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Employment, Unemployment And Labour Laws in India-

Emerging Issues and Challenges

DR. TARUN DAS, Economic Adviser, Ministry of Finance, India.


Despite various studies done in India indicating tangible benefits from liberalisation of
labour markets, Indian labour laws still remain highly restrictive due to political
economy constraints. India has not achieved remarkable improvement in manufacturing
growth. Although industrial output has grown at a faster rate than before, employment
growth has decelerated in the recent years. This suggests that labour reforms are
necessary to allow for larger investments in manufacturing. Manufacturing growth is
crucial for the absorption of semi-skilled and unskilled workers and to reduce the
dependency of labour on agriculture, which employs 58% of labour force but contributes
only 20% of GDP.

1. Labour Force and Unemployment

India’s labour force is estimated to be approximately 375 million in 2002 and is expected
to increase by 7 to 8.5 million per year in the first decade of this century and will increase
by a total of about 160-170 million by 2020, i.e., 2.0 percent per annum. Approximately
35 million persons in 2002 are unemployed of which approximately three-fourth of the
unemployed is in rural areas and three-fifth among them are educated. (Planning
Commission: Vision 2020).

As per the estimates made by the Planning Commission on the basis of NSSO surveys,
overall unemployment rate declined from 8.3 percent in 1983 to 6 percent in 1993-94 but
increased to 7.3 percent in 1999-2000 (Table-1). There were similar trends in both rural
and urban sectors with urban unemployment rates being higher than rural unemployment
rates every year. During 1993-2000, the rate of increase of unemployed persons in the
rural areas at 5.3 percent was significantly higher than that at 3.5 percent in urban sector.
This was due to basically stagnation of agricultural employment during this period.

Table-1: Past and present macro-scenario on employment and unemployment

(CDS Basis) (Person years)
(Million) Growth per annum (%)
1983 1993-94 1999-2000 1983 to 1993- 1993-94 to
94 1999-2000
All India
Population 718 894 1004 2.0 2.0
Labour Force 261 336 363 2.4 1.3
Workforce 239 316 337 2.7 1.1
Unemployment Rate (%) 8.3 6.0 7.3
No. of unemployed 22 20 27 -0.1 4.7
Source: Planning Commission

Persons employed are categorized into three main groups viz. self employed, regular
wage/ salaried and casual labour. Table-2 indicates that more than half of the employed
in the rural areas are self-employed, and the proportion of self-employed in the rural
sector increased for both males and females in 1990-2000, while casual employment
remains more or less invariant. In the urban area, the proportion of self employed slightly
increased for males but decreased appreciably for females. On the other hand, the
proportion of the regular wage earners decreased for the males but increased for females.

Table-2 Percentage distribution of usually employed by status of employment

Males Females
1990-91 2000-01 1990-91 2000-01
Self-employed 55.7 58.9 58.6 59.3
Reg.wage/ salaried 12.8 9.5 3.8 3.2
Casual labour 31.5 31.6 37.6 37.5
Total 100.0 100.0 100.0 100.0
Self-employed 40.7 41.4 49.0 44.4
Reg.wage/ salaried 44.2 41.1 25.9 31.5
Casual labour 15.1 17.5 25.1 24.1
Total 100.0 100.0 100.0 100.0

2. Open unemployment and underemployment

Open unemployment is not a major problem in India. Out of a labour force of 406
million, 397 million were employed leaving 9 million openly unemployed in 2000.
However, employment is characterized by very low quality of employment and low
levels of productivity. About 31 percent of the employed live blow the poverty line. There
is no significant growth of regular employment. Organised employment as a proportion
of total employment declined from 9 percent in 1993-94 to 7 percent in 1999-2000.
Significant employment is taking place in services sectors and small and medium
enterprises. Main growth was observed in casual or contractual employment. Self-
employment has not also increased significantly during 1993-2000. Educated
unemployment at 14.7% is much higher than normal unemployment at 2.2%.

