Labour, Jobs and Employment – Harmonization of labour laws, gender gap, unemployment, etc.

[op-ed snap] The manufacturing muddle


Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy & their effects on industrial growth

From UPSC perspective, the following things are important:

Prelims level: Union Budget, inverted duty structure, GST, Sarva Shiksha Abhiyaan, Annual Labour Bureau survey, Economic Survey 2018, Employees’ Provident Fund Organisation, twin balance sheet problem, Insolvency and Bankruptcy Code

Mains level: Rising youth population and lowering jobs


Correction in IDS

  1. The Union Budget has reinforced the correction of the inverted duty structure (IDS)
  2. An IDS means higher duty on intermediate as opposed to final/finished goods
  3. Final/finished goods often enjoy concessional customs duty under some schemes

Effects of IDS

  1. Chinese/other imports have swamped India’s small- and medium-sized enterprises and large manufacturing companies
  2. It has raised the import-intensity of manufacturing as well as dampened job growth by raising capital intensity
  3. The share of manufacturing in GDP and employment has not risen since 1991

Benefit by GST

  1. The goods and services tax (GST), especially the IGST or Integrated GST component, has begun to erode the advantage that the IDS was giving to foreign exporters in Indian markets

China’s strategic industrial policy

  1. China had followed a strategic industrial policy for two decades and thus stolen a march on India in labour-intensive manufacturing exports
  2. China reduced the absolute numbers and percentage of the poor in the population by absorbing surplus labour in manufacturing
  3. One major reason for this was that China’s agricultural and rural income growth was much higher
  4. It sustained consumer demand and also generated industrial jobs much faster
  5. India’s policy structure failed to utilise its labour advantage to grow labour-intensive manufacturing exports

Return to pre-1991 ‘protectionism’?

  1. Customs duties have been raised on capital goods and electronics, and silica for use in manufacture of telecom-grade optical fibre
  2. Duties have also been raised on labour-intensive manufactures such as food processing, footwear, jewellery, furniture, toys and games

Effect of tariff reductions

  1. Reduction of tariffs (1991-1998) was precipitous, from an average rate of 150% to 40% by 1999
  2. Indian manufacturers, unreasonably protected till 1990, were suddenly exposed to competition
  3. A slower reduction would have enabled them to adjust to import competition, upgrade technology, and compete
  4. The sudden onslaught of lower-priced imports decimated many domestic enterprises
  5. This overexposure gathered momentum as from the early 2000s, free trade agreements with much of East/South-east Asia reduced tariffs further

Rise in informal employment

  1. Beginning 2000, the number of those joining the labour force grew sharply to 12 million per annum till 2004-05
  2. As domestic manufacturing employment growth was slow, they could only be absorbed in agriculture or traditional services
  3. Two fortuitous, though policy-induced, developments have saved the day since 2004-05
  4. As population growth fell from 1990 onwards, entrants to the labour force fell
  5. As school education access grew rapidly, post-Sarva Shiksha Abhiyaan, children remained in school

Present challenge

  1. These entrants, much better educated than the earlier cohort, are now entering the labour force
  2. They want either white-collar jobs in the private or preferably public sector or in industry or in modern services
  3. Data from the government’s Annual Labour Bureau survey and the Centre for Monitoring Indian Economy indicate that job growth is lower than entrants to the labour force
  4. The only sector with a significant increase in labour absorption has been services

Way forward

  1. The GST, Economic Survey 2018 has rightly claimed, led to a formalisation of some informal firms, and hence workers (by registration in the Employees’ Provident Fund Organisation)
  2. The resolution of the twin balance sheet problems (of companies being over-leveraged and banks unable to lend due to mounting non-performing assets), together with the Insolvency and Bankruptcy Code, should now open the floodgates for new manufacturing investment
  3. Policy must attempt to close the loop between rising demand and supply through consumer demand
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