Perhaps the greatest success of China's extraordinary economic resurgence has been the transformation of a poor, largely rural economy into a semi-industrialised, middle-income country with 40 per cent of its GDP coming from manufacturing, over a 100 million factory jobs and over $500 billion of manufactured exports.
In contrast, India's manufacturing sector has stagnated at around 16 per cent of GDP, employs only about 6 million workers in the organised sector (and perhaps another 50 million in small, unorganised units with less than 10 workers) and exports around $60 billion of goods.
Quite clearly, the growth of manufacturing output and employment has been much weaker in India than in China. In particular, India's manufacturing sector has failed to provide a large number of good "blue collar" job opportunities as the labour force grew and the share of agriculture in GDP fell from over 50 per cent (circa 1950) to just over 20 per cent at present.
As a result, nearly 60 per cent of India's 400-million-strong labour force remains "trapped" in low-productivity agriculture, severely compounding the massive problems of poverty and regional disparities.
Most analysts point to four major policy failures in past decades as the principal culprits for industrial under-performance in India.
First, the inward-looking foreign trade policies of an overvalued exchange rate, tight import controls and very high tariffs greatly discouraged Indian manufacturers from seeking export markets at a time (1960 onwards) when world trade was booming and the East Asian "tiger economies" developed through rapid growth of labour-intensive manufactures.
Second, the policy of small-scale industry (SSI) reservations, initiated in 1967 and greatly expanded in 1980, shut out medium- and large-scale Indian firms from precisely those labour-intensive products (garments, shoes, toys, sporting goods, etc.) in which the East Asian tigers made their early billions from exporting.
Third, there was the chronically bad state of infrastructure, provided by government monopoly agencies like state electricity boards, PWD road makers, and the telecom department.
Last, but by no means least, was the heritage of restrictive labour laws, especially the insertion of chapter V(B) into the Industrial Disputes Act during the Emergency year, 1976, and its subsequent tightening in 1982.
These laws prevented retrenchment and closure of industrial enterprises by requiring (rarely given) government permission. Such inflexibility in lay-offs of employees hugely discouraged fresh employment (or new investment in) in units with more than 100 workers.
There has been some progress in the last 15 years. Trade and exchange rate policies have undergone major reform: the exchange rate is realistic and market-responsive, most import tariffs have been phased down to 15 per cent and the hideous edifice of import licensing controls has been dismantled.
As a result, exports have done well, especially in the mid-90s and in the last five years. More recently, the commodity coverage of SSI reservations has been reduced, with selective freeing up of goods with significant export potential.
Infrastructure remains atrocious, with the conspicuous exception of telecom, where serious reforms have triggered a big boom in connectivity, empowering millions of individuals and businesses.
The heritage of anti-employment labour laws remains unreformed, despite the forthright recommendations of Planning Commission Task Forces and the Second National Commission on Labour.
The latter also recommended the repeal of the offending chapter V(B) of the Industrial Disputes Act.
The combination of anti-employment incentives embedded in labour laws and the rigours of a more competitive economy appear to have actually led to a decline in the number of organised sector manufacturing jobs from a peak of 6.9 million in 1997 to 6 million in 2003 (Economic Survey 2004/5). Just 6 million.
Only 1.5 per cent of India's labour force is employed in organised manufacturing units! This is at a time when the Planning Commission estimates the annual increment in the labour force to be nearly 3 per cent or almost 12 million job seekers.
The situation is not just grim; it's desperate. Yet, the apologists for the status quo trot out their false arguments. Let's consider them:
Argument 1: Why get exercised about labour laws when they apply to less than 5 per cent of the labour force (excluding government employees)? It's "hire and fire" for the remaining 90-plus per cent anyway.
Counter: The low share of the organised sector in total employment is precisely the problem. We want the proportion of work force with good jobs to be much higher. Indeed, if chapter V(B) had not been introduced in 1976, the share of the organised sector in total employment might have been 15-20 per cent by now. Restrictive labour laws protect a tiny minority, while encouraging the "casualisation" of the vast majority of India's workers.
Argument 2: Don't take these labour laws too seriously. Indian businessmen know how to work around them. Can't you see that many have downsized their work forces despite the laws?
Counter: Yes, but the costs of such downsizing (legal and illegal) to firms have been very large, sometimes driving them to insolvency. This has driven home to all businesses the disadvantages of having sizable numbers of workers on their books. Better to invest in capital-intensive products or services or find ways of "casualising" the required work force. Either way the net result is many fewer good organised sector jobs.
Argument 3: Don't worry about labour laws for industrial labour. India's future is in modern services like IT and BPO.
Counter: The rise of the IT/ITES sector is wonderful. But please remember that direct employment in them is only about a million with perhaps another 1-2 million of indirect employment. Such numbers cannot substitute for strong growth of labour-intensive manufacturing jobs of the kind so successfully generated in East Asian economies. Besides, IT jobs are typically for college graduates. Where is the employment opportunity for the many millions more of school leavers (and drop-outs)?
Historically, manufacturing has been the major avenue for low-skill, non-agricultural employment in every country which has successfully matched supply and demand in labour markets in the course of its economic development and structural change.
I am afraid the conclusion is inescapable. If we are serious about encouraging the rapid growth of good, non-agricultural jobs, then we have to reform our hugely dysfunctional labour laws.
If we can't muster the political will to do that, then just sit back and watch the tragedy unfold as the much-touted demographic dividend turns into a nightmare of growing unemployment, poverty and social conflict.
The author is Honorary Professor at ICRIER and former Chief Economic Adviser to the Government of India. The views expressed are personal.
