Emerging Unemployment Issues and Challenges-

A Case Study on India

DR. TARUN DAS, Economic Adviser, Ministry of Finance, India, and

Consultant, UN-ESCAP, Bangkok, Thailand.

1. Unemployment, Employment and Poverty

Comprehensive data on employment and unemployment are collected by the National

Sample Survey Organisation (NSSO) through quinquennial surveys. The latest such
survey, results of which are available, was conducted in the 55th Round (1999-2000). The
other quinquennial surveys since 1980 with a relatively large number of households were
conducted in 1983 (38th Round), 1987-88 (43rd Round), and1993-94 (50th Round).
However, the NSSO conducts mini Annual surveys in between the quinquennial surveys,
although results are not strictly comparable due to small sample size.

The NSSO employs two different concepts of employment and unemployment in their
surveys- (a) the usual status (US) where a person remains employed or unemployed for a
longer period during a reference period of 365 days and (b) the current weekly status
(CWS) where a person remains employed or unemployed for a major share of the
working time within a reference period of 7 days. Under each approach, persons are first
classified as ‘labour force’ and ‘out of labour force’, and thereafter ‘labour force’ is
classified into ‘employed’ and ‘unemployed’. For unemployment, US approach is an
indicator of chronic unemployment, while CWS approach covers both chronic and
seasonal unemployment. The distribution of persons as per the latest quinquennial survey
for 1999-2000 is given in Table-1, which is self-explanatory.

Table-1 Percentage distribution of persons by broad usual activity status

Rural Urban
Males Females Persons Males Females Persons
1.Self-employed 32.0 17.0 24.7 22.0 6.2 14.5
2.Reg.wage/ salaried 5.2 0.9 3.1 21.8 4.4 13.5
3.Casual labour 17.2 10.8 14.1 9.3 3.4 6.5
4.Total working (1+2+3) 54.4 28.7 41.9 53.1 14.0 34.5
5.Unemployed 0.8 0.1 0.4 2.2 0.4 1.3
6.Studends 24.7 19.7 22.3 28.2 25.4 26.9
7.Engaged in Domestic works 0.8 31.2 15.6 0.5 45.0 21.7
8.Others 19.3 20.3 19.8 16.0 15.2 15.6
9.Not in labour force (6+7+8) 44.8 71.2 57.7 44.7 85.6 64.2
10.Labour force (4+5) 55.2 28.8 42.3 55.3 14.4 35.8
11.Total persons (9+10) 100.0 100.0 100.0 100.0 100.0 100.0
1.1 Labour Force and Unemployment

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India’s labour force is estimated to be approximately 375 million in 2002 and is expected
to increase by 7 to 8.5 million per year in the first decade of this century and will increase
by a total of about 160-170 million by 2020, i.e., 2.0 percent per annum. Approximately
35 million persons in 2002 are unemployed of which approximately three-fourth of the
unemployed is in rural areas and three-fifth among them are educated. (Planning
Commission: Vision 2020).

As per the estimates made by the Planning Commission on the basis of NSSO surveys,
overall unemployment rate declined from 8.3 percent in 1983 to 6 percent in 1993-94 but
increased to 7.3 percent in 1999-2000 (Table-2). There were similar trends in both rural
and urban sectors with urban unemployment rates being higher than rural unemployment
rates every year. During 1993-2000, the rate of increase of unemployed persons in the
rural areas at 5.3 percent was significantly higher than that at 3.5 percent in urban sector.
This was due to basically stagnation of agricultural employment during this period.

Table-2: Past and present macro-scenario on employment and unemployment

(CDS Basis) (Person years)
(Million) Growth per annum (%)
1983 1993-94 1999-2000 1983 to 1993- 1993-94 to
94 1999-2000
All India
Population 718 894 1004 2.0 2.0
Labour Force 261 336 363 2.4 1.3
Workforce 239 316 337 2.7 1.1
Unemployment Rate (%) 8.3 6.0 7.3
No. of unemployed 22 20 27 -0.1 4.7

Rural
Population 546 659 728 1.8 1.7
Labour Force 204 255 270 2.2 1.0
Workforce 188 241 251 2.4 0.7
Unemployment Rate (%) 8.0 5.6 7.2
No. of unemployed 16 14 19 -1.2 5.3

Urban
Population 172 235 276 3.0 2.7
Labour Force 57 81 93 3.3 2.4
Workforce 52 75 86 3.6 2.3
Unemployment Rate (%) 9.6 7.2 7.6
No. of unemployed 5.5 5.8 7.11 0.5 3.5

Source: Planning Commission

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 1.2 Worker Population Ratios (WPRs)

The number of persons employed per 100 persons, called Worker Population Ratios
(WPRs) or Work Force Participation Rates (WFPRs), for different rounds and for males
and females in rural and urban areas by two different concepts viz. Usual Status (US) and
Current Weekly Status (CWS) are presented in Table-3. As expected, ratios are lower for
CWS than those for US, the difference being larger for rural India than for urban areas. It
is observed from the table that there is very little variation in the WPRs for either males
or females during 1983-2001 implying that the employment scenario remained more or
less stable over the years.

Age-specific WPRs presented in Table-4 indicate that during the period 1998-2001,
WPRs for the age-group 15-59 years increased for all categories i.e. rural males, rural
females, urban males and urban females. In both urban and rural areas, the increase was
larger for females than for males.

Table-3: Worker Population Ratios (Number of persons employed per 100 persons)
Round (Year) Males Females
US CWS US CWS
RURAL
38 (1983) 5.5 5.4 3.4 2.3
43 (1987-88) 5.4 5.3 3.2 2.2
50 (1993-94) 5.5 5.3 3.3 2.7
55 (1999-2000) 5.3 5.1 3.0 2.5
56 (2000-2001) 5.4 5.3 2.9 2.2
URBAN
38 (1983) 5.1 4.9 1.5 1.2
43 (1987-88) 5.1 4.9 1.5 1.2
50 (1993-94) 5.2 5.1 1.6 1.4
55 (1999-2000) 5.2 5.1 1.4 1.3
56 (2000-2001) 5.3 5.2 1.4 1.2

Table-4 Age-specific Worker Population Ratios (WPRs) According to US

(Number of persons employed per 100 persons)

Age- Rural Urban

Group
(Years) Males Females Males Females
1998 2000-01 1998 2000-01 1998 2000-01 1998 2000-01
5-14 5.3 4.5 4.2 3.9 3.8 3.1 1.3 2.1
15-29 73.2 75.0 35.1 37.3 57.3 59.6 11.9 14.5
30-59 96.9 98.0 47.7 54.3 94.2 95.7 21.7 26.1
60+ 71.4 69.5 21.9 19.8 42.0 40.4 7.8 9.2
15-59 86.0 87.3 42.0 46.4 77.2 78.6 17.2 20.7
5+ 60.7 61.7 29.6 32.3 55.9 58.2 12.6 15.3

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Labour force includes workers and those persons who are available for work. Therefore,
Labour Force Participation Rates would be higher than WPRs. Unemployment Rate (UR)
is the ratio of unemployed persons to labour force. Table-5 presents WPRs, Labour Force
Participation Rates and Unemployment Rates for both rural and urban, males and
females, for different categories of households classified by their main source on income.
The WPR is the highest for the agricultural labour households in the rural and for casual
labour households in the urban areas. This is true for both males and females.

