Labour Regulation

–          Small firms more jobs, large firms more capital

–          Organised – less jobs in India

–          Construction – main reason for surge in unorganised sector


Reasons for no – jobs in organised manufacturing

–          Strict labour laws, EPL (employment protection legislation)

–          India labour abundant – but still companies prefer capital intensive (characteristic of richer countries)

–          Definition of formal sector – more than 10 workers ( advantages are social security and benefits and regulated working hours)

–          Contracts are being rolled over in India easily

–          On the job learning is required

–          Permanent employment – reduces firms flexibility and workers incentive to learn or exercise effort.

–          Labour laws – reasonable working conditions and safety at work ( why can’t be repealed – because of lack of political consensus)

–          Extend reach of informal sector , RSBY (Rashtriya Swasthya Bima Yojana) and NPS (New Pension Scheme) and Unemployment insurance schemes are government schemes.

Informality of employment in India

Extent –

–          85% informal, exclude agriculture then 70%

–          33% informal even in public sector

–          Lack of written contracts in informal sector, no paid leave or social security

Causes –

–          Exclusion from formal jobs and voluntarily opting out by workers

–          Burdensome cost of registration for formal sector

–          Less capital with companies

–          Formal more costly due to labour institutions and taxation and regulations

–          Capital used to purchase machines so that people are below 10

Consequences –

–          Less productivity/labour in informal sector

–          Formal sector – train, impart education and skill so value added is 10 times for a formal employee in formal sector than a non-formal employee in formal sector

–          Poverty and informality coexist and strengthen each other – loss of income due to illness etc.

–          Firms – more flexibility and lesser cost in informal sector but also lack worker loyalty and skill building. Also, are plagued by frequent strikes and wage increment demands.

–          Loss of revenue – If informal becomes formal tax base will increase for government thus more tax and also Social schemes will be more effective due to wider reach.

Labour laws as Impediment

–          Manufacturing key driver for labour abundant economies ( India lags behind and more capital and skill intensive in India)

–          More unorganised manufacturing

–          More employment in Smaller Firms (84% in India and 27.5% in Malaysia and 24.8% in China)

–          1990’s economic reforms abolished license regime still less growth in manufacturing. Major reasons are –

(a)    Strict labour laws (sheer size of laws, scope, complexity and inconsistency – 45 legislations in whole India right now)

(b)   Infrastructure bottlenecks

(c)    Credit constrains

–          Labour regulations are only for formal sector

–          As size of firms increases, number of regulations increases so they keep themselves smaller

–          More than 100 workers ( need state permission to fire according to IDA – Industrial Disputes Act)

–          IDA also makes changing work conditions harder.


TFP (Total Factor Productivity) – Aspects such as technology used + worker efficiency + intangible aspects such as tacit knowledge + organisational capabilities and trust taken into account.

–          India (states with stringent labour laws have low growth of manufacturing and less TFP) and they have more smaller firms

–          Contractual labour and outsourcing (non-core jobs) are way out of strict labour regulations (counter view) but, evidences and empirical data suggests that labour laws are hindering growth.

The Mauritian Miracle

–          Flexible labour laws in (Export Processing Zones) EPZs

(1)    Any company could opt for EPZs i.e. no specific geographical boundary required

(2)    10% tax holiday for foreign investors, ease of export and import of raw materials and finished goods, no restriction on profit repatriation + assurance that labour unrest minimum and wage increase moderate

(3)    Firms can adjust labour force and realistic compensations and flexibility in working hours

(4)    Women participation promoted

Result – around 2/3rd of Mauritius population was unemployed in 1960 and in 1990 all of them got employment and GDP grew by more than 5% annually


Services not creating enough jobs –

–          High productivity (i.e. value addition in services but low job growth)

–          Impediments could be – Same as manufacturing i.e. labour laws, infra and funding + regulations

–          High skill and education required

–          So conditions are such that employers are seeking skilled workers whereas paradoxically millions are seeking jobs

–          NSDM (national skill development programme) imparts vocational employment oriented training to 5 crore people in next 10 years through state skill missions and private participation (PPP, NGOs and for profit vocational training institutes)

–          Also quality of primary education needs to be improved.

