GDP: New labour codes and opportunity for India’s weakest states

India has always had surplus labour and, not surprisingly as a result, fairly low wage rates. But instead of these being a strength, Indian states that had surplus labour and low wage rates, have historically been the laggards in the growth story

The idea is that these codes will provide a new, more predictable framework in which India’s labour can be engaged. (Express photo by Harmeet Sodhi)

Five years after they were passed by the Parliament, the Indian government notified the implementation of the four new labour codes last week. The new codes replace 29 existing laws and are aimed towards reforming India’s labour market, a key element in helping the Indian economy achieve its potential. That’s because, as the government claims, these labour codes will modernise labour market regulations, ease compliance burden, widen the security net for workers, including for gig and platform workers, and encourage formalisation. The idea is that these codes will provide a new, more predictable framework in which India’s labour can be engaged.

The proof of this pudding, as they say, will lie in how far these labour codes succeed in creating more jobs for India’s youth in the coming years. India has always had surplus labour and, not surprisingly as a result, fairly low wage rates. But instead of these being a strength, Indian states that had surplus labour and low wage rates, have historically been the laggards in the growth story — think of Uttar Pradesh (UP) and Bihar. On the other hand, countries with similar characteristics, say China, Vietnam and Bangladesh, have, over time, been successful in leveraging these very factors to overtake India, especially in the manufacturing sector — the one sector that has the most ability to absorb surplus labour by means of creating new jobs.

A new report by HSBC Global Investment Research shares an interesting data insight regarding this.

“We find that there are signs of global supply chains being rejigged in labour-intensive mid-tech sectors such as textiles, footwear, furniture, and toys. Countries such as Vietnam have already grown quickly by seizing this opportunity over the last several years, and now the world may be looking for new manufacturers. India’s emerging states have a wage advantage (see attached chart), and if they double it up with better infrastructure, more deregulation, and easier labour laws, they can succeed in attracting some of this mid-tech FDI, and finally become a part of global supply chains,’ states the report.

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Chart

Several key things stand out from this chart. For one, it again underscores the point that China’s manufacturing dominance is no longer about low wage rates. China’s wages are far higher.

The second noteworthy aspect is that Vietnam’s average wage per worker is lower than India’s average. Several Indian states that are already some of the bigger states either in total economic output or else in output per capita — such as Maharashtra, Karnataka, Andhra Pradesh and Kerala — have wage rates much higher than Vietnam.

However — and this is the most important insight from this chart — in most states that have lagged behind in economic growth in the past (e.g. UP, Bihar and Madhya Pradesh, etc.) the wage rates are still lower than in Vietnam. As HSBC points out, with the right incentive structure in the form of easier labour laws and better infrastructure, etc., these states can script a growth story of their own.