Persons employed are categorized into three main groups viz. self employed, regular
wage/ salaried and casual labour. Table-6 indicates that more than half of the employed
in the rural areas are self-employed, and the proportion of self-employed in the rural
sector increased for both males and females in 1990-2000, while casual employment
remains more or less invariant. In the urban area, the proportion of self employed slightly
increased for males but decreased appreciably for females. On the other hand, the
proportion of the regular wage earners decreased for the males but increased for females.

Table-5 Worker Population Ratios (WPRs), Unemployment Rates (URs),

And Labour Force Participation Rates (LFPRs) by Usual Status
(Per 100 persons of age of 15 years and above) in 2000-01
Household type WPRs Unemployment Rate LFPRs
Males Females Males Females Males Females
Rural
Self-emp. in agri. 86.5 44.4 1.0 0.2 87.4 44.5
Self-emp. in non-agri. 85.3 34.9 1.4 0.6 86.5 35.1
Agrl. Labour 89.2 57.0 0.8 0.0 89.9 57.0
Other labour 87.8 43.7 1.2 2.0 88.9 44.6
Others 69.8 21.6 4.3 0.9 72.8 21.8
All 85.2 43.3 1.4 0.5 86.4 43.5
Urban
Self-emp. 81.0 19.7 2.1 2.5 82.7 20.1
Reg.wage/ salaried 73.9 16.3 5.1 3.0 77.8 16.9
Casual labour 87.4 36.4 2.5 0.8 89.5 36.7
Others 20.1 6.6 28.2 25.8 28.0 8.9
All 75.3 19.5 3.8 3.0 78.4 20.1

Table-6 Percentage distribution of usually employed by status of employment

Males Females
1990-91 2000-01 1990-91 2000-01
Rural
Self-employed 55.7 58.9 58.6 59.3
Reg.wage/ salaried 12.8 9.5 3.8 3.2
Casual labour 31.5 31.6 37.6 37.5
Total 100.0 100.0 100.0 100.0
Urban
Self-employed 40.7 41.4 49.0 44.4
Reg.wage/ salaried 44.2 41.1 25.9 31.5
Casual labour 15.1 17.5 25.1 24.1
Total 100.0 100.0 100.0 100.0

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 1.3 Open unemployment and underemployment

Open unemployment is not a major problem in India. Out of a labour force of 406
million, 397 million were employed leaving 9 million openly unemployed in 2000.
However, employment is characterized by very low quality of employment and low
levels of productivity. About 31 percent of the employed live blow the poverty line. There
is no significant growth of regular employment. Organised employment as a proportion
of total employment declined from 9 percent in 1993-94 to 7 percent in 1999-2000.
Significant employment is taking place in services sectors and small and medium
enterprises. Main growth was observed in casual or contractual employment. Self-
employment has not also increased significantly during 1993-2000. Educated
unemployment at 14.7% is much higher than normal unemployment at 2.2%.

The unemployment rates by household types (for persons above 15 years of age) given in
Table-5 indicate that the urban sector has higher unemployment rates than rural areas,
and in general, males have higher unemployment rates than females. Among the four
categories of persons cross classified by sex and urban and rural, urban males have the
highest URs (3.8%), followed by urban females, rural males and rural females.

Table-7 presents the trends of overall unemployment rates (for all persons in labour
force) by both usual status and current weekly status for both males and females in rural
and urban areas during 1993-2001. It is observed from the table that there is a declining
trend of unemployment rates over time. The unemployment rates are higher for urban
areas than rural areas. They are higher among males than among females in rural areas. In
urban areas, the URs are generally higher among females than among males.

Table-7 Unemployment rates (percent in labour force)

Round (Year) Males Females
US CWS US CWS
RURAL
50 (1993-94) 2.0 3.0 1.4 3.0
51 (1994-95) 1.2 1.8 0.5 1.2
52 (1995-96) 1.5 1.8 0.8 0.9
53 (1997) 1.6 2.0 0.9 1.8
54 (1998) 2.4 2.9 2.0 2.7
55 (1999-2000) 2.1 3.9 1.5 3.7
56 (2000-2001) 1.6 2.3 0.6 1.8
URBAN
50 (1993-94) 4.5 5.2 8.3 8.4
51 (1994-95) 3.7 3.9 4.1 4.0
52 (1995-96) 4.0 4.1 3.6 3.5
53 (1997) 3.7 4.3 5.1 5.8
54 (1998) 5.3 5.4 8.1 7.8
55 (1999-2000) 4.8 5.6 7.1 7.3
56 (2000-2001) 4.2 4.8 3.8 3.9

1.4 Sectoral composition of employment

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As per the results of the latest full survey (55th Round in 1999-2000), the rate of
employment growth decelerated from 2.7 percent per annum in 1983-1994 to 1.1 percent
per annum in 1994-2000 (Table-8). The decline in the employment growth rate in the
1990s was associated with a higher growth in GDP indicating a decline in the labour
intensity of production. Some of the important findings emerging from the 55th Round
(1999-2000) are:

(a) The decline in the growth rate of employment was associated with a sharp decline in
the growth rate of the labour force.
(b) As in the past, the share of casual labour in total employment went up.
(c) The number of unemployed increased from 20 million in 1993-94 to 27 million in
1999-2000.
(d) The decline in the employment growth in 1994-2000 was attributable to a stagnation
of employment in agriculture, resulting in a drop of the share of agriculture in total
employment from 60 percent in 1993-94 to 57 percent in 1999-2000.
(e) On the other hand, employment growth in all the sub-sectors within services, such as
trade, hotels, restaurant, transport, storage, communication and financial and
business services, (except community, social and personal services having negative
growth rate) exceeded 5 percent per annum (Table-9).

