Decoding India’s Job and Wage Problem | Can India Truly Surpass the Chinese Economy?

Rathish Balakrishnan sits down with Manish Sabharwal , Vice Chairman, TeamLease Services Limited, to discuss India's Job and Wage Problem. While India's unemployment rates remain relatively stable, the economy grapples with deep-rooted structural challenges, including a heavy reliance on agriculture and low productivity in manufacturing. The discussion provides critical insights into India's economic performance, comparing it with the Chinese economy, and what India needs to do to surpass it.?

Rathish Balakrishnan: Manish, how is India’s job marketing doing? Are we actually seeing more jobs or less jobs?

Manish Sabharwal: India is like the Tale of Two Cities. It was the best of times and the worst of times. We've still got 42% of our labour force working in agriculture. We've got only 11% of our labour force working in manufacturing. And we probably have 50% of people self-employed. Since 1991, we haven't produced enough manufacturing jobs. We haven't formalised the economy enough. Karnataka and Uttar Pradesh have the same GDP, but Karnataka does it with one-fifth the number of people. If everybody in India lived in Bangalore, then India's GDP would be more than China, right?

If you rank manufacturing companies by size, there's a 24 times difference between the biggest and smallest manufacturing firms. Now, if there's a 24 times difference in productivity, then you'll never pay the wage premium. If you don't pay the wage premium, you'll never be productive. So you get stuck in this low-level equilibrium, which shows up in our enterprise stack.?

We have 63 million enterprises, 12 million don't have an office, 12 million work from home, and only 1 million pay Social Security. Only 26,500 companies in India have a paid-up capital of more than ten crores. So 63 million enterprises means nothing if it only translates to that small number at the bottom.?

Rathish Balakrishnan: Does India have a wage problem then?

Manish Sabharwal: Jobs are easy to provide, but do those jobs pull you out of poverty? We've oversold fiscal and monetary policy. If fiscal deficits could make countries rich, why would any country bother being poor? Overselling fiscal and monetary policy has been one of our challenges in economics, where you don't structurally take the worm's eye view of the daily life of employers. You're always taking the bird's eye view of an employer.? This is one of the reasons why India's flow of jobs since 1991 has not transformed the stock of jobs. In the same period, China moved 550 million people from farm to non-farm employment. We still have 200 million people on farms who need to be moved out.

The wide informality of India’s economy is bad for productivity because informal firms can't attract the talent, technology, or capital to be productive.?

The wages question should be viewed as five ways to drive higher productivity, which is states, cities, sectors, firms, and individuals.

?40-50 years ago, you would not have expected a democracy like India to deliver strong shareholder returns, weak wage growth, and China to have delivered weak shareholder returns and strong wage growth, right? You would expect a democracy would care about wage growth and an autocracy would care about shareholder returns. But India's stock market has returned 1,300% in the last 20 years. 13x of your money while in the Chinese stock market is -13%. So if you put ?100 in China, you would have ?87, and in India you would have ?1300. So we have no shortage of labour and we have no shortage of capital. Also 50% of India's foreign direct investment since 1947 has come in the last five years.

Rathish Balakrishnan: What is it then that is holding India back?

Manish Sabharwal: ?Yeah, I mean, in nominal terms, there’s no shortage of land, labour, or capital. Cultural explanations for economic performance are usually unhelpful, if not outright flawed. For instance, you may have heard of the term "Hindu rate of growth," but consider this: India moved from a 2% growth rate to 7% without "shooting all the Hindus." Clearly, the so-called Hindu rate of growth was an incomplete—if not a bigoted—explanation for India's earlier economic struggles.

I don’t think the rule of law has been a major problem either. Yes, we could be more peaceful, but for most investors, employees, and companies, life in India has been relatively predictable outside of a few isolated pockets. Financialisation also isn’t the issue. Our banks are healthier than ever, and equity markets are performing well.

By process of elimination, I believe the primary issue is regulatory cholesterol. Since 1947, India has not managed to convert mass democracy into mass prosperity. Remarkably, we’ve built the world’s largest democracy on the infertile soil of one of the most hierarchical societies. Building a democracy should theoretically be harder than building an economy because democracy isn’t an algorithm—it’s more like a heuristic. In contrast, building an economy is more straightforward: productivity is what drives progress.

In my view, regulatory cholesterol is why we haven’t raised wages, built enough productive firms, or created sufficient factories. For example, the largest factory in China employs 600,000 people, while the largest in India employs only 55,000 at a single location.

Manufacturing globally has also changed. The peak of any country's labour force in manufacturing was Britain during World War II, with 45% of the workforce. The U.S. peaked at 33%, and China peaked at 28%. We’re unlikely to reach those levels again because manufacturing is far less labour-intensive today. However, India’s current figure—11% of the labor force in manufacturing—is far too low. We need to aim for 17–18%.

In the short run, "Make in India" is evolving into "Make for India," with foreign direct investment clustering in areas where domestic markets are reaching critical mass. Recognising the importance of domestic markets is crucial for creating jobs and raising wages. While openness and trade are essential, domestic consumption must also play a significant role.

Consider this: in 1970, India’s trade-to-GDP ratio was 7%. By 1980, it was 14%, and by 1990, it had reached 20%. These figures were sinfully low. Today, our trade-to-GDP ratio is 52%, making India a relatively open economy.

That said, we shouldn’t aspire to be like Singapore with a 180% trade-to-GDP ratio or even Thailand at 95%. These countries have small domestic markets and must rely heavily on external trade. In contrast, India, with its 1.3 billion people, has significant domestic consumption potential.

China is now rightly criticised for focusing too much on investments and exports as engines of prosperity. While India must focus on investments and exports, we must also leverage the power of domestic consumption. Look at the U.S.: it’s not a highly globalised economy, with trade making up just 25% of GDP. Similarly, India must strike a balance by fostering a robust domestic market alongside external trade.