F
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3 October 2017
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GVA and employment share inverse correlation in Indian economy
Analyzing GVA growth via labor market
During the first decade of the 21 century, as much as 85% of GVA growth can be attributed to productivity gains
rather than labor employment. Not surprisingly then, employment elasticity with respect to GDP growth is very low in
the Indian economy.
Nevertheless, most of these conclusions change quickly if we exclude the agricultural sector. The contribution of
st
productivity gains to non-farm
real
GVA growth was ~55% in the first decade of the 21 century, as against ~46% three
decades ago. Further, employment elasticity in the non-agricultural sector is much higher than that in the total
economy.
There is, however, one uniform conclusion with or without the farm sector – an inverse relationship between real
GVA and employment growth in the Indian economy, challenging the established economic literature. If not higher
GDP growth, then what can push job creation in India?
st
This product of ours was named ‘Fuel or Engines’ to represent the consumption
versus investment theme, which we have been discussing for 18+ months now. Our
detailed report released in June 2016 concluded very clearly that with lackluster
investments, consumption is unlikely to bear the entire burden of GDP growth for
long. As and when consumption slows, we argued that real GDP growth will slow
down inevitably because even higher investments will not be able to offset the
impact of slower consumption. With the focus shifting on employment, we plan to
devote the next few versions of this product to the labor market situation in the
Indian economy.
In our view, an alternative way to analyze GDP/GVA* growth is to look at the labor
market. There are only two ways in which GDP can grow – either by increasing labor
employment or raising productivity (or a combination of both). GDP growth in an
economy is equivalent to the summation of growth in labor employment and its
productivity. Thus, for any given level of GDP growth, the higher the productivity
growth, the lower the employment growth required.
Productivity accounted for as much as ~85% of real GDP growth…:
While
Productivity gains
accounted for ~85% of real
GVA growth during the
recent decade
employment accounted for about two thirds of real GVA growth in 1970s, its
contribution fell to as low as 15% during the most recent decade for which data are
available
(Exhibit 1-2).
It implies that productivity gains accounted for ~85% of real
GVA growth during the recent decade. Thus, while employment has grown by only
1.2% per annum during the recent decade (FY04-13, when real GVA growth
averaged 7.6%), productivity growth averaged 6.4% per annum.
* We have used GVA and GDP synonymously in this note because the large difference between GVA and GDP is a recent phenomenon,
which is not covered in this study
Nikhil Gupta – Research analyst
(Nikhil.Gupta@MotilalOswal.com); +91 22 3982 5405
Rahul Agrawal – Research analyst
(Rahul.Agrawal@motilaloswal.com); +91 22 3982 5445
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Exhibit 1:
Contribution of labor employment and
productivity to real GVA growth over past four decades
(%)
35.1
61.3
69.4
84.6
Employment
Productivity
Exhibit 2:
Average growth in employment and productivity
during various periods
(% YoY)
Productivity
Employment
0.7
1.3
1.6
3.5
2.3
3.3
1.1
1.9
2.9
4.8
2.4
3.0
7.1
5.7
64.9
38.7
1973-83
1983-93
30.6
1993-2003
15.4
2003-13
FY85-89 FY90-91 FY92-96 FY97-99 FY00-04 FY05-09 FY10-13
Data arranged as per Lok Sabha elections
We have combined two elections held in 1996 and 1998
Source: Reserve Bank of India (RBI), Central Statistics office (CSO),
National Sample Survey Office (NSSO), MOSL
In contrast to conventional
wisdom, there seems to be
a
negative
correlation
between real GVA growth
and employment
…explaining weak and falling employment elasticity:
As a direct side-effect of
productivity driven real GDP growth, employment elasticity of real GDP has shrunk
considerably in the Indian economy.
Exhibit 3
below shows the long-term trends in
real GVA and employment growth over the past three decades, while employment
elasticity with respect to real GVA is shown in Exhibit
4.
Surprisingly, in contrast to
conventional wisdom, there seems to be a
negative
correlation between real GVA
growth and employment. Ironically, during the past two slowdowns – early 1990s
and early 2000s – while real GVA growth decelerated, employment growth picked
pace. Further, as the contribution of productivity to real GVA growth has increased
over the past four decades, employment elasticity (ratio of employment growth to
GVA growth) has witnessed a downtrend
(Exhibit 4).
Exhibit 4:
Employment elasticity with respect to real GVA
has shrunk considerably since mid-1980s
Employment elasticity to GDP*
1.2
1.0
0.8
0.6
0.4
0.2
0.0
FY84
FY88
FY92
FY96
FY00
FY04
FY08
FY12
* Employment growth/GVA growth Source: RBI, NSSO, CSO, MOSL
Exhibit 3:
Average growth in real GVA and employment in
India over past three decades
10
8
6
4
2
FY84
FY88
FY92
FY96
FY00
FY04
FY08
FY12
Slowdown periods are shaded
(% YoY)
Real GVA
Employment (RHS)
(% YoY)
4
3
3
2
2
1
1
0
3-year centered moving average
Not only employment has
contributed as much as half
of non-farm GVA/GDP
growth in the recent
decade, but also it has
fallen only slightly during
the past four decades
Non-farm sector clears many misconceptions:
Further analysis reveals that the
conclusions of abysmally low share of labor employment to real GVA/GDP growth
and continuously falling employment elasticity are a direct result of the evolving
agricultural sector in the economy. The first decade of the 21
st
century was the only
period since 1970s (or probably earlier) when agricultural employment declined.
Consequently, not only it skewed entire GVA growth in favor of productivity gains,
but also pulled down employment elasticity.
3 October 2017
2

