Tehelka
September 26, 2006

TeamLease Services has just produced an India Labour Report for 2006. This has three segments. The first examines jobless growth since reforms and has projections. Jobless growth arguments are usually articulated about the organised sector and it is important to recognise there are alternate definitions of organised — through labour laws like the Factories Act, excise exemption definitions and small-scale industry nomenclature, with some overlap across these.

In 2001, out of India’s 402 million workforce, 7 percent (27.8 million) was in the organised sector and 93 percent (374.4 million) was in the unorganised sector. The reasons for employment stagnation (public sector restructuring, labour market rigidities) in the organised sector are well-known and there is some evidence of increased outsourcing and casualisation, often triggered by competitive pressures. Add to that something this report doesn’t flag. Since 1991, price of capital (whether debt or equity) has relatively declined, while transacting costs of employing labour have remained the same, and this may also have contributed to declining employment in the organised sector.

The value addition in the report is in depicting regional trends. The only states where organised sector employment increased in the 1990s were Karnataka, Punjab and Himachal and the worst states were MP, UP and West Bengal.

Extrapolate to 2020, the timeframe for this report’s projections. Given euphoria about India’s demographic dividend, what is said about 2020 is particularly disturbing. The working age (20-59) population in 2020 will be 761 million and of this, 716 million will be in the labour force. But 233 million will not have access to formal sources of education or go beyond primary school. Again, extrapolating present employment elasticities, even if the economy grows at 8 percent between 2001 and 2020, 211 million people will be unemployed, mostly clustered in the 15-30 age-group. There are indeed problems with definitions of unemployment. But having accepted them for what they are, in 2020, the all-India unemployment rate will be 29.5 percent, with 33.5 percent in Andhra, 55.4 percent in Goa, 33.3 percent in Himachal, 33.8 percent in UP and 40 percent in West Bengal. That’s a horrifying picture. If this is to be avoided, creating 10 million jobs a year will not do. We need additional employment of 15 million a year.

This brings one to the second segment of the report, where there is an attempt to rank states and create an index. More accurately, there are three separate indices — on labour demand, labour supply and rigidity of labour laws. On labour demand, the top four states are Gujarat, Goa, Himachal and Delhi; and the bottom four are MP, J&K, UP and Bihar. Match that with labour supply, which captures not only quantity, but quality also. The top four states are Goa, Karnataka, Tamil Nadu and Delhi and the bottom four are Orissa, J&K, Bihar and Assam. Why is labour not employed, assuming requisite skills are available? Presumably because of labour market rigidities and that index, which is indeed contingent on some subjectivity in identifying variables, shows Maharashtra, Karnataka, Punjab and Gujarat at the top and UP, Assam, J&K and West Bengal at the bottom. Splicing these findings together, the real concern states turn out to be MP, Orissa, West Bengal, Assam, UP, Bihar and J&K. Generalising a bit, states with high rates of population (and labour force) growth perform the worst. That’s the most important worry about the demographic dividend (or demographic deficit), a factor we often ignore when we only talk about all-India trends.

Finally, there is a third segment to the report, outlining ideas for reform and this is more than the Industrial Disputes Act (IDA). Reforms will reduce transaction costs of employing labour and break the dichotomy between organised and unorganised labour markets, imparting flexibility in the former, but simultaneously ensuring protective legislation in the latter. The obsession with IDA prevents us from recognising that there are several procedural costs that can be reduced and there is no great controversy there. Let’s implement the recommendations of the Second National Commission on Labour. However, I don’t think that will happen as long as labour is on the Concurrent List. Better to move it to the State List.

Debroy, a leading economist,
is Secretary-General, PHDCCI