Home >Opinion >India’s labour market challenges

It is to the credit of Prime Minister Narendra Modi that he continues to use his political capital to push for labour market reforms.

It is not going to be an easy task. His recent speech to the trade unions should also be read as an implicit admission that India cannot have a more flexible labour market unless the trade unions are taken into confidence. The changes made to Indian labour laws by the Modi government are still only akin to chipping away at the edges. Some of the decision-making has been pushed to the states since a wider national consensus seems elusive, as is the case with the land acquisition law as well.

One salient fact about employment in the Indian manufacturing sector was highlighted in a recent paper by economists Ejaz Ghani, William Kerr and Alex Segura. Eighty per cent of Indian manufacturing output comes from enterprises in the formal sector while a similar proportion of manufacturing employment is generated by enterprises in the informal sector. This is a fundamental disconnect: one set of enterprises accounts for most of the output while another set of enterprises accounts for most of the employment. It has also created a labour aristocracy that seeks to protect its privileges but in effect keeps the majority of industrial workers trapped in informal enterprises.

The policy challenge that emerges from this paradox is clear. The government has to create conditions that encourage large enterprises to take on more workers while making it easier for informal enterprises to grow in scale. It is no secret that India does a terrible job on both fronts: industrial employment growth in the corporate sector has been sluggish while informal enterprises are smothered by a corrupt system. The result is one of the biggest failures of Indian public policy since the advent of economic reforms: the inability to create jobs that would allow workers to exit the overcrowded farms.

The traditional Indian policy framework tried to grapple with the problem in an interesting way. The early plans focused on the production of capital goods while it was hoped that village industries would absorb excess labour. Then reservations for small enterprises were introduced to generate employment. Neither strategy worked—but there has been no coherent strategy as a replacement either.

The core economic issues are varied: the capital intensity of Indian industry, the employment elasticity of economic growth, the exchange rate strategy, the level of skills on offer in the labour market, the ease of doing business, the structural impediments faced by informal enterprises and much more. Indian industry seems to believe that all that matters is waving a magic wand called labour market reforms. The problem is far more complicated.

These debates need to be framed against two big issues. One is a challenge. The other is an opportunity.

The challenge is highlighted in the new round of rural distress. It shows once again that the only viable way to break the cycle of distress is through labour-intensive industrialization, as was done in so many other Asian countries, including China.

The opportunity is that China has begun to make the transition up the value chain by exiting the low-value manufacturing it dominated for nearly two decades. Chinese wages are rising, the exchange rate could strengthen and the government wants to shift the economic model towards a greater dependence on domestic consumer demand. These transitions create a unique opportunity for India, which has till now missed the global manufacturing bus because of its own policy mistakes.

Making the Indian labour market less rigid is thus not just about the freedom of big business houses to fire people at will. Nor should it be restricted to such an outcome. The real reason to push ahead with labour market reforms is that these reforms should interact with changes in other areas of industrial regulation so that factory employment begins to rise in tandem with output.

Can India absorb the large number of new entrants to its labour market with adequate reforms? Tell us at

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