3. Sectoral composition of employment

As per the results of the latest full survey (55th Round in 1999-2000), the rate of
employment growth decelerated from 2.7 percent per annum in 1983-1994 to 1.1 percent
per annum in 1994-2000 (Table-3). The decline in the employment growth rate in the
1990s was associated with a higher growth in GDP indicating a decline in the labour
intensity of production. Some of the important findings emerging from the 55th Round
(1999-2000) are:

(a) The decline in the growth rate of employment was associated with a sharp decline in
the growth rate of the labour force.
(b) As in the past, the share of casual labour in total employment went up.
(c) The number of unemployed increased from 20 million in 1993-94 to 27 million in
(d) The decline in the employment growth in 1994-2000 was attributable to a stagnation
of employment in agriculture, resulting in a drop of the share of agriculture in total
employment from 60 percent in 1993-94 to 57 percent in 1999-2000.
(e) On the other hand, employment growth in all the sub-sectors within services, such as
trade, hotels, restaurant, transport, storage, communication and financial and
business services, (except community, social and personal services having negative
growth rate) exceeded 5 percent per annum (Table-4). This refutes criticisms by
some economists that the substantial growth of the service sectors have created
unemployment. In fact, services are not only fastest growing, but also more
employment generating. Consequently, the share of service sectors in employment
increased from 21 per cent in 1983 to 26 percent in 1999-2000.

Table-3: Employment growth rates in 1972-2000 (percent)

Average Annual Growth rate (percent) Employment

Period Population Labor force Employment GDP Elasticity w.r.t.
1972-1978 2.27 2.94 2.73 3.9 0.71
1977-1983 2.19 2.04 2.17 4.0 0.54
1983-1988 2.14 1.74 1.54 4.9 0.31
1987-1994 2.10 2.29 2.43 5.6 0.44
1994-2000 1.93 1.03 1.07 6.0 0.18
Source: Planning Commission, Government of India.

Table-4 Sectoral Employment in 1983 to 2000

Employment (percent to total) Annual growth rate (%)

Sector 1983 1987-88 1993-94 1999-00 1983 1987-88 1983 1993-94

to to to to
1987-88 1993-94 1993-94 1999-00
Agriculture 63.2 60.1 60.4 56.7 1.8 2.6 2.2 0.02
Mining & quarrying 0.7 0.9 0.8 0.7 7.4 1.0 3.7 -1.9
Manufacturing 11.6 11.9 11.1 12.1 3.6 1.2 2.3 2.6
Electricity, gas, water 0.3 0.3 0.5 0.3 2.9 7.2 5.3 -3.6
Construction 3.0 4.4 3.5 4.4 12.1 -1.4 4.2 5.2
Trade, hotels, restaurant 7.6 8.3 8.5 11.1 4.9 3.0 3.8 5.7
Transport, communication 2.9 3.0 3.1 4.1 3.2 3.5 3.4 5.5
Financial, real estate 0.9 1.0 1.1 1.4 4.7 4.5 4.6 5.4
Community/social services 9.8 10.1 11.1 9.2 3.6 4.1 3.6 -2.1
All Sector 100 100 100 100 2.9 2.5 2.7 1.1
Source: Planning Commission, Government of India.

4. Causes and Consequences of Unemployment
4.1 Factors responsible for unemployment

Any strategy to improve the condition of the poor hinges on improving the labour market,
since income from work and quality of work are the main determinants of the living
conditions of the poor (World Bank 1996). India is endowed with an abundant and
technologically skilled labour force, and is ranked first for both these criteria in the
Global Competitiveness Report (GCR). However, India’s labour market has low degree
of labour market flexibility in terms of deployment of human resources, work practices,
and wages. Various studies (Anant 2005, Debroy 1997; Fallon and Lucas 1993; ILO
1999; OECD 1995; Surendra Nath 2005) suggest that such rigidities constrain the
effective redeployment of labour during the process of industrial restructuring and
changes in demand and technology, and act as a disincentive for employment creation.
An industry survey and discussions with industrialists also identify labour regulation as
the second highest obstacle to the operation and growth of business (World Bank 2000).

Average labour intensity in unregistered manufacturing increased from an average of 59.3

percent over 1988-9 to 1990-1 to 62.4 percent over 1993-4 to 1995-6 (World Bank 1998).
Hence, had labour markets functioned more flexibly, pensions been more mobile, and
legislation been more conducive, the organized sector might have occupied a more
prominent share of the work force. Formal sector employees might have grown more
rapidly and been more mobile, and the benefits of more formal employment shared across
a larger number of employees, including women, who have been unable to participate
fully in the labour market.