Table-8: Employment growth rates in 1972-2000 (percent)

Average Annual Growth rate (percent) Employment
Period Population Labor force Employment GDP Elasticity w.r.t.
GDP
1972-1978 2.27 2.94 2.73 3.9 0.71
1977-1983 2.19 2.04 2.17 4.0 0.54
1983-1988 2.14 1.74 1.54 4.9 0.31
1987-1994 2.10 2.29 2.43 5.6 0.44
1994-2000 1.93 1.03 1.07 6.0 0.18
Source: Planning Commission, Government of India.

Table-9 Sectoral Employment in 1983 to 2000

Employment (percent to total) Annual growth rate (%)

Sector 1983 1987-88 1993-94 1999-00 1983 1987-88 1983 1993-94

to to to to
1987-88 1993-94 1993-94 1999-00
Agriculture 63.2 60.1 60.4 56.7 1.8 2.6 2.2 0.02
Mining & quarrying 0.7 0.9 0.8 0.7 7.4 1.0 3.7 -1.9
Manufacturing 11.6 11.9 11.1 12.1 3.6 1.2 2.3 2.6
Electricity, gas, water 0.3 0.3 0.5 0.3 2.9 7.2 5.3 -3.6
Construction 3.0 4.4 3.5 4.4 12.1 -1.4 4.2 5.2
Trade, hotels, restaurant 7.6 8.3 8.5 11.1 4.9 3.0 3.8 5.7
Transport, communication 2.9 3.0 3.1 4.1 3.2 3.5 3.4 5.5
Financial, real estate 0.9 1.0 1.1 1.4 4.7 4.5 4.6 5.4
Community/social services 9.8 10.1 11.1 9.2 3.6 4.1 3.6 -2.1
All Sector 100 100 100 100 2.9 2.5 2.7 1.1
Source: Planning Commission, Government of India.

1.4 Poverty ratios

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Poverty ratios are estimated by the Planning Commission on the basis of the consumer
expenditure surveys conducted by the National Sample Survey Organisation (NSSO).
The latest survey data are available for the 55th round covering the period July 1999 to
June 2000. Despite high population growth, the headcount ratio declined from 55 percent
in 1973 to 26 percent in 1999 for all India (Table-10) i.e. at a rate of 1.1 percentage point
per annum. The decline was fairly uniform across rural and urban areas. Rural poverty,
which accounts for 75 percent of the overall poor, declined from 56 to 27 percent in
1973-1999, while urban poverty dropped from 49 to 24 percent during the same period.
Interstate differentials of poverty also narrowed, although these still remain high. While
only 6 percent of population in Punjab lives below the poverty line, the incidence of
poverty is as high as 43 percent in Bihar.

The absolute number of the poor declined by only 61 million from 321 million in 1973
to 260 million in 1999 due to population growth from 600 million in the early 1970s to
991 million in 1999. In fact, the number of poor remained stable around 320 million in
1973-1994 and declined to 260 million in 1999 due to reduction of poverty ratio by 10
percent in 1993-1999. This shows favourable impact of economic reforms and high
economic growth on the incidence of poverty and employment in 1990s.

Table-10 Estimates of Incidence of Poverty in India 1973-1999

Year Poverty Ratios (%) Number of Poor (Million)

Rural Urban Combined Rural Urban Combined
1973-74 56.4 49.0 54.9 261 60 321
1977-78 53.1 45.2 51.3 264 65 329
1983 45.7 40.8 44.5 252 71 323
1987-88 39.1 38.2 38.9 232 75 307
1993-94 37.3 32.4 36.0 244 76 320
1999-2000 27.1 23.6 26.1 193 67 260

It may be noted that the official poverty ratios are basically “deprivation indices” as the
poverty line takes into account mainly “bare biological needs” (calorie intake of 2400 per
capita per day for rural areas and 2100 per capita per day for urban areas). It does not
consider adequately needs on health, education, housing, transport, water, power,
sanitation etc. not to talk of minimum entertainment and social, cultural and religious
needs. Poverty line assumes fixed consumption basket over time and regions, although it
takes into account price differentials among the states.

The determination of poverty line also assumes continuous relationship between calorie
intake and money income levels, which is not supported by facts. Since there are
differences in consumption habits among the states and there does not exist an optimal
consumption basket, neither the uniform calorie norm nor the substitution of calorie
norms by monetary norms is justified.

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India’s progress in fighting poverty is modest when compared with some of Asian
countries (like China and Indonesia), which experienced faster economic growth (Table-
11). It is, therefore, often argued that a sustained and long lasting eradication of poverty
depends on creation of opportunities for broad based economic development.

Table-11 Poverty and growth in India and selected Asian countries (in percent)

Country Poverty Poverty Annual Average Average

ratios Ratios Reduction GDP growth GDP growth
1975 1995 In 1975-95 1970-1980 1980-1995
% Point (Percent) (Percent)
India 54.9 26.1 1.1 3.2 5.6
China 59.5 22.2 1.9 5.0 11.1
Indonesia 64.3 11.4 2.6 7.8 6.6
Korea 23.0 5.0 0.9 9.0 8.7
Malaysia 17.4 4.3 0.7 7.8 6.4
Philippines 35.7 25.5 0.5 6.2 1.4
Thailand 8.1 0.9 0.4 7.2 7.9
Source of data: For India, Planning Commission; for others World Bank Report on Social Consequences of
the East Asian Financial Crisis, September 1998.
Note: For India, poverty ratios refer to the years 1973 and 1999 respectively.

More than three-fourths of the poor live in rural areas. Economic groups most prone to
poverty are rural households (mainly landless agriculture labour and marginal farmers),
urban casual labour and the self-employed engaged in petty services. Poverty is generated
by many factors such as unemployment, ill health, and lack of access to productive
assets. Demographic factors also interact with socio-economic and environmental factors.
Gender, literacy, land-ownership, employment status, religion and caste are closely
related to poverty. Some social and religious groups do not believe in family planning
and have large family size.

The spatial distribution of poverty in India is highly uneven; linkages between

urbanization, state domestic product and poverty ratios are weak testifying the
complexity of the phenomenon of poverty; and urban poverty is both an outflow of
poverty from the rural areas as also an autonomous phenomenon.

The poor are caught by unfavourable forces at the local, national, and global levels that
combine to form a three-tiered poverty trap. At the local level, factors include skewed
distribution of land and other assets, physical weakness, higher fertility rate, and
relatively lower power to fight against corrupt institutions. These are reinforced at the
national level by various policies ranging from tax laws to interest policies that are
generally pro-rich. At the global level, the poor are held down by a mix of oppressive
factors such as tied grants, falling export prices and rising capital flight.

