ONE of India’s bigger private-sector employers can be found in Patna, the capital of Bihar, a poor, populous state in the east of the country. Narendra Kumar Singh, the boss, has three gold rings on his right hand and arms big enough to crush rocks. His firm, Frontline, has 86,000 people on its books. They are mostly unskilled men from rural areas in poor states like Bihar; thanks to Mr Singh they have jobs in cities all over India. There is lots to celebrate about this. Mr Singh’s business has sales of $185m and its employee base has grown by 1,600% since 2000. He is looking for a Western partner and wants to expand to Sri Lanka and Bangladesh. He is providing paid work for part of the large cohort of young people now entering the workforce. And by shifting people from farms to cities he is helping urbanisation of the sort that underpinned startling progress elsewhere in Asia.

Yet Frontline is also a symptom of a colossal failure. For it is not supplying labour for a manufacturing boom of the kind that helped so many in China, South Korea and Taiwan out of poverty, or for the IT services at which India has excelled. Instead it offers relatively unproductive service-sector jobs—in particular, security guards. It has become de rigueur for every ATM, office, shop and apartment building to have guards. Across India millions of young men now sit all day on plastic seats in badly fitting uniforms with braids and epaulettes, unshaven and catatonically bored as the economic miracle passes by. This isn’t how East Asia got rich.

From a bomb to a boom and back

During the boom of the 1990s and 2000s, it became fashionable to talk of India’s forthcoming “demographic dividend”. This was quite a turnaround. In the 1960s and 1970s, the booming populations of states like Bihar were seen as a curse. “The Population Bomb”, a Malthusian bestseller by two American environmentalists, Paul and Anne Ehrlich, began by describing “one stinking hot night in Delhi”, and its horrifying number of “people, people, people, people”. In the 1970s there was a forced sterilisation programme. Sanjay Gandhi, a thuggish scion of the ruling dynasty, organised vasectomy camps near Delhi—one doctor boasted he could perform 40 sterilisations an hour.

In the 1990s, though, economic liberalisers evoked the experiences of East Asia and the demographic dividend it benefited from when previously high fertility rates began to decline. Working-age populations rose at the same time as the ratio of dependants to workers fell. An associated rise in the rate of saving allowed more investment, helping pay for the vast expansion in manufacturing that employed those workers and lifted hundreds of millions of people out of poverty. In the mid2000s the prospect of a similar dividend in India, where the fertility rate had dropped a lot in the 1980s and 1990s, was a key reason for investors’ optimism. The timing was particularly encouraging: India’s labour force was due to soar as China’s began to decline (see chart 1).

Now many are worried that India is squandering this demographic opportunity. This is partly because the economy is in a funk. Growth is at 4.5%, half the rate at the peak in the mid-2000s. Industry is 27% of output, compared with 40-47% in other big developing Asian economies. High inflation has prompted households to store ever more of their savings in physical assets rather than the financial system (see chart 2). The costs are clear. With few manufacturing exports, India has a chronic balance-of-payments problem. And India has created too few formal jobs in the past decade. India’s leaders have long said they are committed to employment, but have shown little stomach for the economic upheaval rapid job creation entails. China’s policymakers accepted that the process of adding jobs overall often destroyed jobs in particular industries and places. For years India’s politicians have preferred economic palliatives such as NREGA, a giant scheme that guarantees work for the rural poor, and subsidies for the needy. Now India’s borrowing has soared to queasy levels and welfare spending is being squeezed. There are worries that joblessness could be feeding the spasmodic unrest seen in some cities since 2011. Not all protesters were young. And their motivation varied from support for the anti-corruption guru Anna Hazare to disgust at a series of rapes in Delhi. But the protests added to a sense of youthful volatility.

An official report into the public finances in 2012 warned that a combination of slower growth and the demographic bulge could be “politically destabilising”. Rahul Gandhi, who is poised to lead the ruling Congress party in the general election due by 2014, speaks of the “angry” young and their “urgent demand for jobs”. The government’s economic adviser, Raghuram Rajan, says jobs are the biggest priority. Some in the elite seem to be waking up. But is it too late?

Quantity and quality

To see the scale of the challenge, consider that the working-age population, aged between 15 and 64, will rise by 125m over the coming decade, and by a further 103m over the following decade. On current trends a third of the growth will come from poorer and less literate states in the north, notably Uttar Pradesh and Bihar.

Not everyone of working age will be in the job market. More people aged 15-24 will remain in education—26% do today. Some adult women will stay at home; presently only about a third work, a low level by Asian standards. But India probably needs to create about 100m net new jobs in the next decade.

