Low competitiveness depresses hiring of regular workers
While the controversy over whether employment in the country has not just risen slowly but has even contracted rages on—thanks to a leaked NSSO report in Business Standard—it is important to focus on the role of bad policy, including everything that discourages faster growth of labour-intensive exports of the type that countries like Vietnam and Bangladesh have seen. This includes the high cost of capital and poor infrastructure like electricity and expensive office/factory space and time/cost of shipments. Bangladesh’s total exports, for instance, grew by 82% in 2010-16 and Vietnam’s 145% versus just 17% for India. And while India’s overall exports fared poorly—they rose from $179 billion in 2010 to $304 billion in 2018—not only have non-oil imports risen faster, those from China have soared. In the same period, overall imports rose from $288 billion to $466 billion and Chinese imports from $31 billion to $76 billion; rising imports, in turn, restrict local employment.
And there is, then, the elephant in the room, the role of bad labour policy that prevents flexibility like that of hire-and-fire—after paying due compensation—and even overtime and puts a floor to wage levels that are not in keeping with India’s competitiveness; unless India is in a position to effectively stop imports via smuggling, India’s productivity-adjusted labour and other costs have to be comparable with those in competitor countries like China, Vietnam and Bangladesh if local manufacturing and jobs are not to be hit.
A new study by Radhicka Kapoor and PP Krishnapriya at ICRIER examines the rise of contract labour in India’s already small organised sector. While total employment in the manufacturing sector was just around 50 million of India’s total workforce of around 450 million, the share of the unorganised sector within this was as high as 72% in FY16. And, as the study found, the share of contract workers in total employment increased sharply from 15.5% in FY01 to 27.9% in FY16, while the share of directly hired workers fell from 61.2% to 50.4%; at 8.4%, the growth of contract employment has outstripped the growth of regular employment at 3.2% over the last decade. While the traditional view has been that states which have more rigid labour laws, and industries that are more labour-intensive, tend to use more contract labour, the study found that this wasn’t necessarily true. So, while the share of contract workers rose in states like West Bengal and Maharashtra that have unfriendly labour laws, the same had happened in states like Andhra Pradesh and Karnataka that have better laws. And while the share of contract workers in the leather/handbag/footwear industry rose from 19% to 23% between FY01 and FY14, that in the automobile sector rose from 14% to 46%. And since this growing contractualisation is taking place despite contract wages rising faster than regular ones, the study concludes that contractualisation is a way to keep costs down as well as restrict the bargaining powers of trade unions while imparting flexibility to hiring and firing. So, while politicians may want to raise minimum wages, or raise them for contract workers, if this makes the industry uncompetitive, this will restrict employment growth.