The culture of poverty theorists argue that poverty breeds poverty and a poor family has a
high probability of staying poor as these families are associated with high risks of ill
health, high fertility rates, inadequate education, low skill, irregular sources of livelihood,

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low productive jobs, insecure shelter, limited accessibility to basic services and lack of
dynamism. With the progress of urbanization, traditional joint families progressively
broke down into micro families, which are economically less viable. A general
improvement in health services led to an increase in the expectation of life and a larger
proportion of aged persons. A decline in the infant mortality and maternal mortality rates
increased the proportion of labour force in total population and that of females in the
reproductive age group. But the growth of employment generally lagged behind the
growth of labour force.

Various studies by the World Bank (1997, 2000, 2003) made the following observations:

(a) There are sharp disparities in poverty ratios between states, between men and
women, and between city and countryside.
(b) Although the Central government adopted a policy of growth with social justice,
no state government effectively combined both policies to encourage growth and
develop human resources and physical infrastructure.
(c) Agricultural investment, not agricultural subsidy, reduces poverty. Differentials in
agricultural growth and rural wages were major factors, which led to different
levels of poverty across Indian states (Ravallion and Dutt). Green revolution,
better irrigation and infrastructure were associated with rising rural wages and
increased rural non-farm employment, such as in Punjab and Haryana, which had
the highest per capita GDP and lower poverty.
(d) Investment on human capital reduces the extent of poverty. The human resource
approach to poverty reduction across Indian states is exemplified by Kerala,
which exported relatively skilled labour internationally and benefited from
remittances, even though its GDP growth was not rapid.
(e) Degree of urbanization was found to be less significant to affect poverty across
states, reflecting the capital-intensive, import-substituting nature of India's
industrial development, its requirements for skilled rather than unskilled labour,
and labour market regulations that limited the growth of organised employment.
(f) Inflation is a "harsh tax" on the poor because their incomes are not generally
indexed to prices.

2 Causes and Consequences of Unemployment

2.1 Factors responsible for unemployment

Any strategy to improve the condition of the poor hinges on improving the labour market,
since income from work and quality of work are the main determinants of the living
conditions of the poor (World Bank 1996). India is endowed with an abundant and
technologically skilled labour force, and is ranked first for both these criteria in the
Global Competitiveness Report (GCR). However, India’s labour market has low degree
of labour market flexibility in terms of deployment of human resources, work practices,
and wages. Various studies (Anant 2005, Debroy 1997; Fallon and Lucas 1993; ILO
1999; OECD 1995; Surendra Nath 2005) suggest that such rigidities constrain the
effective redeployment of labour during the process of industrial restructuring and
changes in demand and technology, and act as a disincentive for employment creation.

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An industry survey and discussions with industrialists also identify labour regulation as
the second highest obstacle to the operation and growth of business (World Bank 2000).

Average labour intensity in unregistered manufacturing increased from an average of 59.3

percent over 1988-9 to 1990-1 to 62.4 percent over 1993-4 to 1995-6 (World Bank 1998).
Hence, had labour markets functioned more flexibly, pensions been more mobile, and
legislation been more conducive, the organized sector might have occupied a more
prominent share of the work force. Formal sector employees might have grown more
rapidly and been more mobile, and the benefits of more formal employment shared across
a larger number of employees, including women, who have been unable to participate
fully in the labour market.

Rigid labour laws and high protection of labour encouraged increasingly capital-intensive
industries (Gangopadhyay and Wadhwa 1998). Labour legislation and public sector
employment gave employment protection and relatively high wages to the few employed
in the formal sector, which constitutes only 8 percent of total labour force. In addition,
labour mobility across sectors was hindered by the pension system in the formal sector,
pensions are not mobile across jobs and many years of work are needed before an
employee becomes eligible for a pension.

2.2 Wage rate and employment

Wage is a vital factor determining employment. Although wage rate and employment are
inversely related (Table-12), rise in wage is necessary for growth in a developing
economy as higher wages increase purchasing power of workers and thereby enhance
effective demand for goods and services, which in turn pushes up employment. Several
studies have indicated that low employment elasticity in India is due to relatively high
wage rate, low productivity, shift in factor price in favour of capital and labour market
distortions caused by both government regulations and private institutions. Table-12
indicates that the growth in wages was very high across industries in the pre-reforms
period than in post-reforms period.

Table-12 Real wage growth rates and Employment elasticity

Sectors Real wage growth rates Elasticity of employ- Elasticity of employ-
ment to wage rate ment to output
1983 1993-94 to 1993-94 1999-00 1993-94 1999-00
to 1993-94 1999-00
Agriculture 14.3 1.4 -1.36 -1.35 0.93 1.06
Mining & quarrying 8.0 6.1 -0.17 -0.67 1.04 0.55
Manufacturing 12.4 7.4 -0.85 -0.97 1.08 0.99
Electricity, gas, water 8.9 8.3 0.23 -0.92 0.71 0.73
Construction 4.4 0.8 -0.72 -0.61 1.05 0.88
Trade, hotels, 13.9 4.5 -1.73 -0.56 0.77 1.10
transport,
communications
Community/social/ 2.6 5.5 -0.41 -0.82 1.08 1.10
Financial ser.
All sectors 13.5 6.5 -0.66 -0.57 0.99 1.02
Source: Bhattyacharya and Sakthivel (2005)

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 2.3 Organised manufacturing and employment

Manufacturing has played a major role for improving economic growth in the East Asian
countries. For example, the share of manufacturing in GDP in Malaysia improved from
only 9.8% in 1970 to 29.2% in 2000, whereas that in India increased from 7.2% to 9.6%
in the same period. Consequently, the share of organised manufacturing in employment
increased from 4.6 percent to 14.1 percent, whereas that in India declined from 2 to 1.8
percent over the same period (Table-13). Other East Asian countries had experienced
similar trends as in Malaysia and also sharp reduction of poverty.

Table-13 Share of organised manufacturing in GDP and employment

in India and selected Asian economies since 1970 (percent)
Year Share of organised manufacturing in labour force Share of organised manufacturing in GDP
India Indo- Malay- Thai- Korea Taiwan India Indo- Malay- Thai- Korea Taiwan
nesia sia land nesia sia land
1970 2.0 1.1 4.6 1.1 7.3 … 7.2 2.6 9.8 4.7 19.8 …
1980 2.3 1.6 9.4 2.8 13.0 30.1 7.2 4.3 14.8 … 30.6 35.6
1990 2.0 3.4 11.2 5.4 15.1 29.0 7.7 11.9 20.6 … 38.0 33.3
2000 1.8 4.2 14.1 6.7 10.4 26.0 9.6 17.1 29.2 26.4 38.6 27.6
Source: UNIDO Industrial Database 2003(CD-ROM),
And World Bank World Development Indicators 2003(CD-ROM)