Need for formal Apprenticeships

Importance –

–          Tapping demographic dividend

–          Earning while learning

–          Higher education challenges are – cost, quality and scale + no work ready force

Transition in labour force is from agriculture to non-agriculture, from rural to urban, from unorganised to organised, from school to working, from subsistence self-employment to wage employment

Japan, US, UK, Germany used this method successfully (Germany – Dual classroom + Workplace)

Advantages –

–          Low cost, increased productivity, greater loyalty and motivation and more retention

Indian case –

–          Complex and burdensome rules

–          Tight norms so that companies do not hire cheap labour in guise of apprenticeship programme – but now this need to be relaxed and corporates to be incentivised to impart on job training and education

Solution –

(a)    Simple regulation – single window clearance for pan-India apprenticeship

(b)   Wider reach – Many sectors are barred such as services from having Apprentices

(c)    Flexibility to companies – ‘rigid worker apprentice ratio’ and long schemes such as 4 years needed which need to be deregulated. Also, high penalties for small violations

(d)   Dual system of training – Colleges – theoretical and companies – practical

(e)   Active exchanges – portals matching employers and apprentices

Way to Evidence based better policy

–          Education increases productivity, skill and participation, SSA (sarva siksha abhiyan) has increased teacher student ratio, primary school access, infra and student enrolment ratio but quality of education has deteriorated

–          So, change in school governance needed, so education policy needs to shift from providing better access towards ‘educational outcomes’

Inputs –

–          Infra necessary (but doesn’t count much from education quality improvement) same is case with Mid Day Meal scheme which increases student retention and enrolment but not education quality.

–          So, only weakness is pedagogy and governance (main cause of hampering better outcomes)

Pedagogy – (science of education, teaching and classroom instruction)

–          ‘completing the textbook’ – does not mean learning

–          So interventions required towards learning (no formal teacher required) and cost effective than the large investment in standard schooling system

Governance –

–          High teacher absence (25% in rural areas)

–          High fiscal cost due to teacher absence

–          Improving monitoring and supervision (tenfold increase in return on investment)

–          Motivating teachers by awarding good performances (performance linked pay) 15-20 times more effective than increasing teachers numbers

–          So, performance depends more on structure of pay

Way to Policy

1.)    Learning outcomes be the explicit goal, high level independent monitoring for that

2.)    ‘Universal functional literacy and numeracy that allow children to ‘read to learn’. So, locally hired short-term teaching assistants required which are also cost effective

3.)    Governance – better monitoring and performance measurement + management + clear goals + rewards for achieving goals

4.)    Next generation (demographic dividend) should be literate and skilful

5.)    Cost effective policies required due to highly fiscally constrained environment

Cautions to preparedness

–          ‘Business as usual’ – high fallouts as timely and right kind of preparations are needed.

Problems –

–          Infra, education and institutional structures such as business regulation and labour laws

–          Informal labour higher and labour frictions due to lack of social security also higher

–          High inequality and less growth rate

–          Skill mismatch with requirement

–          Few quality jobs increment – most of them are in construction and informal sector.

Reforms –

–          Improve infra, education and institutional impediments of labour laws and business regulations

–          Agricultural reforms – larger holding, more capital investment and technological update, non-farm jobs increment, rural entrepreneurship i.e. horticulture, dairy and meat to be promoted

–          Apprenticeship in Manufacturing industries to be favoured directly after school.

–          Fill vacuum created by china in Semi­­-skilled manufacturing

–          Equitable growth and sustainable development and formal sector increment will reduce social frictions

Decline –

–          Failure to attain above will have disastrous effects with increased government spending on social sector and huge burden of population on agricultural sector and also high inequality with less inclusive growth.


Next Chapter – Human Development In India

–          Enlarge ‘people’s choices’

–          Objective of development is to create an enabling environment for people to enjoy long, healthy and creative lives.

Introduction –

–          Focus both income and non-income dimensions

–          Challenge – formulate  ‘inclusive’ plans to bridge regional, social and economic disparities (i.e. inclusive development)

–          Comparison b/w India and World’s other countries on key parameters + Domestic spending + comparing different components of HDI and their relative importance with each other

Human and Gender development –

–          HDI – 0.554 of India in 2013 UNDP report (Medium Human Development Category but below average)

–          3 factors are taken into account ‘life expectancy’, ‘knowledge access’ and ‘quality of life’ i.e. ‘Gross nation income per capita at PPP.

–          Rank 136/187 countries

–          MMR 200/1 lakh mothers

–          Female labour force participation is 29% while male have more than 80%

–          MPI (Multidimensional poverty index) 0.283 just equal to Pakistan and Bangladesh (MDI identifies deprivations in the same household in education and health and living standard)

–          MPI (53.7% of India is affected by it)

–          Participatory process needed for inclusion of excluded electorates from decision making process

–          Internal conflicts dealt with development and redistribution (operation green hunt was criticized by many)

–          RTE and MGNREGA had impact on rural migration and gave hope to agricultural labourers in non-seasonal employment

Inclusive development

–          Central expenditure on ‘Social services and rural development’ is 18% of total expenditure

–          General government (i.e. centre + states) 22-25% in which education gets around 46% and health around 19%

