Indian Economy, 5th edition (101 page)

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From the point of view of firms, informal work arrangements bring benefits: lower price and greater flexibility in adjusting the quantity of labour in response to fluctuating demand. Yet, these benefits are partly offset by costs, such as low worker loyalty and inadequate incentive to invest in worker skill building. Moreover, any net benefits need to be weighed against the social costs to the workers and the economy as a whole.

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Finally, persistently high levels of informality come at a significant fiscal cost in terms of forgone fiscal revenue.
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In 2004-05, the unorganised sector contributed roughly half of India’s GDP
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implying a significant expansion of the tax base if the informal sector were to join the formal economy. The high prevalence of informality also hampers the ability of economic policies to have direct and quick impact on the economy.

Labour Laws as Impediment

A rapid expansion of the manufacturing sector has been a key element of the growth experience of successful developing countries, especially labour-abundant ones. In this context, the Indian manufacturing sector exhibits many peculiarities:

i.
It contributes (also documented earlier in the chapter) a rather small and stagnant share to GDP;

ii.
Its composition is more skewed towards skill and capital intensive activities compared to countries at similar levels of development;
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iii.
Only a small share of employment in manufacturing is in organised manufacturing. The unorganised manufacturing sector accounted for almost 70 per cent of total manufacturing employment in 2009-10
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;

iv.
Employment is heavily concentrated in small firms. The degree of concentration is much higher than in other Asian countries. For example, the share of micro and small enterprises in manufacturing employment is 84 per cent for India versus 27.5 per cent for Malaysia and 24.8 per cent for China.

These characteristics of Indian manufacturing are quite puzzling in that product market reforms since the early 1990s, including dramatic trade liberalisation and virtual abolishment of the industrial licensing regime, have been primarily focused on removing various constraints on the manufacturing sector. How then does one explain the peculiarities of the Indian manufacturing sector? Several theories have been put forward to explain this puzzle, ranging from strict labour laws that have hindered growth, especially of labour-intensive industries, infrastructure bottlenecks that have prevented industries from taking advantage of reforms, and credit constraints due to weaknesses in the financial sector which may be holding back small and medium sized firms from expanding. India’s labour regulations have been criticised on many grounds including sheer size and scope , their complexity, and inconsistencies across regulations:

i.
There are 45 different national and state level labour legislations in India.
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The labour laws apply only to the organised sector.

ii.
As the size of a factory grows, it increasingly becomes subject to more legislation. A few specific pieces of the legislation are particularly constraining.

iii.
According to Chapter VB of the
IDA
(Industrial Disputes Act), it is necessary for firms employing more than 100 workers to obtain the permission of state governments in order to retrench or lay off workers.

iv.
While the IDA does not prohibit retrenchment, states have often been unwilling to grant permission. Section 9A of the IDA lays out the procedures that must be followed by employers before changing the terms and conditions of work, which introduces additional rigidities for firms in using their existing workers effectively.
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In particular, worker consent is required in order to modify job descriptions or move workers from one plant to another in response to changing market conditions.

How do these regulations affect the manufacturing sector quantitatively?

Evidences
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show that industrial performance has been weaker in states with pro-worker labour laws. There have also been several recent studies that establish the importance of labour regulations.
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Estimates using plant-level data suggest that firms in labour intensive industries and in states with flexible labour laws have 14 per cent higher TFP than their counterparts in states with more stringent labour laws. Moreover, the impact of delicensing has been highly uneven across industries within India’s organised manufacturing sector. In particular, labour-intensive industries have experienced smaller gains from reforms. In addition, states with relatively inflexible labour regulations have experienced slower growth of labour-intensive industries and employment. Further, the difference in the performance of labour-intensive industries in states with flexible labour laws and states with inflexible labour laws has increased over time. Labour laws may also be an important factor responsible for the skewed distribution of size in Indian industries. Firms in states with more inflexible labour regulations tend to be smaller, especially in the labour-intensive sub sectors of manufacturing.

A contrarian view is that Indian businesses have learnt to get around the laws by hiring contractual labour, outsourcing non-core activities, etc; it is thus argued that labour regulations are not a binding constraint to industrial performance and employment growth. Indeed, in surveys of firms, businesses do not list labour laws among the top constraining factors. One way of reconciling this response with the systematic empirical evidence discussed here is that firms have learned to adapt to the labour laws by either not hiring permanent workers or by staying below the threshold of these laws and therefore, they do not see them as a constraint. A study
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points out that the counterfactual of whether labour laws would constrain firms that would emerge in the absence of strict labour laws cannot be captured in the surveys. Moreover, the adverse consequences of the labour laws can be inferred from the low rate of job creation in the formal sector, low productivity in the informal sector, and small firm size, especially in labour-intensive industries and states with more inflexible labour laws.

