Abstract
Despite witnessing a decade of rapid economic growth, an acceleration of growth in the organised manufacturing sector has eluded India. Using state-level data from the Annual Survey of Industries, we examine the factors constraining the growth of output and employment in this sector. We find that states with inflexible labour regulations witnessed slower growth in employment and output than states with flexible labour regulations. However, it would be incorrect to put the entire onus of the dismal performance of this sector on labour regulations as firms are responding to rigidities in the labour market by greater use of contract workers. Factors such as restrictive product market regulations and infrastructural bottlenecks have also adversely affected the performance of the manufacturing sector. Importantly, given that the days of industrial licensing are gone, much of the action for improving the business environment needs to be taken at the state level.
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Source: Calculations from ASI published statistics (several years)
Source: Calculations from ASI’s published statistics (2000–01 and 2010–11)
Source: Calculations from ASI published statistics (2000 and 2010)
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Notes
United Nations, 2009.
NDMEs employ at least one wage (hired) worker and have between two and five workers in total. DMEs employ between six and nine workers in total, of which at least one would be a hired worker.
Different states have adopted diverse approaches for dealing with the problems of land acquisition. Gujarat has a land-pooling model whereby 50 per cent of the land is acquired while the remaining 50 per cent is left with the original owners, giving them a stake in the upsides generated by land monetisation. In Haryana and Rajasthan, trunk and industrial infrastructure are created by the state governments but private developers directly participate in other activities. For future research, it is important to create an appropriate index which captures differences in the ease of acquiring land at the state level.
Although, the NSS database covers both organised and unorganised sector, it does not provide comparable annual data on the unorganised sector, making it difficult to study both together. Hence, we focus on ASI in analysis.
Capital intensity is defined as the ratio of real fixed capital to total persons engaged. Capital is measured by fixed capital as reported in ASI. This represents the depreciated value of fixed assets owned by the factory on the closing day of the accounting year. It is deflated using WPI for machinery and equipment. Total persons engaged includes workers (both directly employed and employed through contractors), employees other than workers (supervisory, managerial and other employees) and unpaid family members/proprietor etc.
In order to classify industries as labour or capital intensive, we calculate the capital intensity for all industries in the organised manufacturing sector for every year from 1999 to 2011. An industry is classified as labour intensive if its capital intensity is below the median value for the manufacturing sector throughout the decade. Similarly, an industry is classified as capital intensive if its capital intensity is above the median value for the manufacturing sector throughout the decade. The remaining industries are classified as ambiguous.
The ratio of workers to total persons engaged was 76.85 and 78.35 per cent in 2000–01 and 2010–11, respectively.
The number of contract workers in the organised manufacturing sector increased from 1.17 million in 2000–01 to 3.04 million in 2010–11, while the number of directly employed workers increased from 4.55 million to 5.91 million over the same period. The total persons engaged increased from 7.42 million to 11.41 million.
In this year, industrial de-licensing was effectively abolished, except for a small number of industries where it was retained in these industries “for reasons related to security and strategic concerns, social reasons, problems related to safety and overriding environmental issues, manufacture of products of hazardous nature and articles of elitist consumption” (Government of India 1991).
The ranking of countries are based on various parameters including starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.
The Act has made it mandatory to get the consent of at least 70 per cent of the affected people for acquiring land for PPP projects and 80 per cent for acquiring land for private companies. The new law provides compensation four times the market price for rural land and up to twice the value of urban land for acquiring for public works or industrial activities. The Act stipulates establishment of a state social impact assessment unit, the office of a commissioner, rehabilitation and resettlement, and a state-level monitoring committee by each state government.
This definition of skill intensity is a rather narrow one as it simply looks at education level of workers and does not take account of factors such as vocational training. The classification of industries on the basis of their skill intensity is an area that needs further research.
ASI reports variables in nominal value terms. Any analytical work requires deflating these variables. An obvious candidate for this is the wholesale price index (WPI) series. However, we cannot use the WPI as a deflator directly because while ASI follows the NIC classification of industries, WPI is constructed with a view to capturing price movements based on nature of commodities and final demand. Therefore, we approximate commodities based on the nature of economic activities and map NIC activities to WPI commodities, and create a WPI for each of the industries in the analysis.