India has not only slower growth of output but also lower employment elasticity (Table-
14) and higher wage rate and lower productivity (Tables-15) than those in selected East
Asian countries.
Table-14 Employment and Output Growth
Country Average annual GR of Average annual GR of Employment elasticity
employment (%) gross output (%) w.r.t. Output
1. India (1970-1996) 1.9 7.0 0.27
2. Indonesia (1975-1996) 9.4 14.7 0.64
3. Malaysia (1971-1996) 6.9 11.7 0.59
4. Korea Rep. (1970-1996) 6.9 14.2 0.49
Source: UNIDO Industrial Database 2003(CD-ROM),

Table-15 Characteristics of employment in organised manufacturing

No. of workers employed to produce PPP$1 Ratio of wage per worker to GDP per capita
Million worth of value added
Textiles Paper & Electrical All manu- Textiles Paper & Electrical All manu-
Products machinery facturing Products machinery facturing
India 84 55 33 54 4.3 3.3 4.7 3.3
Indonesia 45 25 10 38 0.9 1.5 1.5 1.0
Korea 21 12 11 13 1.3 1.5 2.2 1.5
Malaysia 34 29 31 30 1.1 1.3 1.2 1.2
Taiwan 40 23 34 30 1.1 1.2 1.21.5 1.2
Thailand 50 12 24 24 1.2 2.0 1.4
Source: UNIDO Industrial Database 2003(CD-ROM),
and World Bank World Development Indicators 2003(CD-ROM)

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 2.4 Women and Child Labour

Women in the workforce

Women constitute significant proportion of the labour force. The female participation in
labour force however, varies across urban-rural areas. According to the 57 th NSSO round
(July 2001-June 2002), the Work Force Participation Rate (WFPR) for females went up
in rural areas but declined in urban areas compared to the WFPR in the 56th round (July
2000-June 2001). In rural areas it went up by 8 percent from 433 to 463. In urban areas, it
dipped from 195 to 185.

Eighty-eight percent of women workers are engaged in the rural areas, primarily in
agricultural activities, and related sectors such as animal husbandry. In the urban areas, a
significant proportion of women workers are employed in the unorganized sectors in
household industries, petty trades and services, building and construction activities, etc.
Most of these activities are low paid or unpaid. According to National Institute of Public
Finance & Policy (NIPFP) study on Gender Budgeting the average female wage is almost
80 percent of the male average in urban areas, while it is less than 60 percent of the
corresponding male rate in rural areas.

The employment of women in the organized sector (both public and private) as on 31st
March, 2002 at 4.95 million, constituted 18.1 percent of the total organized sector
employment in the country, compared to 17.9 percent in 2001. The distribution of women
employees across industries reveals that community, social and personnel services sectors
employed 56.5 percent of women workers followed by manufacturing (20.6 percent),
agriculture and allied occupation (9.4 percent) and finance, insurance, real and business
(5.2 percent). The proportion of women in the organized sector also varies between
States, the employment of women being higher where literacy rates are better among
females.

Improvement in the quality of women’s employment depends upon increased access to

education and skill development training. Several initiatives have been made in this
direction in order to provide training for women in the labour force. There are about 776
Institutes (224 Women Industrial Training Institutes and 552 Women Wings in General
Industrial Training Institutes (ITI)/Private ITI), which provide about 47,472 training seats
for vocational training facilities for women at craftsman level.

Female unemployment rates are generally higher than male unemployment rates though
differences narrowed down over time and were nearly eliminated in rural areas in 1999-
2000. Female unemployment rate in urban areas at 9.8 percent was more than the male
unemployment rate at 7.2 percent underlying the need to create employment
opportunities for females in urban areas.

The employment of males and females depends not only on their levels of education but
also on their socially defined roles in the households. Indian boys are generally brought
up and educated with the expectations that they be main bread-earners. But girls are

12
viewed as future housewives and homemakers rather than paid workers in labour
markets. The educational levels of the labour force by sex (Table-16) indicate very high
incidence of illiterate female workers in both rural and urban areas, although the
incidence has a declining trend over time. The illiterate women are crowding into
unskilled and manual labour jobs that are low paying and sometimes hazardous to their
health and safety. To some extent, this is due to desperation and poverty induced
compulsions that women are forced to enter paid labour markets. However, one positive
outcome is that better educational attainments are providing women with the opportunity
to undertake jobs hitherto not accessible. In fact, the gap between male and female
graduates in urban areas has almost vanished in 1999-2000 (Table-16).

Table-16 Percentage distribution of labour force by educational status

1987-88 1993-94 1999-2000
Males Females Males Females Males Females
Rural Urba Rur Urb Rur Urb Rur Urb Rur Urb Rural Urban
n
Illiterate 48 20 82 52 43 18 78 46 40 16 74 41
Primary 30 30 12 19 28 25 14 19 27 22 16 17
Middle 12 16 3 7 14 18 4 9 16 19 6 10
Secondary 8 22 2 12 11 25 3 14 14 26 4 16
Graduate 2 12 1 10 3 15 1 12 3 17 1 16
Total 100 100 100 100 100 100 100 100 100 100 100 100

In the Unorganised sectors, bulk of the women’s labour about 72 percent is engaged in
agriculture activities. In the organized sectors, there is excessive concentration of women
employment in community, social and personal services and in manufacturing (Table-
17). Even these are at the lower range of the job hierarchy implying lower incomes and
relatively low status.

In rural areas, women are better paid than men in public utilities, construction, while in
urban areas they are better paid in construction, trade and hotels, transport and
communications and financial services. (Table-17).

Table-17 Percentage distribution of female workers in organised sectors

Sectors 1991 1998 % Change Female/Male wage
during ratio in 1999-2000
1991-98 Rural Urban
Agriculture 10.3 9.8 -4.3 0.70 0.42
Mining & quarrying 1.5 1.4 -1.4 0.31 0.58
Manufacturing 21.8 21.0 -2.8 0.50 0.75
Electricity, gas, water 0.9 0.9 2.3 1.12 0.85
Construction 1.4 1.6 11.8 1.06 1.05
Trade, hotels, restaurant 0.9 0.9 0.0 0.92 1.32
Transport, communication 3.6 3.7 2.9 0.82 1.19
Financial, real estate 4.7 4.8 3.1 0.58 1.04
Community/social services 54.9 55.8 2.5 0.97 0.77
All Sector 100 100 0.7 0.90 0.83

13
Child Labour

The problem of child labour is a major social concern. The number of working children
in the country declined from 2 percent of the total population and 6 percent of the total
labour force in 1981 to 1.34 percent of the population and 3.59 percent of the total work
force respectively in 1991. The estimated number of working children in the country as
per the 55th Round of NSSO Survey (1999-2000) is 10.4 million. Children continue to
be employed in the unorganized and home-based industries and domestic services. The
State with the highest child labour population in the country is Andhra Pradesh, which
had 1.66 million working children. Other States having a child labour population of more
than a million (as per 1991 Census) are Madhya Pradesh, Maharashtra and Uttar Pradesh.