SERVICES NOT CREATING
ENOUGH JOBS

While the share of employment in services in India was relatively high at take-off, its growth has since then been slow (as have been discussed earlier in this chapter). At the same time, the share in value added, which was high at take-off, has continued to rise quickly. This implies that
while productivity in the sector has been high, the services sector is not creating many jobs
this is the opposite of the problem with the industry.

In the process of business creation, there may some common impediments to services and industry both, for example, regulatory hurdles and access to funding and infrastructure. Labour regulations are also likely to constrain creation of jobs in services. For example, 27 per cent of retail stores in India report labour regulations as a problem for their businesses.
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But what stands out for the services sector is the importance of
education
and
skilling
. Suitable higher education is important for high-end services such as IT, software development, and finance. Mid-level services such as retail trade, hotels, and restaurant services also require adequate skilling of the labour force. The ‘formal apprenticeship’ programme of the government, which places
employers at the heart of education,
can play a powerful role in imparting job-relevant skills and also retraining, preparing, and upgrading the labour force. In its current form, the Act and the Rules governing apprenticeships are outdated and rigid from both the perspective of employers and employees and they need to be amended (discussed in the next sub-title
‘Need of Formal Apprenticeship’
).

Addressing both quality and quantity issues are the twin challenges in skill development and training so as to correct the mismatch between employers who do not get people with requisite skills and millions of job seekers who do not get employment. The National Skill Development Mission (NSDM) aims to impart employment-oriented vocational training to
8 crore people over the next 5 years
by working with state governments ( through the State Skill Missions) and incorporating the private sector (through PPPs and for-profit vocational training) and NGOs. Basic education is also an important input for enhancing human capital. Recent government initiatives to expand access to quality primary education are important; however, more needs to be done (discussed under the forthcoming sub-title ‘Improving Primary Education’), see Box 2.8).

NEED OF FORMAL APPRENTICESHIPS

In the process of achieving a quality manpower, experts have always emphasised the schemes which impart formal apprenticeships to the working population of a country. Though India has already such schemes put in place, but due to several reasons could not bring in the desired effects in the economy. As India aspires for higher demographic dividend, it is high time that India re-oriented and restructured the existing set of Acts and Rules governing the apprenticeships to bring in rational points, we may have a
three part
discussion on the issue.

1. The Importance of Apprenticeship

Equipping the labur force with productive skills lies at the heart of tapping the demographic dividend. Apprenticeships are an effective way of ensuring that entry-level workers have the skills required to join the formal workforce by ‘learning on the job’ and even ‘earning while learning’. It has been amongst the oldest social institutions in India. However, it needs to be formalised and scaled up. In the current environment, India’s educational system is overburdened by sheer demand for quality education. According to a recent study
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by India’s first vocational university, 80 per cent of India’s higher education system of 2030 is yet to be built and is grappling with the
threefold problem
of cost, quality, and scale. This is compounded by the inability of much of the current education system to produce ‘work-ready’ labour. In fact, the
disconnect
between the formal educational system and requirements of the employers becomes even more acute in times of rapid structural and technological change. In such an environment, company-led apprenticeship programmes, that place employers at the heart of education, can play a powerful role in imparting job-relevant skills and also repairing, preparing, and upgrading the labour force. They can aid five important transitions that the labour force is currently making

i.
from agriculture to non-agriculture,

ii.
from rural to urban,

iii.
from the unorganised sector to the organised,

iv.
from school to work, and

v.
from subsistence self-employment to wage employment.

Several countries have benefited greatly from focused programmes on skilling the workforce on the job, including Japan, US, UK, and Germany. Germany, in particular, has a well-known dual education system that combines classroom/online courses at a vocational school with workplace experience at a company. School authorities are responsible for the former while the company is responsible for the latter. More than 75 per cent of Germans below the age of 22 have attended an apprenticeship programme. Training apprentices also benefits corporates. The UK Task Force Report on Apprentices in 2005, demonstrated that the benefits of apprenticeships were numerous, including – i).increased productivity, ii). lower net costs of training (versus training non-apprentices), iii). greater staff retention, and iv). a more highly motivated workforce.