Consequently, we re-estimate the contribution of employment and productivity
growth to real GVA/GDP of the non-farm sector
(Exhibit 5).
The results are exactly in
contrast to the previous conclusions. Not only labor employment has contributed as
much as half of non-farm GVA/GDP growth in the recent decade, but also it has
fallen only slightly every decade during the past four decades. Employment growth
in the non-farm sector during the past decade was ~4% per annum, when the non-
farm sector posted growth of 8.5% per annum. The corresponding growth numbers
during 1970s were 2.4% and 4.5%, respectively.
Employment elasticity in
the non-farm sector has
averaged 0.48 in the past
decade versus 0.22 for the
entire economy
Accordingly, employment elasticity with respect to GDP/GVA growth in the non-
farm sector is not as weak as for the entire economy (including agriculture). In fact,
employment elasticity in the non-farm sector has averaged 0.48 in the past decade,
versus 0.22 for the entire economy
(Exhibit 6).
Exhibit 6:
Employment elasticity with respect to real GVA
with and without agricultural sector
1.2
Employment elasticity to GDP*
Total
Excluding Agriculture
Exhibit 5:
Contribution of employment and productivity to
non-farm GVA growth over past four decades
(%)
Employment
Productivity
46.5
44.9
52.4
54.5
1.0
0.8
0.6
0.4
0.2
0.0
FY84
FY88
FY92
FY96
FY00
FY04
FY08
FY12
* Employment growth/GVA growth
53.5
55.1
47.6
45.5
2003-13
1973-83
1983-93
1993-2003
Source: RBI, CSO, NSSO, MOSL
The conclusion of an inverse
correlation between GDP
growth and employment
growth remains intact with
or without the agriculture
sector, which is in stark
contrast to the established
economic literature
However, one uniform conclusion is highly disturbing:
Since the decline in
agricultural employment is highly desirable, it is appropriate to accept the results of
the non-farm sector, which convey that employment elasticity with respect to
GVA/GDP growth has averaged about 0.50 over the past four decades.
Does this imply that low GDP growth hurt employment generation in the economy,
as is almost universally accepted? We do not think so. Although employment
elasticity has averaged about 0.52 since early-1970s, it has peaked during the
slowdown periods and bottomed during the peak GDP growth periods
(Exhibit 6).
The conclusion of an inverse correlation between GDP growth and employment
growth remains intact with or without the agriculture sector, which is in stark
contrast to the established economic literature
(Exhibit 7).
3 October 2017
3

Exhibit 7:
Real GVA and employment share an inverse
correlation in the non-farm sector too
11
10
9
8
7
6
5
4
FY84
FY88
FY92
FY96
FY00
FY04
FY08
FY12
Slowdown periods are shaded
Real GVA
(% YoY)
Employment (RHS)
(% YoY)
7
6
5
4
3
2
3-year centered moving average
Exhibit 8:
Employment and real GVA growth during various
periods without agricultural sector
(% YoY)
6.6
3.8
2.6
7.4
6.1
Non-farm real GVA
6.6
Employment
9.3
7.8
6.7
4.2
2.8
2.8
2.8
5.1
FY85-89 FY90-91 FY92-96 FY97-99 FY00-04 FY05-09 FY10-13
Source: RBI, CSO, NSSO, MOSL
In wake of hard data, the almost unanimously accepted non-arguable conclusion
that high GDP growth leads to high employment falls flat in case of the Indian
economy. In fact, during periods of highest non-farm growth of 9% (FY05-12),
employment grew at an average of 3.4% only, implying that higher growth was more
driven by productivity gains
(Exhibit 8).
What needs further investigation?
Now, there are two key questions, which will be addressed in our subsequent
reports on the subject.
First,
what explains the inverse correlation between
employment and GVA/GDP growth in the Indian economy? Don’t established
economic theories work in India?
And
second,
if higher GDP growth does not necessarily lead to more jobs,
what will
create more jobs? Considering the race to adopt automation by companies to lead
in productivity gains, some sections tend to argue that the economy has already
missed the bus to provide sufficient employment opportunities. However, we will
discuss that this is not true.
3 October 2017
4

NOTES
3 October 2017
5

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