Economics focus

The Himalayas of hiring

Three out of every ten of the world’s new workers will be Indian.
Employing them won’t be easy

The Economist Aug 5th 2010

LABOUR is cheap in India: signage is painted by hand; bricks are piled nine-high
on the crowns of construction workers; shops are more crowded with attendants
than customers. As China’s workforce becomes older, costlier and stroppier, some
firms will look to exit the dragon. Only India has the numbers to match it.

According to the International Labour Organisation, the number of Indians in the

workforce will increase by almost 80m over the next decade. But that is an
understatement, argues a new paper* by Tushar Poddar of Goldman Sachs and
Pragyan Deb, now at the London School of Economics (LSE). Only a third of
Indian women currently seek paid work, they point out (other estimates are even
lower). If that figure rises to 38% by 2020, then the Indian workforce will swell
by 110m, they reckon. Three out of every ten extra workers in the world will be
Indian.

India’s renowned services sector will employ about 45m of them, the authors
forecast. But 40m will have to find work in industry. Overshadowed by India’s
digital dynamos, India’s widget-makers are no slouches. Manufacturing grew at a
perky 8% annual rate over the past decade and in the last fiscal year contributed
a greater share (16.1%) of India’s GDP than agriculture for the first time in the
country’s history. But its contribution to employment is less impressive: just
12%.

Unfortunately, India’s manufacturers economise on labour, despite its abundance,

favouring capital or technology instead. India’s advantage “does not lie in
manufacturing that is labour-intensive,” a conference was told last year by Baba
Kalyani, chairman of Bharat Forge, an impressive car-parts maker. In the 1980s
his company’s workers cost about 700-800 rupees a month, he said. Today they
cost 20,000-30,000. “We were never competitive in the 1980s. We are extremely
competitive today. And the difference is technology.”

His is not the only firm to take the manual out of manufacturing. Even in
industries such as clothing, jewellery and toymaking, the ratio of labour to capital
halved over the 1990s, according to† Deb Kusum Das, Deepika Wadhwa and
Gunajit Kalita of the Indian Council for Research on International Economic
Relations (ICRIER) in Delhi. The regiments of assembly-line workers characteristic
of China’s industrial revolution are harder to find in India. Several scholars have
identified a “missing middle” in Indian manufacturing: workers cluster either in
minuscule factories or large and sophisticated ones (see right-hand chart).

What is deterring Indian manufacturers from hiring more people? Messrs Poddar
and Deb name India’s “archaic labour laws” as the “biggest challenge” among
many to industrial growth. According to India’s employers’ association, the
central government imposes over 55 labour laws and the states another 150 or
more. The most notorious is the Industrial Disputes Act, which requires any
establishment employing 100 or more workers to ask the state’s permission
before firing anyone. The tiny minority of Indians to whom this provision applies
enjoy better protection than any of their counterparts in the rich OECD, except
the Czechs and the Portuguese. And they are better insulated from collective
dismissal than any of them.

In a well-known study** in 2004, Tim Besley and Robin Burgess of the LSE count
the damage done by this law. Because India’s labour regulations are the joint
responsibility of the central government and the states, some parts of the country
are much tougher than others. States that amended the law in favour of workers
over employers suffered weaker investment, employment and output at factories
that employed ten workers or more, Messrs Besley and Burgess found. “Attempts
to redress the balance of power between capital and labour can end up hurting
the poor,” they warned.

Their sombre conclusion has not gone unchallenged, however. Aditya

Bhattacharjea†† of the Delhi School of Economics criticises the authors for a
number of infelicities, such as lumping together amendments big and small.
Messrs Besley and Burgess label Gujarat as a pro-worker state, for example,
because of its 1973 decision to fine companies a piffling 50 rupees a day for
failing to set up joint worker-management councils properly. The authors also
implicitly assume that national amendments to the act were implemented in the
same year countrywide. But in some states, the government anticipated decisions
at the centre; in others, state-level judges resisted them.

Regulation hurts

Some of Mr Bhattacharjea’s criticisms are reflected in a more recent paper*** by

Poonam Gupta of ICRIER, Rana Hasan of the Asian Development Bank and Utsav
Kumar of the Conference Board. The fortunes of Indian manufacturing differ not
only from state to state, they point out, but also from industry to industry. Tough
states have not impeded Indian industry as a whole, they find. But industries that
are labour-intensive do better in states that have relatively flexible labour
markets. Such industries grew by about 7% a year from 1984 to 2004 in flexible
states, such as Andhra Pradesh and Karnataka. In inflexible states, such as West
Bengal, Orissa and Maharashtra, they grew by only 3.5%. “Pro-labour regulations
hurt where it matters the most—industries which employ more labour,” the
authors write.

Even minor reforms of the labour laws can be controversial. Some lobbyists have
concluded that their energies would be better spent elsewhere. Indeed, only 15%
of the manufacturing firms surveyed by the World Bank in 2006 identified labour
regulations as a big obstacle to their operations; 36% worried about electricity.
But just as history is written by the victors, surveys are answered by the
incumbents. Researchers can only question the firms that exist; they cannot talk
to all the ones that might exist, if India’s labour laws permitted them to prosper.
Unless those laws are reformed, no one will ever know how many of India’s extra
110m workers such companies might have hired.

Sources
*Goldman Sachs Global Economics Paper 201, July 28th 2010

†ICRIER Working Paper 239, June 2009

**The Quarterly Journal of Economics, February 2004

††CDDRL, Stanford Unviersity. Working Paper 96, January 2009

***MPRA Paper No. 13496, February 2009