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Employment U-turn: Rural India is India’s main employer

The recently released periodic labour force survey (PLFS) for 2019-20 brings to the fore a worrying truth about the Indian economy – an increasing trend in the number of people employed in agriculture. Worryingly the share of workers employed in manufacturing, construction and even some services contracted.

The latest PLFS data suggests that rather induce a transition out of agriculture in to manufacturing, the typical pathway to structural transformation and a process that was all too slow in India to begin with, the Indian economy is now restructuring such that agriculture is emerging as the primary driver of job growth. To put this in perspective, consider the following: Between 2018-2020, India’s total employed labour force went up from 380.57 million in 2018-19 to 426.75 million in 2019-20. Of this, an additional 46.18 million jobs, as many as 32.72 million or 70.9% were created in agriculture. The number of manufacturing and construction workers increased by a mere 1.65 million and 3.58 million, respectively, in 2019-20. What does this mean for the future of agriculture and the economy more broadly?

Unpacking trends

Consider the following facts.

First, labour force participation rate or LFPR. This is defined as the ratio of the country’s labour force, whether employed or unemployed, to its total population. As Chart 1 reveals there has been a significant increase in the LFPR, from 36.9% in 2017-18 and 37.5% in 2018-19 to 40.1% in the 2019-20 PLFS. However, this jump is perceptibly higher for rural than urban India.

Note: Rates are based on usual (principal+subsidiary) economic status during the preceding 365-days reference period.

Second worker population ratio or WPR. This is the percentage of the country’s population that is actually employed. The WPR, too, has gone up significantly in 2019-20; again this is on account of rising employment in rural India.

Note: Rates are based on usual (principal+subsidiary) economic status during the preceding 365-days reference period.

With the percentage of employed persons in the population rising, it is natural to also expect a corresponding drop in the ratio of those unemployed. The unemployment rate is defined as the percentage of persons in the country’s labour force that are unemployed (the total labour force, we saw, includes those who are both employed and unemployed). The chart below shows a sharp one percentage point dip in the unemployment rate in 2019-20. Once again, it is rural that has registered a bigger fall than urban.

Note: Rates are based on usual (principal+subsidiary) economic status during the preceding 365-days reference period.

With rural India emerging as the primary location for job creation, it is inevitable that agriculture is the primary driver. This is visible in the table below which highlights the distribution of workers or employed persons by broad industry/ sector.

Percentage distribution of employed workers

2017-18 2018-19 2019-20
Agriculture 44.1 42.5 45.6
Manufacturing 12.1 12.1 11.2
Construction 11.7 12.1 11.6
Mining & quarrying 0.4 0.4 0.3
Electricity, water, etc 0.6 0.6 0.6
Trade, hotels & restaurants 12.0 12.6 13.2
Transport* 5.9 5.9 5.6
Other services 13.2 13.8 11.9
TOTAL 100.0 100.0 100.0

Note: Employment is based on usual (principal+subsidiary) economic status during the preceding 365-days reference period; *Includes storage & communications.

It can be seen that the share of workers employed in the agricultural sector has risen to 45.6% in 2019-20, from 42.5% and 44.1% for the preceding two PLFS years. This has been accompanied by the declining percentages of those engaged in manufacturing, construction and most services, barring trade, hotels & restaurants. Importantly, while the country’s rural employed workforce expanded by 35.82 million in 2019-20, over 89% of it was because of agriculture.

Is this trend of rising employment in agriculture reflective of a genuine rural resurgence and is this trend good for the Indian economy?

Through 2019-20, as the Indian economy decelerated, agriculture provided resilient. Agricultural growth stood at 4.3% in 2019-20, which not only surpassed that of overall gross value added (4.1%), but even manufacturing (minus 2.4%) and construction (1%).

One shouldn’t be surprised to see these results being replicated in the next PLFS for 2020-21 as well. Agriculture, we know, was the only sector that grew (by 3.6%) amidst an overall economic contraction (of 6.2%) in 2020-21. There were three main reasons for that – a good monsoon (both 2019 and 2020 were surplus rainfall years), farm-related activities being exempted from lockdown restrictions and stepped-up government procurement of produce. For a more detailed background on this, see our previous note (https://cprindia.org/news/9808).

The questions that really need to be asked is: Can agriculture continue to be the economy’s primary growth driver and job generator and how desirable is this for the rural economy?

The previous Employment and Unemployment Surveys of the National Sample Survey Office (the NSO’s earlier avatar) had shown India’s industry and services sectors to have added about 52 million jobs between 2004-05 and 2011-12. Of that, 25 million was in construction alone, with manufacturing (6 million) and other services (21 million) adding the rest. The 52 million-odd additional employment opportunities helped in pulling away some 37 million Indians from farms. And that, in turn, drove up rural wages, both in nominal and real terms (see chart below).

Note: Nominal wages are simple arithmetic all-India average for rural male labourers across 25 agricultural and non-agricultural occupations; for real wages, the Consumer Price Index for Rural Labourers has been used.

Source: Labour Bureau.

We will, in a subsequent note, be pointing out how the growth in non-farm incomes (including in rural areas) from roughly the mid-2000s till around 2013-14 actually gave a huge boost to Indian agriculture. Not only did it generate more demand for farm produce, but also stimulated diet and cropping diversification. Agriculture’s own cause was enabled by the growth of employment and income opportunities outside of agriculture.

The reversal in India’s structural transformation back toward agriculture is undoubtedly an indicator of deep distress in the Indian economy and a fall back to subsistence employment. The policy implications in the short term are significant. Enhanced safety nets through PM-KISAN and MGNREGA, which allows work on farm land for small and marginal farmers, will be critical investments needed to ensure that incomes are protected and basic needs are met. However, without firing other cylinders of the economy, in the long term, the costs of this reversal in India’s structural transformation will be heavy. Any discussion on a post COVID 19 economic revival has to recognize the limits of a growth model where agriculture is re-emerging as the primary employer.

This note, part of the Understanding the Rural Economy series by CPR, has been authored by Harish Damodaran and Yamini Aiyar, with research support from Ragini Rao Munjuluri and Samridhi Agarwal.

Find all previous notes as part of the series here: