed, if easier land acquisition, where the government role is limited, has to become the order of the day. The Rajasthan government has made a start on this front. Other states need to follow.

c) For any infrastructure boom to take off, banks should be in a position to lend. The government owned public sector banks are currently in a mess. The last thing they would want to do is to lend to infrastructure companies and infrastructure projects The gestation period for infrastructure projects is very long and there are many things that can go wrong in between.

d) To reduce the dependence of the infrastructure sector on banks for borrowing, India needs a well-functioning corporate bond market. (This is something that people have been writing about for the last 25 years). A well-functioning corporate bond market has the wherewithal to finance long-gestation infrastructure projects.

e) What does not help is the fact that the infrastructure sector in India is full of crony capitalists. And that stems from the fact that given the way the system functions, only a crony capitalist can perhaps manage it. This is like a chicken and egg story. Also, these crony capitalists in the past have had the habit of siphoning off the money lent to them by banks for infrastructure projects.

f) The construction sector can really take-off once the real estate sector takes off. The real estate sector has forward and backward linkages with 250 ancillary industries.[3] This basically means that when the real estate sector does well, many other sectors, right from steel and cement, to furnishings to paints etc., do well. The multiplier effect is huge.

The real estate sector has now been in the doldrums for more than five years. The simple reason for this lies in the fact that most Indian real estate has been unaffordable for a while now. For this anomaly to be corrected the nexus between politicians and builders needs to end. The system of electoral financing needs to evolve and move away from the way it currently is. And this is easier said than done.

[1] NREGA FAQs

[2] A.Amirapu and A.Subramanian, Manufacturing or Services? An Indian Illustration of a Development Dilemma, Working Paper 409, Centre for Global Development, June 2015

[3] Urban India Real Estate – Promising Opportunities, KPMG, August 2016

The column originally appeared in Vivek Kaul’s Diary on August 24, 2016

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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