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Where the jobs are

India’s low-skilled workers ultimately need jobs in large-scale manufacturing,for which labour laws must be made flexible


October 19, 2012 3:51:39 am

The International Monetary Fund’s recent downgrading of the growth forecast for India from 6.2 per cent to 4.9 per cent for 2012,which came on the heels of the decline in the actual growth rate to below 5.5 per cent in the first half of 2012,has brought reforms back to the centrestage of the policy discourse. Which reforms are needed and why?

India’s growth trajectory has been unique. While most miracle-growth economies,such as South Korea,Taiwan and China,were propelled by super-high manufacturing growth with a concomitant decline in the agricultural share of both GDP and employment,India has achieved its impressive annual growth of 8.2 per cent over the last nine years with a stagnant share of manufacturing in GDP. While the share of agriculture in GDP declined significantly,agricultural employment has fallen at a snail’s pace. It is services that have surged in India,growing at double-digit rates. Some sub-sectors such as real estate and business-related services have grown at astonishing rates of 20 per cent or more during some years.

This experience has led some to argue that liberalisation can claim little credit for India’s growth success as the most prominent deregulatory reforms have targeted the still sluggish manufacturing sector and further that,in view of the sluggish response of manufacturing,economic reforms to free up the labour market are unnecessary. But neither of these could be farther from the truth.

The economic liberalisation of the 1990s and early 2000s has contributed to the growth in services in at least two ways. First,contrary to the reform critics,direct liberalisation in service sectors such as telecom,banking,and civil aviation has been associated with galloping growth,notwithstanding the recent troubles of the last of these sectors. The claim that liberalisation has been limited to manufacturing is a myth.

Second,and often overlooked,even if manufacturing wasn’t pulling up India’s average growth over the last decade,just keeping pace with GDP meant that its growth accelerated from the 5-6 per cent range to the 8-9 per cent range. In turn,this manufacturing growth has created a significant secondary source of demand for services,both directly for business-related services that manufacturing uses and indirectly for non-traded services such as restaurants,real estate and tourism by contributing to rising incomes.

In recent work with Arvind Panagariya,I show that a 1 per cent increase in manufacturing growth was associated with a one-for-one increase in services growth. We also dispel the bugaboo that services growth has not been inclusive; as entrepreneurs,the Scheduled Castes (SCs),Other Backward Classes (OBCs) and Scheduled Tribes (STs) have seen value added and employment in their enterprises either keep pace with overall growth or even outpace it. Disadvantaged groups have capitalised on growth opportunities in services and narrowed their gap relative to the traditionally privileged forward castes.

While services growth thus has had a definite link to reforms and has been inclusive,the Dehejia-Panagariya studies also point to why India can ill afford to ignore manufacturing growth. Looking just at 2006,we find that formal urban service enterprises accounted for 71.9 per cent of total output,whereas they accounted only for 29 per cent of employment. In other words,urban,formal service firms and the workers they employ are at least three times as productive as informal and rural firms,yet the latter categories employ more than 70 per cent of the service sector workforce.

The contrast is even sharper when looking at growth. Formal firms grew at about 23 per cent annually between 2001 and 2006,whereas informal firms grew at 3.5 per cent. Looking at the largest firms,this difference is even more dramatic: firms with 20 or more workers accounted for 21 per cent of output in 2001 and 53 per cent of service sector output in 2006,while their share in employment rose only from 7 per cent to 10 per cent. In other words,the productivity of workers in the largest service sector firms has skyrocketed.

What is often forgotten is the flip side of the coin: that even within the booming service sector,there is a vast pool of highly unproductive labour,working in informal service sector firms,often rural and often with a single employee,namely the proprietor. In other words,the challenge of raising the productivity of the Indian workforce is not only in agriculture but also in all but the largest service sector firms.

Given their limited skills,where will these workers find more productive employment? It isn’t realistic to take the paanshop proprietor to an IT firm. Eventually,manufacturing — in particular,labour-intensive manufacturing — is the only remaining answer.

This brings us back to the recent proposals for “reforms” of contract labour,minimum wage,and related labour laws. The proposed reforms go precisely in the wrong direction: they would raise the already high labour costs in the organised sector. While such increases may be popular with already well-paid and vocal organised sector workers,they will drastically cut the already meagre employment opportunities in the organised sector for those informal,contract and casual workers toiling at subsistence wages or worse. India’s vast pool of low-skilled labour,whether in agriculture or services,can ultimately only be productively employed in large-scale labour-intensive manufacturing and that requires greater,not less,flexibility in the labour laws.

RAJEEV DEHEJIA is a professor of public policy at the Robert F. Wagner Graduate School of Public Service at New York University,US

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