Rate cut won't help in job generation, reveals study
employment. In the 1980s, while a unit of labour used to cost Rs 10,000, a unit of capital was 16 times dearer, costing about Rs 1,57,000.
Mumbai: Amidst increasing demand from industries for a interest rate cut to revive investment and growth, a new study based on the recent report of the annual survey of industries (ASI) states that a further cut in interest rate is not going to meaningfully improve employment generation in the country as automation has started replacing labour even in some of the labour intensive sectors.
With lower costs, relatively better productivity and no restrictive laws on capital (machinery and equipment), senior economist at Motilal Oswal Securities said that the Indian manufacturing sector doesn’t seem to be incentivised enough to increase labour employment.
In the 1980s, while a unit of labour used to cost Rs 10,000, a unit of capital was 16 times dearer, costing about Rs 1,57,000. Over the next three decades, this huge gap between labour and capital costs disappeared, as labour continued to turn more expensive, while capital cost was broadly unchanged.
In FY10, a unit of labour cost Rs 1,47,000, while a unit of capital cost Rs 1,32,000. In FY15, while labour costs surged even higher to Rs 2,54,000, a unit of capital cost Rs 1,46,000. While the cost of a unit of labour was 0.1 times the cost of capital in the early 1980s, it crossed 1x for the first time in FY10 and has increased further to 1.7 times in FY15.
“Not surprisingly then, industries prefer capital over labour. These facts question the legitimacy of further rate cuts in a labour-abundant economy such as India. If the policy makers want the manufacturing sector to increase employment meaningfully, we believe making capital relatively cheap is certainly not the right thing to do,” said a team of analyst led by Nikhil Gupta, economist at Motilal Oswal Securities.
As per the data, labour employment by Indian industries grew 2.5 per cent in FY15, while real gross value added (GVA) grew 8.4 per cent. Over the past 35 years, employment in industrial sector has grown at an average of 2 per cent, while real GVA has increased at an average of 8 per cent. Thus, while real GVA and employment tend to move in similar direction, almost 75 per cent of GVA growth has been
contributed by improved productivity.