Economic Survey 2013: Good jobs & labour reforms must for economic growth

India must create more productive jobs, perhaps not by sarkari schemes, but through economic growth, labour reforms and a hassle-free business climate. This is the vision held out by chief economic advisor RaghuramRajan, who has continued with the tradition of his predecessor KaushikBasu and scripted a special chapter, ‘Seizing the Demographic Dividend’.


Rajan says that jobs being created now are mainly in low productivity construction and that there are not enough formal jobs in manufacturing.

The high productivity service sector, too, is unfortunately not creating enough jobs. More people will, however, look for jobs because of the demographic dividend and also shift away from agriculture.

So, the policy focus should be to make jobs more productive and also to create a buffer. About 2.8 million jobs will go by 2020 if India follows China’s path and reduces the proportion of workforce in the farm sector to around 40%.

Like all economists, Rajan has, of course has made assumptions in his forecast. Workforce exiting the farm sector can be absorbed in other jobs, provided the government fixes issues such as rigid labour laws, stifling business environment and creaky infrastructure.

Such a shift will improve, the total factor productivity – which measures how productive intrinsically the job is – and spur growth.

More importantly, Rajan recognises the dangers of increasing informalisation of labour force – about 85% of our workforce is in the informal sector. Rajan says existing labour laws are responsible for paucity of good jobs and also for inadequate protection that most workers have. India needs many more firms in the formal sector.

So, he prescribes retaining permanent workers with their privileges and encouraging others to move into contractual employment that can be terminated, but with protection such as unemployment insurance and the right to reverse unfair dismissal through appeal.

Surely, the government should also create social security net for informal workers. Trade unions that sneer at the notion that flexible labour laws will increase employment should see reason.

Besides labour reform, vast improvements are needed in infrastructure, education and business regulation. Better access to land and finance will help business grow.

Power shortage will come down if the government scraps the Coal Mines Nationalisation Act, opens up mining and gets all users to buy their coal at market prices. It must cut red tape. There is no reason why states cannot adopt best practices such as lowering the number of procedures to Patna levels or procedures around construction permits to Ahmedabad levels. Work should also be resumed in big projects.

The larger point is the onset of a strong demographic dividend, spelling a rise in the share of workers in the total population and fall in the share of dependants, which will accelerate India’s growth when the workforce is productive. It will also help enhance savings and investment rates. The challenge before unions, political parties and policymakers is do everything possible to realise this growth potential.