Rigid labour laws and high protection of labour encouraged increasingly capital-intensive
industries (Gangopadhyay and Wadhwa 1998). Labour legislation and public sector
employment gave employment protection and relatively high wages to the few employed
in the formal sector, which constitutes only 8 percent of total labour force. In addition,
labour mobility across sectors was hindered by the pension system in the formal sector,
pensions are not mobile across jobs and many years of work are needed before an
employee becomes eligible for a pension.

4.2 Wage rate and employment

Wage is a vital factor determining employment. Although wage rate and employment are
inversely related (Table-5), rise in wage is necessary for growth in a developing economy
as higher wages increase purchasing power of workers and thereby enhance effective
demand for goods and services, which in turn pushes up employment. Several studies
have indicated that low employment elasticity in India is due to relatively high wage rate,
low productivity, shift in factor price in favour of capital and labour market distortions
caused by both government regulations and private institutions. Table-5 indicates that the
growth in wages was very high across industries in the pre-reforms period than in post-
reforms period.

Table-5 Real wage growth rates and Employment elasticity
Sectors Real wage growth rates Elasticity of employ- Elasticity of employ-
ment to wage rate ment to output
1983 1993-94 to 1993-94 1999-00 1993-94 1999-00
to 1993-94 1999-00
Agriculture 14.3 1.4 -1.36 -1.35 0.93 1.06
Mining & quarrying 8.0 6.1 -0.17 -0.67 1.04 0.55
Manufacturing 12.4 7.4 -0.85 -0.97 1.08 0.99
Electricity, gas, water 8.9 8.3 0.23 -0.92 0.71 0.73
Construction 4.4 0.8 -0.72 -0.61 1.05 0.88
Trade, hotels, trans- 13.9 4.5 -1.73 -0.56 0.77 1.10
port, communications
Community/social/ 2.6 5.5 -0.41 -0.82 1.08 1.10
Financial ser.
All sectors 13.5 6.5 -0.66 -0.57 0.99 1.02
Source: Bhattyacharya and Sakthivel (2005)

4.3 Organised manufacturing and employment

Manufacturing has played a major role for improving economic growth in the East Asian
countries. For example, the share of manufacturing in GDP in Malaysia improved from
only 9.8% in 1970 to 29.2% in 2000, whereas that in India increased from 7.2% to 9.6%
in the same period. Consequently, the share of organised manufacturing in employment
increased from 4.6 percent to 14.1 percent, whereas that in India declined from 2 to 1.8
percent over the same period (Ghosh 2005). Other East Asian countries had experienced
similar trends as in Malaysia and also sharp reduction of poverty. India has not only
slower growth of output but also lower employment elasticity and higher wage rate and
lower productivity than those in selected East Asian countries (Ghosh 2005).

4.4 Women and Child Labour

Women in the workforce

Women constitute significant proportion of the labour force. Eighty-eight percent of

women workers are engaged in the rural areas, primarily in agricultural activities, and
related sectors such as animal husbandry. In the urban areas, a significant proportion of
women workers are employed in the unorganized sectors in household industries, petty
trades and services, building and construction activities, etc. Most of these activities are
low paid or unpaid. According to National Institute of Public Finance & Policy (NIPFP)
study on Gender Budgeting the average female wage is almost 80 percent of the male
average in urban areas, while it is less than 60 percent of the corresponding male rate in
rural areas.

The employment of males and females depends not only on their levels of education but
also on their socially defined roles in the households. Indian boys are generally brought
up and educated with the expectations that they be main bread-earners. But girls are
viewed as future housewives and homemakers rather than paid workers in labour
markets. The educational levels of the labour force by sex indicate very high incidence
of illiterate female workers in both rural and urban areas, although the incidence has a

declining trend over time. The illiterate women are crowding into unskilled and manual
labour jobs that are low paying and sometimes hazardous to their health and safety. To
some extent, this is due to desperation and poverty induced compulsions that women are
forced to enter paid labour markets. However, one positive outcome is that better
educational attainments are providing women with the opportunity to undertake jobs
hitherto not accessible. In fact, the gap between male and female graduates in urban
areas has almost vanished in 1999-2000.

