Behind rising manufacturing employment

Enterprises with 10+ workers had a higher rate of employment growth in 2020-21 and 2021-22 than own-account enterprises. So, factors other than distress—very likely, the easing of labour laws—pushed up manufacturing employment during the period.

employment, manufacturing employment
Growth in manufacturing employment during 2020-21 was mostly in rural areas, and during 2021-22, it was mostly in urban areas. (IE)

By Bishwanath Goldar and Suresh C Aggarwal

According to the latest Periodic Labour Force Survey (PLFS) data, manufacturing employment increased by about 5% in 2020-21 and about 8% in 2021-22. This hike is remarkable because manufacturing employment has been falling since 2011. About three million jobs were lost in manufacturing between 2011-12 and 2017-18. This job loss was more than made up in 2020-21 and 2021-22, when about eight million manufacturing jobs were created. These hikes in manufacturing employment are also remarkable as several surveys of manufacturing and services enterprises were undertaken in India in 2020/2021 to assess the impact of the Covid-19 pandemic on Indian MSMEs, which showed that the pandemic had a severe adverse effect on employment. Yet, the manufacturing sector could attain fast employment growth in 2020 and 2021, overcoming the negative impact of the pandemic. Due to the recent hikes, manufacturing employment in 2021-22 exceeded 2011-12’s by over six million.

Some commentators have recently drawn attention to the fact that India’s employment structure, which was shifting away from agriculture over past decades, has lately been moving towards agriculture again. Because of this reversal, agricultural employment in 2021-22 exceeded that in 2011-12. This unexpected change in the employment structure has been ascribed to economic distress-driven employment caused by a slowdown in economic growth and the economic fallout of the pandemic.

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The increases in manufacturing employment in 2020-21 and 2021-22 cannot be attributed entirely or predominantly to distress-driven employment, although Covid-19-related distress may have played some role. If distress-driven employment was the prime cause of hikes in manufacturing employment in 2020-21 and 2021-22, this should have manifested in increases in employment in own-account industrial enterprises. Such enterprises do not have hired workers, are often run by families, generally have 1-3 workers, and very rarely have 10 or more workers. By contrast, employment growth in 2020-21 and 2021-22 was relatively high in the size classes of 10-19 workers and 20+ workers.

Growth in manufacturing employment during 2020-21 was mostly in rural areas, and during 2021-22, it was mostly in urban areas. With lost job opportunities in the cities because of the pandemic, a large number of reverse migrant workers had no option but to seek a subsistence living by engaging in whatever economic activities they could find. In some cases, this situation might have led to work-sharing in own account industrial enterprises in rural areas. Therefore, the rapid growth in manufacturing employment in rural areas in 2020-21 might partially reflect this phenomenon. But, there were possibly other strong forces which caused large increases in manufacturing employment in 2020-21 and 2021-22.

The easing of labour regulations is probably one of the important factors behind these significant increases. The positive effect of the labour reforms in Rajasthan in 2014 on industrial employment has been documented in the Economic Survey of 2018-19 (vol. I, chapter 3). By March 2020, such reforms had been undertaken by several other states. The threshold limit for applicability of Chapter V-B of the Industrial Disputes Act, 1947, was raised from 100 to 300 workers in nine states, and 13 states permitted women to work in factories at night under the Factories Act, 1948. Also, three states enhanced the threshold for the definition of ‘factory’ from 10 to 20 workers (with power) and 20 to 40 workers (without power), and five states enhanced the applicability threshold limit for the Contract Labour Act, 1970. These reforms must have had a significant effect on employment in manufacturing.

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Consider the nine states that had, by March 2020, enhanced the threshold limit under Chapter V-B of the Industrial Disputes Act, 1947, from 100 workers to 300 workers. This set includes states that had raised the threshold limit for defining a ‘factory’ under the Factories Act, 1948, and the threshold limit under the Contract Labour Act, 1970. The manufacturing employment in these states was 9% higher in 2020-21 than in 2018-19, and the manufacturing employment in the rest of the states was 4% higher in 2020-21 than in 2018-19. Is this not strongly suggestive of a significant positive effect of labour reforms on manufacturing employment growth in India?

Writers are respectively, former professor, Institute of Economic Growth, Delhi and visiting fellow, Institute for Human Development, Delhi.

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First published on: 01-04-2023 at 04:15 IST
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