Employment implications of India’s international trade – A macro view based on Input-Output analysis

Often trade policy of a country is evaluated for its employment effect and a liberal import policy is criticised for its adverse impact on domestic employment in a more explicit manner. However, for reasons such as low worker reallocations due to trade and employment creation from a concomitant export expansion, what bears relevance for employment outcomes is the aggregate effect, and not the sector-level effects of trade. In this paper, we focus on the aggregate employment effects of trade by accounting for the interdependencies among sectors of the economy. We make use of the Input-Output model and integrate the Reidel’s method to account for differential employment intensity of exports and imports and also the import-sourcing countries; to improve precision of the estimated employment effect of trade in Indian economy. Computations show that employment intensity of exports continues to remain higher than of the imports; suggesting the employment potential of the aggregate exports in the economy. At an aggregate level, the proportion of export supported employment has more than doubled over a period of two decades. On the import front, the proportion of employment forgone has more than trebled. While the net trade generated an employment surplus during 1993-94, an employment deficit is observed during 2013-14. The employment foregone due to imports has increased faster than the employment supported by exports. The analysis in the paper registers increasing employment opportunities foregone at an aggregate level as a net effect of trade. Under an aggressive liberalisation, two opposing forces have been in place. Greater exports support more employment, while higher imports have costed employment in the domestic economy. The relative employment intensity of exports underscores their role in employment generation and hence the continued impetus. On the import front, the increasing employment forgone noted from the analysis, as also through its stronger indirect impact should not be interpreted to advocate for (continued or higher) import protection in the long run. Past experiences have shown that import protection through a trade policy, without an industrial policy in place, can be only a temporary guard for employment. Although raising tariffs can be a source of interim employment relief, an industrial policy must be used in parallel to strengthen the domestic industry. Also, not only are the indirect employment effects stronger, they can also be more complicated to address due to their embodied effects (which are manifested through inter-sector linkages) which are generally difficult to track explicitly. This highlights that any shocks in the external sector would have employment affects on the upstream supplier and downstream buyer sectors. And, that such effects are relatively stronger on the import side. It must be made explicit here that the present paper does not related the trade deficit as the cause of a corresponding employment deficit. However, few suggestions have been brought forward to strengthen employment opportunities from trade.