The policy of the government is to prohibit the employment of children below age 14
years in factories, mines and hazardous employments and regulate the working conditions
of children in other non-hazardous areas of employment. The government of India
adopted a National Policy on Child Labour in 1987 with three-fold objectives viz. legal
action plan, general developmental programs and project based action plan. Under project
based action plan, the Government of India has adopted two schemes, namely, National
Child Labour project Scheme (NCLP) and Grant-in-Aid to voluntary organizations for
taking up action oriented programs in the field of rehabilitation of child labour. There are
currently 100 National Child Labour Projects (NCLPs) covering 2.08 lakh activities
undertaken under the NCLP are the establishment of special schools to provide non-
formal/formal education, vocational training, healthcare, stipend and supplementary
nutrition, etc. to children withdrawn from employment. Under the scheme of NCLPs, so
far about 1.87 lakh children has approved the continuation of NCLP Scheme during the
Tenth Plan period and its further extension to 150 more child labour endemic districts.
Under the Gant-in-Aid Scheme, the Voluntary Organizations involved in rehabilitation of
child labour are provided financial assistance for the projects undertaken by them in the
areas, which are not covered by the scheme of NCLP.

2.5 Labour laws and labour markets

Labour is highly protected and Indian labour laws do not allow hire and fire policy. As
per existing laws under the Industrial Disputes Act 1947, no employer cannot close an
establishment or declare lock out or retrench any labour without taking prior approval of
the concerned government authority if the establishment employed more than 100
laborers on permanent basis in the previous 12 months. Various researchers in the past
had concluded that this clause stood in the way of further organised employment and led
to growth of more capital-intensive industries. Therefore, this protection is counter-
productive and acts against the overall interest of the workers.

Labour figures in the Concurrent List (for both Centre and States) of distribution of
legislative powers in the Constitution. As both Centre and States can legislate in this area,
India has perhaps the largest number of legislations on labour in the world. There are
over 165 labour legislations including 47 labour related laws enacted by the Central

14
government (Debroy 1997) dealing with industrial relations, social security, industrial
safety and health, child and women labour, minimum wages and bonus, labour welfare,
emigration, employment exchange and miscellaneous issues. There is a considerable
degree of overlap among these acts, and there are wide variations as regards basic
concepts such as employee, workman, wages, factory, child labour and industry. For
example, the term ‘wage’ is defined in 11 different ways in 11 different labour laws.
Court case laws also differ among different states causing further confusion. Many
studies have suggested simplification of rules and procedures, harmonization and
rationalization of acts, and grouping these acts under five or six broad and comprehensive
acts dealing with basic issues.

Labour regulation has been identified by many researchers (Stern 2001 and Sachs et al.
1999) as an important factor influencing the investment climate in India. As Besley and
Burgress (2004) show, policy choices of the Indian state governments as regards labour
legislation strongly affected manufacturing performance. The study by Besley and
Burgress (2004) based on state level panel data for the period 1958-1992exploits two
important facts: (a) labour regulation only applies to the registered manufacturing sector
and (b) the Indian constitution empowers the state governments to amend central
legislation. The principal central legislation is the Industrial Disputes Act of 1947. This
Act has been extensively amended by the state governments since 1950s. Besley and
Burgress (2004) read the text of each amendment and classified these as pro-worker (+1),
neutral (0) and pro-employer (-1).

Besley and Burgress (2004) then show that pro-worker labour reforms are closely
associated with an increase of urban poverty but do not affect rural poverty. This is due to
the fact that labour legislation applies basically to the registered manufacturing units,
which exist primarily in urban areas. Moreover, they observe that the adverse affects are
large. For example, the state of West Bengal, which is ruled by the communist parties for
the last three decades, had passed large number of pro-worker amendments during his
period. Had it not taken these labour policies, its urban poverty ratio would have been 11
percent lower in 1990. These results suggest that attempts to redress the balance of power
between capital and labour can end up actually hurting the poor in the medium and long
term.

Besley and Burgress (2004) further observe that a pro-worker labour legislation is
associated with lower per capita manufacturing output. This is due to the fact that pro-
worker legislation led to less output in registered manufacturing sector. States with more
pro-worker labour regulation tend to have less investment in the registered manufacturing
sector, and larger informal manufacturing sectors. As organised trade unions are able to
extract more wages and benefits in the registered sectors, capitalists prefer to remain in
the unorganised sectors where labour has no power.

These results on labour regulations are mirrored in the relationship between urban
poverty elasticities and labour regulation. States that had more pro-worker legislation had
been less effective in reducing poverty at a given level of growth. States, which enacted
pro-employer labour legislation, achieved significantly higher growth rates.

15
 3 Government Policy responses
3.1 General policies

In various five-year plans, employment generation was viewed as a by-product of

development and growth, and not as a goal to be pursued independently of economic
development. 1970s and 1980s witnessed the emergence of various employment
generation and self-employment programs as a part of poverty alleviation programs.
Although level of employment expanded over the years, the growth rate of employment
still lags behind that of labour force.

Anti-poverty programs have been strengthened over the years to generate more
employment, create productive assets, impart technical and entrepreneurial skills and
raise the income level of the poor. Most of the poverty alleviation and employment
generation programs are targeted towards the rural development, as majority of the poor
live in rural areas.
Most evaluations of the poverty alleviation programs, done by the government or others,
conclude that these programs are not very effective in reducing poverty. They suffer from
ill defined and multiple objectives, limited targeting, under-funding, complex
administration, high administrative costs and leakage, lack of proper accountability and
adequate monitoring. A recent study of the Public Distribution System (PDS) suggested
that only 25 percent of food grains actually reach the poorest 40 percent of the
population, and administrative costs account for 85 percent of total expenditure and
therefore far outweigh the income gains to the poor.

3.2 Active labour market policies

(a) Rural development and poverty alleviation programs

Growth with social justice had been primary objective of Indian planning since its
inception in 1951, and several anti-poverty measures are in operation for decades
focusing the poor as the target groups. These include welfare programs for the weaker
sections, women, children, and a number of special employment programs for self- and
wage employment. Ongoing economic reforms since 1991 strengthened these programs
to generate more employment, create productive assets, impart technical skills and raise
the income levels of the poor.