China’s boom created 130m net jobs in services and industry between 2002 and 2012. But India is no China. The most recent survey showed no net new jobs were created between 2004-05 and 2009-10, a dramatic slowdown on the previous five years, when 60m jobs were created.

These figures may not be as shocking as they seem. Fewer jobs were created partly because some folk voluntarily withdrew from the workforce. More women in rural areas decided not to look for jobs—perhaps because several fairly good years for farmers meant they did not need the cash. Wages for the unskilled have been rising, and though this is partly because of the NREGA guaranteed-work scheme, it suggests there has not been a collapse in the jobs market. For all these caveats, though, the headline data remain disquieting. Even during a boom few jobs were created. Now that the economy is growing more slowly things have got harder.

The rural poor seem likely to be frustrated, which will add to the number of migrants headed for the cities. The better-educated will suffer, too. By some estimates India produces twice as many new graduates each year as it can absorb. In a half-built private-run campus in Patna most students have modest expectations of their future salaries—typically $500 a month. Even so, their professor worries they won’t all get job offers.

The problem lies not just in the quantity of jobs, though; quality matters too. Statistics verify what the naked eye can see in any Indian city. They all have their armies of guards, peons, delivery boys, ear-dewaxers and men who sit on stools in lifts pressing the buttons. About 85% of India’s jobs are with “informal” enterprises—those organisations with fewer than ten staff which are not incorporated. Another 11% are casual jobs with formal companies. Only 16% of Indians say they get a regular wage. People with informal jobs are usually very poor. An official study of 2004-05 data concludes that 80% of informal workers got less than the then national minimum wage of $1.46 a day. There are some good jobs. But India’s IT firms, for example, account for only a few million jobs out of a total of half a billion.

All this seems to be closely linked to the lack of manufacturing. Although some 23% of Indian workers are categorised as working in “industry”, compared to nearly 30% in China and 22% in Indonesia, half of India’s “industrial” workers are in construction whereas the figure is just a quarter in Indonesia. Of the remainder almost all are in the “manufacturing” subcategory. But these are not jobs that involve exposure to modern machinery, techniques and training (crucial for unskilled labour let down by the country’s education system). More than half of Indians in the manufacturing sector work in facilities without electricity.

The obvious problem is a “missing middle”. Most of the jobs are in tiny operations. Most of the value added is in a few big, sophisticated firms that prefer using machines to humans. Some, such as Tata Sons and Mahindra, are well-known. Most of those seem keener on expanding globally than on building factories at home. For every dollar of foreign direct investment (FDI) made by outsiders in Indian manufacturing in the five years to March 2012, local firms invested 65 cents in manufacturing abroad. The number of jobs in factories (excluding the very smallest) has increased since 2005; but only by 2.8m.

What manufacturing FDI India does attract tends to be high-end—Volkswagen has a smart €570m plant full of robots. Meanwhile investment is pouring into Vietnam and Indonesia (see chart 3) as costs in China rise. Li & Fung, a big trading firm based in Hong Kong which buys goods in Asia and sells them in the West to retailers including Walmart, gets some 5% of its goods from India, compared with about 20% from South-East Asia.

Death on the shop floor

India’s missed opportunity is most evident in textiles and clothing, a labour-intensive industry that has been dominated by China. In 2011 McKinsey, a consultancy, found that purchasing managers at global clothing firms wanted to shift their sourcing from China; their favoured new destinations included Bangladesh, Vietnam, Indonesia and Cambodia—but not India. India’s textile exports have grown, but those from Vietnam and Bangladesh, combined, easily outstrip them.

Why don’t more people want to make things in India? Indian migrant workers are sought across the world, not least in the Gulf. But at home tricky labour relations are a problem.

In a dusty lawyers’ room in the industrial belt near Delhi, five workers explain how they were fired by Maruti Suzuki, a carmaker controlled by Suzuki of Japan, after simmering tensions on the shop floor led to a riot at a nearby plant in July 2012. A manager was burned to death. The men are in their 20s and from rural families. They have a strong sense of injustice. “We have told our families that they should consider us as behind bars and that they should make other plans for their lives. We are ready for a long fight.” The Maruti violence has so far been a one-off. But the episode unnerved businesspeople.