They examine state-level indexes of labour regulations developed by Besley and Burgess, and OECD (2007). The Besley and Burgess measure relies on amendments to the IDA as a whole. Bhattacharjea’s measure focuses exclusively on Chapter VB of the IDA—that is, the section that deals with the requirement for firms to seek government permission for layoffs, retrenchments, and closures. Bhattacharjea considers not only the content of legislative amendments, but also judicial interpretations to Chapter VB in assessing the stance of states vis-à-vis labour regulation. The OECD study is based on a survey of experts and codes progress in introducing changes in recent years to not only regulations dealing with labour issues, but also the relevant administrative processes and enforcement machinery. The regulations covered by the survey go well beyond the IDA and include the Factories Act, the Trade Union Act, and Contract Labour Act among others.
Andhra Pradesh, Rajasthan, Tamil Nadu, UP and Karnataka are classified as having flexible labour regulations. Maharashtra, Orissa and West Bengal are classified as having inflexible labour regulations. Assam, Bihar, Gujarat, Haryana, Kerala, Madhya Pradesh and Punjab are classified as the neutral states.
The extent of state control covers issues such as public ownership of enterprises, the scope of public enterprise sector, its size, and the extent of direct control over business enterprises. Barriers to entrepreneurship cover administrative burdens on start-ups and administrative rules and procedures for obtaining clearances and approvals of various types among other things. The states of Punjab, Maharashtra, Tamil Nadu, Karnataka and Haryana are classified as having restrictive product market regulations. Madhya Pradesh, Rajasthan, Orissa, Assam, and Bihar have liberal product market regulations. The remaining are classified as neutral.
The states which are classified as having effective and stringent SPCBS are West Bengal, Assam, Bihar, Haryana, Himachal Pradesh, Karnataka, Maharashtra, Punjab and Rajasthan. The states whose SPCBs were classified as being ineffective were Gujarat, Tamil Nadu, Andhra Pradesh, Jammu & Kashmir, Kerala, Madhya Pradesh, Orissa, Tripura and Uttar Pradesh.
Given that there exist a number of legislations pertaining to labour, land, and environmental issues, and that there have been many state-level amendments recently, it is important to construct an updated index which captures these state-level variations. While this is beyond the scope of this paper, this is an essential exercise for future research.
T& D losses refer to power that is generated but not paid for. This is because some of it is lost along power lines naturally in the process of transmission and distribution, while some of it is stolen. In areas where T&D losses are high, the quality of power, as reflected in the voltage as well as reliability, is low. Thus, T&D losses are not directly related to capacity, but are determined by state-level political decisions. Therefore, they reflect the quality of both infrastructure and institutions.
Results for employment elasticity are reported in the Appendix.
Past policies which gave strategic priority to tertiary education and capital made skilled labour relatively cheap and have led to faster growth of capital or skilled labour-intensive industries.
Correlation between Regulatory and Infrastructure variables reported in Appendix 2.
Total employment includes directly employed workers, contract workers and supervisors, managerial staff, and other employees.
The Union Cabinet cleared amendments to the Factories Act, 1948 which includes increasing the limit of overtime for workers from 50 hours per quarter to 100 hours per quarter, lifting restrictions on night shifts by women in factories and reducing the eligibility for entitlements such as annual leave with wages to 90 days from the current 240 days. It also made amendments to the Apprenticeship Act (1961), dropping the provision that called for the arrest and imprisonment of employers who did not implement this act and to the Labour Laws Act (Exemption from Furnishing Returns and Maintaining Registers by Certain Establishments) which seeks to allow firms employing up to 40 workers to file a combined compliance report for 16 labour laws, up from the current nine. Further, the Rajasthan assembly has also passed changes which reduces the applicability of the Factories Act to units with more than 20 workers with power and 40 without power (down from the existing norm of 10 and 20 workers, respectively); of the Contract Labour Act (CLA) to companies with more than 50 workers (from the current 20); and of the Industrial Disputes Acts (IDA) to factories employing 300 workers (up from the current 100).
Krueger (2007).
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Kapoor, R. Creating jobs in India’s organised manufacturing sector. Ind. J. Labour Econ. 58, 349–375 (2015). https://doi.org/10.1007/s41027-016-0032-5
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DOI: https://doi.org/10.1007/s41027-016-0032-5