Government relied mainly on two approaches for poverty alleviation: the first based on
the anticipation that economic growth will have a “trickle down effect” on the levels of
living of all groups; and the second that direct anti-poverty programs are also required.
Government shifted public expenditure away infrastructure and industry towards social
sectors, and improved targeting of subsidies through changes in the public distribution
system. Central government expenditure on social sectors (comprising education, health,
water supply, sanitation, housing, slum development, social welfare, nutrition, rural
employment and minimum basic services) as a ratio to total expenditure increased from
7.7 percent in 1990-91 to 11.7 percent in 2005-06, and as a ratio to the GDP increased
from 1.3 percent to 2 percent over the same period.

16
One of the better-targeted programs is the Integrated Child Development Services. Food
for works program is also more successful at targeting the poor and improved their living
standards at a relatively low cost.

As unemployment is the root cause of poverty and the population growth in India is very
high, there should be more emphasis on family planning. For an urban family a child is
born by parental planning and family size is limited to the necessary minimum. On
contrary, in rural India a child is regarded as an asset and is expected simply because of
normal life cycle progressions.

Government is trying to change this environment by suitable public policy on education,

health and family welfare, and economic incentives for micro families. But these
measures have marginal impact on the net reproduction rates and the family size as socio-
cultural-religious environment put a constraint on the effectiveness of family planning.
Female education, awareness and better standard of living would create the required
consciousness among the people that smaller families are desirable. If the needs for
health and family welfare services are fully met, it will be possible to achieve substantial
decline in the family size and enable the families to improve quality of life.

Low productivity of small landholders leads to poverty, low energy in-take and under
nutrition, which in turn prevents the development and creates a vicious circle. In most of
the States, non-farm employment in rural areas has not grown very much and cannot
absorb the growing in labour force due to high population growth. Those who are getting
educated specially beyond the primary level do not wish to do manual agricultural work.
They would like better opportunities and more remunerative employment in rural areas.
This can be done by developing agro-based and rural resource-based enterprises.

Government provides several fiscal and monetary incentives for the small-scale
industries, many of which are based on agricultural goods and rural resources. But these
small industries suffer from lack of modern technology, adequate bank credits, skill
labour and efficient network of markets. It is imperative that a program of skill
development, vocational training and technical education is adopted on a large scale in
order to generate productive employment in rural areas for those living there. The entire
gamut of existing poverty alleviation and employment generation programs may have to
be restructured to meet the newly emerging demand for employment.

(b) Education and training

The National Policy on Education (1986) provides a broad policy framework for total
eradication of illiteracy and sets a goal of expenditure on education at 6 percent of the
GDP. As against the goal of 6 percent, the total expenditure on education in India is
currently 4 percent of GDP. A high priority has been accorded in this sector in the Tenth
Five Year Plan, with an emphasis on basic education, training and adult education. The
Budget for 2004-05 imposed an education cess at the rate of 2 percent on all taxes and

17
duties to finance the program on universal education. For workers, there are various
industrial training centres and the vocational courses.

Higher technical and professional education in the country has played a significant role in
economic and technical development by producing quality manpower. There are at
present 1,265 approved engineering colleges at the degree level. Apart from this 1,034
institutes impart courses on Master of Computer Application (MCA). There are 958
approved Management Institutes imparting MBA courses. All India Council for
Technical Education (AICTE) has delegated the powers of approval of diploma level
technical institutes to the State Governments. Strong linkages have been developed
between technical institutions and the industry. For strengthening technical education and
improving the quality of polytechnic pass-outs, various steps have been taken through
technician education development programs.

3.3 Protective safety nets

In India, positive discrimination in favour of the weaker sections as an instrument of social

justice has been accepted both socially. There are job reservations in the public sector for
scheduled castes (SCs), Scheduled Tribes (STs), Other Backward Classes (OBCs), women,
handicapped, minority ethnic groups etc. Social security is listed in the Concurrent List of
the Constitution placing responsibility on both the Centre and the States. However, the
provision of effective social security continues to be a challenge in view of financial
constraints, high incidence of poverty, unemployment, illiteracy and the large size of
labour force in the unorganized and informal sectors.

The permanent social security benefits provided through legislative measures like
Minimum Wages Act, Industrial Disputes Act, Workmen’s Compensation Act, Employees
State Insurance Act, Employees Provident Fund & Miscellaneous Provisions Act,
Maternity Benefit Act, and Payment of Gratuity Act, etc. cater to mainly organised urban
labour comprising only 8 percent of the total labour force. Most of the states have pension
schemes for the old and disabled, but due to eligibility criteria of income and age, only 9
percent of old-age population gets the benefit of pension. Most of the States implemented
the Minimum Wages Act, but the levels of minimum wages and coverage vary from state
to state. Some special employment Programmes are also being implemented by some state
governments like the Employment Guarantee Scheme in Maharashtra and the self-
employment Scheme for Registered Unemployed in West Bengal.

Immediately after the independence, the Government enacted the Industrial Dispute Act
(IDA), 1947 for protection of workers. IDA permits lay-off, retrenchment and closure in
all undertakings, which do not employ more than 100 workers. In the case of larger units,
as per the Act, no retrenchment, lay-off or closure is allowed without taking prior
permission from the government and the affected workers not being served at least three
months’ notice in writing indicating reasons for such actions.

In addition, in order to mitigate the possible adverse impact of economic reforms, a

National Renewal Fund (NRF) has been established to fund schemes for compensation,

18
retraining and redeployment of workers affected by restructuring. The NRF is being
financed partly by disinvestments of government equity in public enterprises and partly by
contributions made by the World Bank and individual country donors. Since its inception
in 1992 the Fund has financed the voluntary retirement of 100,000 workers who have
opted for voluntary retirement.

Some important initiatives taken over the years to improve the well-being of the
weaker sections like the scheduled castes, as well as Other Backward Classes include: (I)
Reservation of jobs to the extent of 22 percent for SCs/STs in both public and private
sectors, (ii) Reservation of 27 percent of jobs for Other Backward Classes (OBCs) in the
Central Government and Public Sector Undertakings, excluding the creamy layer. (iii)
Setting up a National Commission for Backward Classes, (iv) A scheme for education
complexes in low literacy pockets for improving literacy among tribal women, (v) setting
up of a National Backward Classes Finance and Development Corporation to promote
economic and other development activities of the backward classes. (vi) Providing rice
and wheat to the tribal dominated areas at concessional prices even lower than the public
distribution prices. (vii) Establishment of the Tribal Cooperative Marketing Development
Federation, and (viii) creation of new Ministry for tribal welfare in October 1999 by the
coalition government.

Commercial banks are required to lend at least 40 percent of their credits towards the
priority sectors consisting of small-scale industries, agriculture, retail trade, small
transport operators etc. Banks also provide loans at concessional interest rates to the
weaker sections, minority communities and persons affected by natural calamities, riots,
disturbances etc.

