By Ajit Pai
In a world of heightened uncertainty, India requires greater autonomy in its strategic choices driven by enhanced self-reliance and improved global competitiveness. India has shown accelerated progress in the past decade on both counts but has yet to bridge the gap to attain sufficient resilience and growth security for complete confidence in becoming a developed nation by 2047. A potential source of competitive strength, India’s anticipated demographic dividend, could prove the opposite if its formal employment outside of government jobs and employment outside agriculture do not grow materially faster.
Labour productivity is an important indicator that is closely linked to economic growth and competitiveness of an economy. It can be represented as output measured in GDP per unit of labour measured in hours worked over a reference period. High labour productivity generally results in high levels of economic activity and standards of living while making products and services more competitive and boosting their demand. India’s labour market remains the least efficient within large economies, with the lowest labour productivity rate of major economies.
Understanding productivity metrics
Interestingly, the general metric of GDP/hour uses a purchasing power parity (PPP)-adjusted GDP overstating the productivity of workers in countries with low cost of living, as the organisations that mostly calculate this metric (ILO, OECD, World Bank) are more interested in the welfare of workers in countries with low cost of living rather than competitiveness of their enterprises.
The more flattering comparison is generally convenient for governments in such countries but makes them complacent about the competitiveness of their enterprises to the detriment of their longer term GDP and employment growth prospects. Global trade occurs in non-PPP adjusted currency. Lower output per worker in real terms affects trade competitiveness. Overstated labour productivity in PPP terms breeds policymaker complacency and pressures Indian enterprises. In real terms for labour productivity, US is 32x that of India, France is 24x, and China is 4x, while in PPP terms the US and France are 8x that of India, and China 2x. While India is behind in PPP terms, it is an even bigger difference in real terms for India to cover by 2047, especially with countries like Vietnam improving labour productivity at a faster pace than India.
Several interconnected factors are contributing to this abysmal metric. These include highly fragmented industries, scale of enterprise still below critical mass, low levels of urbanisation, suboptimal planning, slow and costly logistics and transportation, high compliance and regulatory burden, and frictions to labour mobility. A legacy of vestigial misaligned policies related to agriculture, urbanisation, industry, and labour has contributed to keeping ~43% of India’s workforce engaged in agriculture while best practices in large economies have ~2%. Of these factors, a broadly held view is that issues surrounding labour are collectively the most significant impediment to accelerating India’s productivity and competitiveness across sectors. Clearly, there is an urgent and tremendous need to accelerate growth in India’s labour productivity and focus on streamlining and aligning policies to make this happen as rapidly as possible.
A history of labour codes
In 2019, it was with great enthusiasm that industry and workers looked to the central government’s efforts to rationalise a maze of labour related laws and regulations into four Codes (on wages, industrial relations, social security, and occupational safety, health, and working conditions) that were more suitable to prevailing domestic and international circumstances. The passing of the four Codes by Parliament brought with it great optimism but somehow the five years since have not seen the transformation that was expected.
Although the four labour Codes were passed by Parliament in 2019 and 2020, their implementation has been delayed because both the central and state governments must enact corresponding rules. While many states have published draft rules, the final notification to bring the Codes into effect is pending. Labour is a concurrent subject, meaning both the central and state governments have the power to make laws and rules. This requires both levels of government to finalise and notify their respective rules before the Codes can be enforced. Much greater inter-state mobility has increased the relevance of government of India in labour matters relative to state governments than ever before, although there is still ample opportunity for the states to leverage their labour policies as a source of competitiveness. It is the states where the path to implementation has been progressing most unevenly with some pushing hard to accelerate it while others are still sluggish.
The labour Codes reflect a giant step forward and will provide the foundation for further progress, if fully implemented. Further required reforms are visible. It is apparent that India needs to have overtime hours and overtime rates as a ratio of regular hours more in line with competing Asian economies. For the gig economy, the social security code favours a structure closer to defined benefit while appearing as defined contribution with employers/ platforms having a maximum limit of revenue or payout based on platform consolidated metrics rather than efforts of an individual worker. This will be an impediment to worker productivity reaching potential, reduce flexibility for gig workers, and increase the complexity of the system. A simpler defined contribution portable account where every gig or platform worker gets benefits directly proportionate to the quantum of their labour contributions/payouts on multiple platforms is much better suited to leverage the efficiencies of the gig economy and ensure its proliferation while improving social security benefits to a larger segment of the labour force.
Given the headwinds for global trade, India’s enterprise competitiveness needs to close the gap with peers rapidly. The Centre and states must prioritise the implementation of the four streamlined labour Codes and also pave the way for additional reforms to shift gears for accelerating labour productivity in India and ensure it becomes a truly resilient developed economy by 2047.
The author is lead strategy partner at GPS, EY
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