In the Unorganised sectors, bulk of the women’s labour about 72 percent is engaged in
agriculture activities. In the organized sectors, there is excessive concentration of women
employment in community, social and personal services and in manufacturing. Even
these are at the lower range of the job hierarchy implying lower incomes and relatively
low status. In rural areas, women are better paid than men in public utilities, construction,
while in urban areas they are better paid in construction, trade and hotels, transport and
communications and financial services. (Table-6).

Table-6 Percentage distribution of female workers in organised sectors

Sectors 1991 1998 % Change Female/Male wage
during ratio in 1999-2000
1991-98 Rural Urban
Agriculture 10.3 9.8 -4.3 0.70 0.42
Mining & quarrying 1.5 1.4 -1.4 0.31 0.58
Manufacturing 21.8 21.0 -2.8 0.50 0.75
Electricity, gas, water 0.9 0.9 2.3 1.12 0.85
Construction 1.4 1.6 11.8 1.06 1.05
Trade, hotels, restaurant 0.9 0.9 0.0 0.92 1.32
Transport, communication 3.6 3.7 2.9 0.82 1.19
Financial, real estate 4.7 4.8 3.1 0.58 1.04
Community/social services 54.9 55.8 2.5 0.97 0.77
All Sector 100 100 0.7 0.90 0.83

Child Labour

The problem of child labour is a major social concern. The number of working children
in the country declined from 2 percent of the total population and 6 percent of the total
labour force in 1981 to 1.34 percent of the population and 3.59 percent of the total work
force respectively in 1991. The estimated number of working children in the country as
per the 55th Round of NSSO Survey (1999-2000) is 10.4 million. Children continue to
be employed in the unorganized and home-based industries and domestic services. The
State with the highest child labour population in the country is Andhra Pradesh, which
had 1.66 million working children. Other States having a child labour population of more
than a million (as per 1991 Census) are Madhya Pradesh, Maharashtra and Uttar Pradesh.

4.5 Labour laws and labour markets

Labour is highly protected and Indian labour laws do not allow hire and fire policy. As
per existing laws under the Industrial Disputes Act 1947, no employer cannot close an
establishment or declare lock out or retrench any labour without taking prior approval of
the concerned government authority if the establishment employed more than 100
laborers on permanent basis in the previous 12 months. Various researchers in the past
had concluded that this clause stood in the way of further organised employment and led
to growth of more capital-intensive industries. Therefore, this protection is counter-
productive and acts against the overall interest of the workers.

Labour figures in the Concurrent List (for both Centre and States) of distribution of
legislative powers in the Constitution. As both Centre and States can legislate in this area,
India has perhaps the largest number of legislations on labour in the world. There are
over 165 labour legislations including 47 labour related laws enacted by the Central
government (Debroy 1997) dealing with industrial relations, social security, industrial
safety and health, child and women labour, minimum wages and bonus, labour welfare,
emigration, employment exchange and miscellaneous issues. There is a considerable
degree of overlap among these acts, and there are wide variations as regards basic
concepts such as employee, workman, wages, factory, child labour and industry. For
example, the term ‘wage’ is defined in 11 different ways in 11 different labour laws.
Court case laws also differ among different states causing further confusion. Many
studies have suggested simplification of rules and procedures, harmonization and
rationalization of acts, and grouping these acts under five or six broad and comprehensive
acts dealing with basic issues.

Labour regulation has been identified by many researchers (Stern 2001 and Sachs et al.
1999) as an important factor influencing the investment climate in India. As Besley and
Burgress (2004) show, policy choices of the Indian state governments as regards labour
legislation strongly affected manufacturing performance. The study by Besley and
Burgress (2004) based on state level panel data for the period 1958-1992exploits two
important facts: (a) labour regulation only applies to the registered manufacturing sector
and (b) the Indian constitution empowers the state governments to amend central
legislation. The principal central legislation is the Industrial Disputes Act of 1947. This
Act has been extensively amended by the state governments since 1950s. Besley and
Burgress (2004) read the text of each amendment and classified these as pro-worker (+1),
neutral (0) and pro-employer (-1).

