Small isn't beautiful

While employment in the country is growing at rates never seen in the past, and experts have forecast full employment two or three years down the road, what is worrying is that this growth is accompanied by the 'casualisation' of labour. As a result, while there are more jobs for everyone, the quality of the jobs is usually quite poor. While 56 per cent of those employed today are self-employed, another 29 per cent fall under the category of 'casual employment'; just 15 per cent are 'regular' employees. This proportion has changed little since 1990. As a result, not only are wage/salary levels low, the productivity gains that should accrue to the economy with greater employment are not taking place either.

Indeed, labour productivity growth has fallen, according to the OECD's Economic Survey of India, from 4.36 per cent per annum during the decade of the 1990s to 3.76 per cent in the 2000s. While the economy has benefited from the shift in population away from agriculture to industry and services, within the non-agriculture sector the greater growth has been in the informal sector. So, while productivity in the informal agricultural and non-agricultural sector was Rs 27,958 in 2003 (at 1999-00 prices), the share of those employed here rose from 92.6 per cent in 1993 to 94 per cent in 2003. In the overall formal sector, where productivity was Rs 308,099 in 2003 (at 1999-00 prices), by contrast, the share of those employed fell from 7.4 to 6 per cent. And within this, while private sector productivity (Rs 431,699) was higher than that of the public sector (Rs 319,883), the share of those employed in the organised private sector fell from 2.1 to 1.9 per cent.

The reason for these trends can be traced to economic policies that have discouraged larger firms and labour policies that encourage the use of capital despite the abundance of labour. So while large firms (with more than 100 employees) used around 1.3 times the capital that the smaller firms did in 1998-99, this rose by around half, to 1.9 times, in 2003-04. The two, in fact, are interlinked. About 87 per cent of manufacturing employment in the country, for instance, takes place in micro-enterprises that employ fewer than 10 persons each, and these firms produce just a third of the manufacturing output. With lower productivity per employee, it is not surprising that wages in this segment are lower (on average, firms with more than 250 employees have double the productivity of the smaller firms). As a result of this falling productivity, the total share of labour in the value added in industry has fallen, from 36 per cent in the early 1990s to 31 per cent in 1999-00, and further to 29 per cent in 2003-04.

The OECD Survey points out that when it comes to regular employment, India has perhaps the most pro-labour policies in the entire world, with the exception of two OECD countries, the Czech Republic and Portugal! So it's hardly surprising that, when it comes to large industrial units (with more than 100 workers), the greatest growth in employment between 1999 and 2004 took place in the category of contract workers. Since anti-poverty schemes like the rural employment guarantee programme cannot change this, it should be obvious that labour reforms hold the key.