–          In terms of GDP – social sector spending is 6.8 to 7% in which education got 3.3% recently and health just 1.36% (this data includes both government and private sector expenditure)

–          Government health expenditure is very low, and lowest in BRICS grouping with private sector in India spending double of public sector


–          Country’s policy shifted from ‘wage employment’ to ‘self-employment’

–          NSSO (National Sample Survey Office) carries out large sample surveys on household expenditure every 5 years

–          Definition of poverty on Monthly Per Capital Expenditure (MPCE)

–          Tendulkar Committee – Rs 673 Rural and Rs 860 Urban MPCE is poverty line. (Would have changed in new Economic survey)

–          % of poor decreased from 37.2% in 2004-05 to 29.8% in 2009-10 (absolute numbers also decreased)

–          IMR – from 58 – 44 (current) in 2011

–          Indication in fall in deprivation from above data

–          Rangarajan Committee to ‘review methodology for measurement of poverty’


–          Income Gini coefficient – deviation of distribution of income (or consumption) among the individuals within a country from a perfectly equal distribution. It is 36.8 for India lower than USA and Brazil

–          Quintile income ratio – Measure of average of richest 20% of population to the poorest 20% (5.6 for India better than USA, Australia, UK etc.)

Rural Urban Gap

–          Rs 1281 for rural and Rs 2401 for urban MPCE average showing rural urban gap in consumption

–          But, rate of increase in consumption is higher in rural areas thus showing the bridging of the gap.

–          57% rural expenditure is on food and 44% of urban is on food thus showing rural people spend more on food


–          More jobs need to be created

–          Women labour participation is low

–          Educated youths are going to increase the labour force soon who were not there

–          Twelfth plan approach paper stresses on ‘Skill development’ which will increase the production and savings


–          CDS (Current Daily Status)

–          (LFPR) Labour Force Participation Rate declined and also unemployment rates were lower in 2009-10

–          Regular wage/employment/salaried workers – 15.6%, casual labour – 33% approx. and Self-employed 51%

–          Also organised sector contains 80% men and 20% women

Comparative Human Development of States

–          In this comparison is done basically for rates of Growth, Poverty, Rural Urban Disparity, Unemployment, Health – IMR, life expectancy, birth rate and death rates, education, financial inclusion and Key social sector programmes performance. Except growth all other indicators for Bihar are worst or very poor. Kerala topped all except unemployment where it is again topper but in negative sense.

–          Remarks – need to rethink on criteria for devolution of funds

(Income distance) i.e. inequality in income generation against national average 12th FC and (Fiscal capacity distance) no idea what it means used in 13th FC and population are used, while HDI and inclusion indicators are neglected.

–          Criteria of ‘special category of states’ needs to be revised (hilly and difficult terrain, low pop. Density, high ST pop. Strategic location along border, economic and infra backwardness and non-viable state finances) because Bihar is low on almost every indicator yet it is not a Special Category State.

Social Economic and Caste Census

–          Saxena committee – ‘Methodology for a BPL census in rural areas’

–          SECC (Socio Economic and Caste Census)

–          Use of AADHAR to check duplicates

–          DEO (Data entry operators) technically qualified and computer literate.

–          Public scrutiny ‘claims and objection stage’ for recommended list of BPL

–          Prof. Abhijit Sen Committee – for examination of SECC data and recommend appropriate methodology for determining beneficiaries.

Poverty alleviation and employment generation programmes

–          MGNREGA – One hundred days of guaranteed wage employment in a financial year to every household whose adult members volunteer to do unskilled manual work. 1/3 participation of women is must

–          Encourage sustainable development

Effects –

–          Increased bargaining power of labour

–          Reduction in Distress Migration

–          Improved Economy

–          CPI-AL i.e. consumer price Index of Agricultural labour is index with wage of MGNREGA

New initiatives

–          More activities permitted

–          Electronic fund Management System (eFMS) to reduce delay in wage payment

–          Above 100 days in drought areas

–          Using AADHAR to prevent leakage

–          Total Sanitation Campaign (TSC) and MGNREGA converged

SGSY (Swarnjayanti Gram Swarojgar Yojana)

–          Self-employment programme (mix of government subsidy and bank credit)

–          50% SC/ST and 40% women participation must

–          RSETI – rural self-employment training Institutes set in every district

Restructured as NRLM (National Rural Livelihood mission)

–          1 member (preferably women of BPL family to be brought under SHG’s) and setting up of SHG’s

–          Capacity building of every stakeholder i.e. government, bank, NGO, SHG’s etc.

–          Capital subsidy for incentivising thrift and self-credit mechanism to be developed

–          Security net for rural landless labourers

–          Swarnjayanti Shahri Rozgar Yojana is similar with Amalgamation of various Schemes – Community Development, wage employment and skill training etc.