Besley and Burgress (2004) then show that pro-worker labour reforms are closely
associated with an increase of urban poverty but do not affect rural poverty. This is due to
the fact that labour legislation applies basically to the registered manufacturing units,
which exist primarily in urban areas. Moreover, they observe that the adverse affects are
large. For example, the state of West Bengal, which is ruled by the communist parties for
the last three decades, had passed large number of pro-worker amendments during his
period. Had it not taken these labour policies, its urban poverty ratio would have been 11

percent lower in 1990. These results suggest that attempts to redress the balance of power
between capital and labour can end up actually hurting the poor in the medium and long

Besley and Burgress (2004) further observe that a pro-worker labour legislation is
associated with lower per capita manufacturing output. This is due to the fact that pro-
worker legislation led to less output in registered manufacturing sector. States with more
pro-worker labour regulation tend to have less investment in the registered manufacturing
sector, and larger informal manufacturing sectors. As organised trade unions are able to
extract more wages and benefits in the registered sectors, capitalists prefer to remain in
the unorganised sectors where labour has no power.

These results on labour regulations are mirrored in the relationship between urban
poverty elasticities and labour regulation. States that had more pro-worker legislation had
been less effective in reducing poverty at a given level of growth. States, which enacted
pro-employer labour legislation, achieved significantly higher growth rates.

5 Government Policy responses

5.1 Active labour market policies

Growth with social justice had been primary objective of Indian planning since its
inception in 1951, and several anti-poverty measures are in operation for decades
focusing the poor as the target groups. These include welfare programs for the weaker
sections, women, children, and a number of special employment programs for self- and
wage employment. Ongoing economic reforms since 1991 strengthened these programs
to generate more employment, create productive assets, impart technical skills and raise
the income levels of the poor.

Government relied mainly on two approaches for poverty alleviation: the first based on
the anticipation that economic growth will have a “trickle down effect” on the levels of
living of all groups; and the second that direct anti-poverty programs are also required.
Government shifted public expenditure away infrastructure and industry towards social
sectors, and improved targeting of subsidies through changes in the public distribution
system. Central government expenditure on social sectors (comprising education, health,
water supply, sanitation, housing, slum development, social welfare, nutrition, rural
employment and minimum basic services) as a ratio to total expenditure increased from
7.7 percent in 1990-91 to 11.7 percent in 2005-06, and as a ratio to the GDP increased
from 1.3 percent to 2 percent over the same period.

As unemployment is the root cause of poverty and the population growth in India is very
high, there should be more emphasis on family planning. For an urban family a child is
born by parental planning and family size is limited to the necessary minimum. On
contrary, in rural India a child is regarded as an asset and is expected simply because of
normal life cycle progressions.

Government is trying to change this environment by suitable public policy on education,
health and family welfare, and economic incentives for micro families. But these
measures have marginal impact on the net reproduction rates and the family size as socio-
cultural-religious environment put a constraint on the effectiveness of family planning.
Female education, awareness and better standard of living would create the required
consciousness among the people that smaller families are desirable. If the needs for
health and family welfare services are fully met, it will be possible to achieve substantial
decline in the family size and enable the families to improve quality of life.

Low productivity of small landholders leads to poverty, low energy in-take and under
nutrition, which in turn prevents the development and creates a vicious circle. In most of
the States, non-farm employment in rural areas has not grown very much and cannot
absorb the growing in labour force due to high population growth. Those who are getting
educated specially beyond the primary level do not wish to do manual agricultural work.
They would like better opportunities and more remunerative employment in rural areas.
This can be done by developing agro-based and rural resource-based enterprises.

Government provides several fiscal and monetary incentives for the small-scale
industries, which help employment generation. But these industries suffer from lack of
modern technology, adequate bank credits and efficient network of markets. It is
imperative that programs of skill development, vocational training and technical
education are adopted on a large scale to generate productive employment in rural areas.
The entire gamut of existing poverty alleviation and employment generation programs
may have to be restructured to meet the newly emerging demand for employment.

