[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...

MORE MARKETS, LESS GOVERNMENT
area. Very small businesses in the unorganised
sector are subject to few labour
regulations. Across different
types of employment contact, EPL for
temporary or contract employees is just
above the OECD average. Allowing
employees to carry out “non core” work
on temporary agency contracts has
been a main area of recent labour reform.
19. These differences in employment
regulations are mirrored in recent development
in labour markets. While
employment growth has been strong
over recent years, net gains in employment
have been occurring almost exclusively
in the unorganised part of the
economy, which is not subject to restrictive
labour market regulation. In
the organised sector, employment has
actually fallen. The detrimental impact
of excessively restrictive EPL can also
be clearly seen across types of employment
contract; while contract employment
has grown, regular employment
has shrunk (Figure 5). This bias towards
contract employment is only
evident in larger firms, which bear the
brunt of India’s restrictive EPL. Employment
in smaller firms has been increasing
for both contract and regular
workers.
20. It is often argued in India that strict
EPL is not particularly harmful because
firms find ways to circumvent the
legislation. One way of avoiding difficulties
with the labour laws is to stay
small. Indeed, almost 90% of manufacturing
firms employ less than ten people,
a much larger share than in all
OECD countries and China. However,
most of these firms produce far below
minimum efficient scale and are in the
informal sector, the least productive
segment of India’s business sector.
Large firms, faced with high implicit
employment costs, substitute capital
for labour. Thus, restrictive EPL also
effectively negates one of India’s key
comparative advantages of relatively
low-cost labour.
21. Overall, labour market policy in India
is ineffective at protecting employment;
job destruction is lower in areas
of the labour market not subject to the
most restrictive of India’s labour market
regulations. It has also resulted in
a number of unintended consequences
that have been accentuated as product
markets have became more competitive.
With newcomers to the labour
market being pushed into lower-paid
informal employment, economic
growth has not been as inclusive as it
could have been. Our indicators suggest
that some states have introduced a
degree of reform into labour markets.
As yet, these reforms have been at the
margin but, nonetheless, they do appear
to be having some impact on labour
markets. The share of labour income
has stabilised in reforming states
whereas it continues to fall in more restrictive
states. Liberalisation also appears
to be positively related to the
extent of job turnover. Even if there is
currently little evidence of employment
gains in the most liberal states, higher
job turnover improves a person’s chances
of finding a job that matches their
skills. To improve the functioning of
the labour market as the labour force
grows over the next decade comprehensive
labour reform is needed to better
protect all workers, lower the costs of
employment adjustment, and help address
the distortions that have
emerged.
Reforms Need To Be Ongoing If
Government Is To Achieve Its
Growth Target
22. An important key to improving India’s
economic performance further is to
change policies at both the central and
state government level that result in high
levels of government interference in markets
and restrict competition. Relative to
recent history, the government has already
moved significantly in this direction.
However, this article has touched on
areas in which less government intervention
would increase the extent to which
market forces are able to operate and
result in more efficient outcomes. Reform
in these key areas would yield enormous
benefit for the Indian economy.
Indeed, it is difficult to envisage government
achieving its GDP growth target of
10% in 2011 without further reform in
these and other areas outlined in detail
in the recent OECD Economic Survey of
India. The impressive response of the
Indian economy in areas that have been
reformed in the past should give policymakers
confidence that further liberalisation
will deliver additional growth
dividends and foster the process of pulling
millions of people out of poverty.
End Notes
1
OECD (2003b), Privatising stateowned
enterprises: an overview of
policies and practices in OECD countries,
OECD, Paris.
2
OECD (2002), Regulatory policies in
OECD countries: From interventionism
to regulatory governance,
OECD, Paris.
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