All insurance companies, both life and general, are wholly nationalized, and play a major
role for providing social security in the form of various schemes such as insurance for life,
floods, fire, earthquakes, riots, war risks, accidents etc. In recent years, they have
introduced several special schemes such as Medi-claim Policy, Comprehensive Crop
Insurance Scheme (CCIS), Social Security Scheme for Poor Families in the age group of
18-60 (to provide personal accident insurance), Hut Insurance Scheme for Poor families in
rural areas (to provide fire insurance cover for huts and belongings of landless labourers),
Railway passengers Insurance Scheme (to cover cases of deaths and injuries to bona fide
passengers on account of terrorist attacks, bomb blasts etc.), Professional Indemnity
Insurance, Teak wood Insurance, Tea Plantation Insurance etc. A Social Security Fund has
been set up with contributions from the Government and the Life Insurance Corporation
for the purpose of providing social security through group insurance on the lives of
persons forming part of weaker and vulnerable sections of the society.

In the last few years, group insurance schemes for landless agricultural labourers, life
insurance scheme for integrated Rural Development Program (IRDP) beneficiaries and
group insurance for certain categories of workers belonging to weaker sections of a the
society have been introduced. In 1999 the government launched a new Crop Insurance
Scheme replacing the existing Comprehensive Crop Insurance Scheme and widened its

19
scope to cover almost all food and non-food crops and to help farmers to stabilize their
incomes particularly in disaster years.

3.4 Gender specific issues

Despite significant progress, indicators of human development, such as life expectancy,

literacy, school enrollment and medical care, in India lag far behind those of most East
Asian countries. Still more than 35 of the adult population are illiterate. Wide gender
disparities also exist in India with regard to economic, health and educational attainment.
More than 40 percent of India’s illiterates are girls or women. The incidence of infant
mortality and child malnutrition is more pervasive for females; however, female life
expectancy at birth has improved during the last decade and now exceeds male life
expectancy. The generally poorer health of women is caused by dual work burdens in
production and reproduction tasks and skewed pattern of intra-household food allocation
in favour of male members. Regional variations are also observed in gender disparities
correlated to poverty incidence.

3.5 Labour market reforms

At present, amendments to 13 acts are being examined by all stakeholders. Even

amendments of simple issues relating to definitions and scope have taken much longer
period than expected due to existing parliamentary procedures for amendment and lack of
political consensus. While China drastically reformed its previous employment relations
pushing the workers to a more insecure regime and transferring substantial bargaining
power to the employer within a decade of reforms, India virtually did nothing to change
its labour laws even after 14 years of reforms (Saha 2005). In the absence of labour
reform, the only avenue of downsizing was voluntary retirement schemes (VRS), pursued
both by the private and the public sector, which resulted in high costs and long
adjustment period. The methods of recruitment were also predominantly contractual, and
where that was not possible, firms resorted to outsourcing. This led to dualism within
firms, slower growth of permanent employment and abnormally high share (82 percent)
of Unorganised employment in total labour force.

China made significant reforms in labour markets within a decade of initiating reforms.
As for the labour relations within an enterprise, the reform went deeper by transferring
the bargaining power mostly in favour of the employer, while the enterprise union and the
state machinery are expected to protect the workers’ interest under the general guidelines
for labour welfare and protection. The employer has freedom in hire and fire and to make
his employees work according to a mutually agreed contract. This particular provision of
allowing firm-specific contracts to govern the employment relation has reduced the
state’s role drastically. In practice, things can go wrong, if the state agencies do not play
their roles properly and workers are forced to accept unfair terms.

China’s long history of extreme employment security might have compelled them to
reverse almost all the previous provisions. In the absence of domestic private
entrepreneurs, liberalised labour market was perhaps necessary to attract foreign

20
investors (Henley 2004). But it has made redistribution of surplus within the Chinese
enterprises biased in favour of employers (Ostrovisky 2003).

China was successful in creating a new labour market, which enhanced mobility of
labour. Although this led to mass layoffs and open unemployment, sustained high
industrial growth especially in the coastal regions helped their redeployment. In spite of
harsh working conditions led by competition, workers seemed to have benefited from
wage growth, significant new job creation and opportunities for self-employment (Saha
2005). In sum, China’s manufacturing sector experienced a sort of industrial revolution,
which reduced people’s dependency on agriculture.

Despite various studies done in India indicating such benefits from liberalisation of
labour markets, Indian labour laws still remain highly restrictive due to political economy
constraints. India has not achieved remarkable improvement in manufacturing growth.
Although industrial output has grown at a faster rate than before, employment growth has
decelerated in the recent years. This suggests that labour reforms are necessary to allow
for larger investments in manufacturing. Manufacturing growth is crucial for the
absorption of semi-skilled and unskilled workers and to reduce the dependency of labour
on agriculture, which employs 58% of labour force but contributes only 20% of GDP.

The different courses of reforms taken by India and China can be explained partly by
their policy history, political institutions and industrial relations framework. In the case of
China, the history of extreme employment security compelled a complete reversal of
labour policy to attract foreign capital, which was very important, as there was very little
entrepreneur class within the country. Political institutions and one trade union policy
further restricted the Chinese workers from conducting true collective bargaining. Hence,
they suffered on the redistribution front (Chen et.al.1996, Kanbur and Zhang 2005).

Currently the median age of the Indian working population is, at 24.3 years, one of the
lowest among the large nations. India is likely to add 83 million to its working age
population of 675 million by 2010 according to the estimates by the United Nations.
However, existing restrictive labour laws have been a deterrent to employers forcing
them to prefer capital-intensive options for production, even if they would have otherwise
preferred labour-intensive options due to low wages in India (Ahya and Sheth 2005).
Despite various well-researched studies, which recommended initiating a structural
approach to labour market reforms, the government has avoided confronting the issue of
unemployment head on (Aya and Sheth 2004). Politicians’ efforts to protect labour in the
public sector add to inflexibility in the labour market.

Only 8% of Indian labour force are employed in the organised sector and almost 60% of
manufacturing output comes from unregistered companies. A large number of factories
remain outside any regulations. Although certain industries took the advantage and grew
in terms of size, profit, skill and technology, most others existed for bare survival. A
prolonged regime of import substitution damaged their business instincts. While the
organized sector provided too much of job-security for too long, the unorganised sector
provided too little to too many. Unfortunately, political parties preferred retaining this

21
dualism in order to preserve their vote banks in organised labour force. Consequently,
good research works and policy prescriptions on labour reforms remained on paper
leading to poor uptake of research by the policy makers.

22