Most evaluations of the poverty alleviation programs, done by the government or others,
conclude that these programs are not very effective in reducing poverty. They suffer from
ill defined and multiple objectives, limited targeting, under-funding, complex
administration, high administrative costs and leakage, lack of proper accountability and
adequate monitoring. A recent study of the Public Distribution System (PDS) suggested
that only 25 percent of food grains actually reach the poorest 40 percent of the
population, and administrative costs account for 85 percent of total expenditure and
therefore far outweigh the income gains to the poor.

5.2 Protective safety nets

In India, positive discrimination in favour of the weaker sections as an instrument of social

justice has been accepted both socially. There are job reservations in the public sector for
scheduled castes (SCs), Scheduled Tribes (STs), Other Backward Classes (OBCs), women,
handicapped, minority ethnic groups etc. Social security is listed in the Concurrent List of
the Constitution placing responsibility on both the Centre and the States. However, the
provision of effective social security continues to be a challenge in view of financial
constraints, high incidence of poverty, unemployment, illiteracy and the large size of
labour force in the unorganized and informal sectors.

The permanent social security benefits provided through legislative measures like
Minimum Wages Act, Industrial Disputes Act, Workmen’s Compensation Act, Employees
State Insurance Act, Employees Provident Fund & Miscellaneous Provisions Act etc. cater
to mainly organised urban labour comprising only 8 percent of the total labour force. Most
of the states have pension schemes for the old and disabled, but due to eligibility criteria
of income and age, only 9 percent of old-age population gets the benefit of pension. Most
of the States have the Minimum Wages Act, but implementation and coverage are poor.
Some special employment Programmes are also being implemented by some state
governments like the Employment Guarantee Scheme in Maharashtra and the self-
employment Scheme for Registered Unemployed in West Bengal.

5.3 Gender specific issues

Despite significant progress, indicators of human development, such as life expectancy,

literacy, school enrollment and medical care, in India lag far behind those of most East
Asian countries. Still more than 35 of the adult population are illiterate. Wide gender
disparities also exist in India with regard to economic, health and educational attainment.
More than 40 percent of India’s illiterates are females. The incidence of infant mortality
and child malnutrition is more pervasive for females; however, female life expectancy at
birth improved in 1990s and now exceeds male life expectancy. The generally poorer
health of women is caused by dual work burdens in production and reproduction tasks
and skewed pattern of intra-household food allocation in favour of male members.
Regional variations also exist in gender disparities correlated to poverty incidence.

5.4 Labour market reforms

At present, amendments to 13 acts are being examined by all stakeholders. Even

amendments of simple issues relating to definitions and scope have taken much longer
period than expected due to existing parliamentary procedures for amendment and lack of
political consensus. While China drastically reformed its previous employment relations
pushing the workers to a more insecure regime and transferring substantial bargaining
power to the employer within a decade of reforms, India virtually did nothing to change
its labour laws even after 14 years of reforms (Saha 2005). In the absence of labour
reform, the only avenue of downsizing was voluntary retirement schemes (VRS), pursued
both by the private and the public sector, which resulted in high costs and long
adjustment period. This led to dualism within firms, slower growth of employment and
high share (92 percent) of Unorganised employment in total labour force.

China made significant reforms in labour markets within a decade of initiating reforms.
As for the labour relations within an enterprise, the reform went deeper by transferring
the bargaining power mostly in favour of the employer, while the enterprise union and the
state machinery are expected to protect the workers’ interest under the general guidelines
for labour welfare and protection. The employer has freedom in hire and fire and to make
his employees work according to a mutually agreed contract. This particular provision of
allowing firm-specific contracts to govern the employment relation has reduced the

state’s role drastically. In practice, things can go wrong, if the state agencies do not play
their roles properly and workers are forced to accept unfair terms.

China’s long history of extreme employment security might have compelled them to
reverse almost all the previous provisions. In the absence of domestic private
entrepreneurs, liberalised labour market was perhaps necessary to attract foreign
investors (Henley 2004). But it has made redistribution of surplus within the Chinese
enterprises biased in favour of employers (Ostrovisky 2003).