Economists have long identified arcane labour laws as the key to India’s manufacturing problem. Scholars have gleefully dissected India’s 51 central and 170 state labour statutes, some of which pre-date independence, to demonstrate how they make it hard for firms with more than a handful of staff to fire people and allow disputes to become legal endurance tests. Studies have shown how tighter rules impede growth in labour-intensive industries and prompt firms to remain small.

Two-tier world

Yet the industrial belt in which Maruti’s factory sits shows times have changed. Big firms can bypass labour law by using “contract” workers, technically employed by third-party agents. In the past decade they have used—or, workers say, abused—this kink in the rules a lot more. At three car and motorbike plants, based on discussions with workers, about 70% of 14,500 staff work on a contract basis. Their average wage is $5-6 per working day, a quarter of what permanent, unionised staff get. The minimum wage in Guangzhou, a Chinese industrial hub, is $10.5 per working day.

That might appear to be good news. If lots of factory workers can be hired at globally competitive rates, on flexible terms, manufacturing firms should pile into India. In practice the situation is unstable. As the Maruti riot showed, the two-tier workforce has caused anger—the five men in the lawyers’ room were permanent employees who say they were disgusted by the treatment of their contract colleagues. Maruti is abandoning the distinction. And from a financial perspective the contract system is not as good as it looks for employers. They must still hire unionised permanent staff, and though these may be in a minority they can account for the majority of a plant’s wage bill, lifting the average pay across all workers to Chinese levels.

The labour situation is a long way from the strikes and militancy of the 1970s, but it is unpredictable. That puts off potential manufacturers. And there are lots of other deterrents, too, from red tape to erratic electricity (see, for example, the monumental blackout across north and east India in 2012), a lack of land, bad roads and busy ports. One shipping boss thinks logistics add 20% to the cost of making something in India, compared with 6-8% in China. The Middle Kingdom hardly excelled on such metrics 20 years ago, but India does seem to be especially intimidating for industrial firms. Where non-labour problems have been tackled, notably in Gujarat, manufacturing does better. But Gujarat—population 60m—is not a big state by Indian standards.

Since 2000 India has tried carving out special economic zones (SEZs) to create islands with lower taxes and access to infrastructure, where manufacturers can feel at home. But these have been a limited success, with many dominated by IT firms. A new twist is a proposed industrial corridor between Delhi and Mumbai, inspired by the expressway between Seoul and Busan in South Korea. The project has Japanese support, but basic things such as access to land and water have yet to be settled.

In its frustration India is flirting with a more overt industrial policy. A new rule says that government offices must now buy computers with a chunk of components made locally. This is designed to improve the balance of payments and promote an indigenous industry. The government is also now offering subsidies that could be worth billions of dollars to attract a microchip foundry. There is a push to indigenise the defence industry.

The legislation on offer to try to change the situation more generally may not enthuse industry. There are noises about labour-law reform, but rather than liberalise the regime for permanent workers it may merely tighten the one for contract employees. A bill that is supposed to make it easier to buy land could make the process even more expensive and protracted, argue many businesspeople.

For robust jobs growth there must be a change of mindset among officials, judges and politicians. Although Mr Gandhi and others are talking about the challenge, not everyone is, partly due to the electoral system’s skew towards the countryside. Only 10% of legislators in the lower house have urban constituencies in which 75% or more of the population is urban, reckons the Centre for the Study of Developing Societies (CSDS), a think-tank. Jobs in factories in cities are not a priority for most politicians.

Failing gently

Could the voices of the young change this? There is a rising level of political involvement. A recent survey by CSDS and the Konrad Adenauer Stiftung, a German think-tank, found that nearly twice as many of today’s 18- to 33-year-olds say they are interested in politics as did in 1996. Some 20% of young rural men say they participate in protests, as do 22% of college-educated young men. Those with exposure to the media, from talk shows to social media, are most politically active. One of India’s big mobile-messaging sites, Nimbuzz, with 25m mostly young users, says traffic doubled in the aftermath of the rape scandal in Delhi in December and during the Anna Hazare anti-graft protests. But the young have little independent political identity; their party allegiance is much like that of their parents. Nor do they have any obvious muscle.

The lack of political resolve and of a clear signal from voters mean India is unlikely to summon up the single-minded dedication with which South Korea, Taiwan and China created industrial jobs. Its demographic dividend will yield only a fraction of what it could, and the problem of low-quality employment will fester. That would be an immense waste. Most policymakers and well-off people would deny that it is a deep threat, though. The country’s religions, its distinctive mix of hierarchical culture and populist politics and its durable family structures will ensure social stability, they say.

They are probably right. They might want to pay their security guards a little more, though. Just in case.