A push for labour-intensive manufacturing

The outbreak of Covid-19 and the containment policies adopted to address it have presented an unparalleled shock to labour markets, and levels of unemployment have surged in India as a result. Estimates from the Centre for Monitoring Indian Economy (CMIE) suggest that 122 million jobs were lost in April 2020. The large scale loss of jobs is unsurprising given that much of India’s workforce is engaged in work arrangements that do not offer security of tenure and continuity of income. Also, many of them are in jobs that do not give them the luxury of working from home. Even amongst regular wage salaried workers, who account for 24 per cent of total employment, 69.5 per cent had no written job contracts with their employer with respect to the  duration of employment (2018-19).This makes them just as vulnerable as casual workers to the dual shock of the pandemic and lockdown.

Given the widespread loss of jobs and incomes, there is an immediate need to accelerate the pace of job creation. A comprehensive and clear plan needs to be put in place for this purpose. Strengthening, expanding and effectively implementing the Mahatma Gandhi National Rural Employment Guarantee Act scheme and establishing an urban employment guarantee scheme, as many analysts have noted, are critical elements of this plan. However, public workfare programmes cannot alone provide a long-term  solution to India’s jobs crisis, which predates the Covid-19 shock. Data from the recently released Periodic Labour Force Survey shows that in 2018-19, the unemployment rate was 5.8 per cent and 8.8 per cent by usual status and current weekly status, respectively. The youth unemployment rate stood at an alarming 17.3 per cent (usual status).

As the jobs crisis exacerbates in the wake of the pandemic, a reorientation of India’s growth strategy is required with focus on sectors that are employment-intensive and can create jobs for large masses of India’s unskilled and low-skilled workers. This calls for a focus on labour-intensive manufacturing. India’s idiosyncratic structural transformation has been marked by a shift straight from agriculture to service-led growth, leapfrogging the phase of manufacturing growth. Consequently, the share of manufacturing, which is typically a key driver of job creation, has remained flat at 12 per cent of total employment for three decades. Significantly, the sectoral composition of growth within manufacturing has been such that it is the capital- and skill-intensive industries that have performed better than labour-intensive ones. Whilst many have argued that this is a consequence of India’s supposedly rigid labour laws, it is a well-known fact that firms have resorted to strategies such as hiring of contract workers  and outsourcing of activities to unregistered units and  home-based workers to circumvent regulations and reduce labour costs.  Also, given that these legislations are often poorly enforced, there is considerable difference between de-facto and de-jure flexibility in labour regulations.

The dismal performance of labour-intensive manufacturing to a large extent is a consequence of the industrial policy regime established in India after Independence, which focused on achieving self-sufficiency in capital goods while leaving labour-intensive manufacturing to small-scale and cottage industries and household enterprises. The Small Scale Industrial Policy (1967), which reserved the production of several labour-intensive manufactures for small scale industries and effectively banned the entry of medium and large enterprises in the production of these items, adversely impacted the growth of labour-intensive industries. 
 

A gradual phasing out of this policy was started in 1997 and completed in 2015. But even today, labour-intensive industries continue to be dominated by small and informal enterprises, which are unable to achieve economies of scale. For instance, in the apparel industry, over 50 per cent of employment continues to be accounted for by enterprises hiring one to nine workers, most of which are in the unorganised sector. Recent policy initiatives like ‘Make in India’ have also concentrated on capital-intensive and skill-intensive sectors as we continue to believe that it is these industries which are more powerful symbols of economic success and growth. This is despite the fact that they have limited ability to absorb the large numbers of workers at the bottom of the education and skills ladder. That the capital-labour ratio in the apparel industry has been considerably lower (roughly one-ninth) than that of the much-celebrated automobile industry (in the registered sector) points to the enormous employment generation potential of the former.

In this backdrop, there is a need for an industrial policy with a focus on labour-intensive manufacturing.  Importantly, the policy needs to be designed with an eye on both exports and domestic demand. It is worth noting that India is still classified as a low-middle income country with a per capita gross national income of a little over $2,000 annually and has considerable untapped domestic demand for labour-intensive manufactured goods of an affordable variety from those in the low- and middle-income deciles. However, this does not mean that we should turn inwards  and  resort to a strategy of import substitution. Our past experience of protecting small businesses in employment intensive sectors from competition has in fact inhibited them from realising their potential of job creation, and highlights the dangers of protectionism. Importantly, India needs a tariff policy that is compatible with industrial policy to enhance the competitiveness of its labour-intensive industries. The experience of the apparel industry highlights how high import tariffs on key inputs, such as synthetic fibres, have hurt the competitiveness of one of India’s most labour-intensive industries.

A necessary accompaniment to a strategy of labour-intensive industrialisation is the extension of a basic minimum level of social security to all workers. This will not only help enhance worker well-being and therefore productivity but also lay the foundation for meaningful labour reforms, which strike a balance between the need for firms to adapt to ever-changing market conditions on the one hand, and workers’ security on the other. 

Importantly, it needs to be recognised that creating secure good jobs for India’s workforce is important not just to resolve the employment crisis, but also to address the pre-existing problem of weak aggregate demand and reverse widening labour market disparities.

The writer is senior fellow, Indian Council for Research on International Economic Relations