China was successful in creating a new labour market, which enhanced mobility of
labour. Although this led to mass layoffs and open unemployment, sustained high
industrial growth especially in the coastal regions helped their redeployment. In spite of
harsh working conditions led by competition, workers seemed to have benefited from
wage growth, significant new job creation and opportunities for self-employment (Saha
2005). In sum, China’s manufacturing sector experienced a sort of industrial revolution,
which reduced people’s dependency on agriculture.

The different courses of reforms taken by India and China can be explained partly by
their policy history, political institutions and industrial relations framework. In the case of
China, the history of extreme employment security compelled a complete reversal of
labour policy to attract foreign capital, which was very important, as there was very little
entrepreneur class within the country. Political institutions and one trade union policy
further restricted the Chinese workers from conducting true collective bargaining. Hence,
they suffered on the redistribution front (Chen, Kanbur and Zhang 2005).

Currently the median age of the Indian working population is, at 24.3 years, one of the
lowest among the large nations. India is likely to add 83 million to its working age
population of 675 million by 2010 according to the estimates by the United Nations.
However, existing restrictive labour laws have been a deterrent to employers forcing
them to prefer capital-intensive options for production, even if they would have otherwise
preferred labour-intensive options due to low wages in India (Ahya and Sheth 2005).
Despite various well-researched studies, which recommended initiating a structural
approach to labour market reforms, the government has avoided confronting the issue of
unemployment head on (Aya and Sheth 2004). Politicians’ efforts to protect labour in the
public sector add to inflexibility in the labour market.

Only 8% of Indian labour force are employed in the organised sector and almost 60% of
manufacturing output comes from unregistered companies. A large number of factories
remain outside any regulations. Although certain industries took the advantage and grew
in terms of size, profit, skill and technology, most others existed for bare survival. A
prolonged regime of import substitution damaged their business instincts. While the
organized sector provided too much of job-security for too long, the unorganised sector
provided too little to too many. Unfortunately, political parties preferred retaining this
dualism in order to preserve their vote banks in organised labour force. Consequently,
good research works and policy prescriptions on labour reforms remained on paper
leading to poor uptake of research by the policy makers (Das and Virmani 2005).

Selected references

Ahya, Chetan and Mihir Sheth (2004) Rising unemployment and need to fire on all
cylinders, JM Morgan Stanley, 17 November 2004.

Anant, T.C.A., K. Sundaram and S.D. Tendulkar (1998) Employment

Policy in South Asia, International Labour Office.

Besley, Timothy and Robin Burgess (2004) Can Labour Regulation Hinder Economic
Performance? Evidence from India, Quarterly Journal of Economics, 91-134.

Das, Tarun and Arvind Virmani (2005) Bridging Research and Policy- A case study for
India, Global Development Network.

Debroy, Bibek and P.D. Kaushik (2005) ed. Reforming the Labour Market, Academic
Foundation, New Delhi.

Gangopadhyaya, S. and W. Wadhwa (1998) ‘Economic reforms and labour’, Economic

and Political Weekly, 30 May 1998.

Ghosh, A.K. (1999) ‘Current issues of employment policy in India’, Economic and
Political Weekly, pp.2592-608, vol.34, no.36.

Gupta, S.P. (1999) ‘Globalisation, economic reforms and role of labour’, International
Labour Office, New Delhi.

Nath, Surendra (2005) ‘Labour policy and economic reforms in India’, pp.173-234, in
Debroy, Bibek and P.D. Kaushik (2005) ed. Reforming the Labour Market, Academic
Foundation, New Delhi.

Saha, Bibhas (2005) A Comparative Study of the Labour Laws and the Labour Markets
of China and India, a Report prepared for the Ministry of Finance, Government of India.

Sharma, Alakh N. (2004) Globalisation, labour markets and poverty: emerging

perspectives in India, DT Lakdawala Memorial Lecture at the 87th Conference of the
Indian Economic Association, Benaras Hindu University, Varanasi, 21 December 2004.

Warner, Malcolm (2000) Changing Workplace Relations in the Chinese Economy,

Macmillan press Ltd., UK.

World Bank (2004) India Development Policy Review, Oxford University Press, New