Given the rapidly falling employment elasticity, it is obvious India is not going to be able to meet the needs of a rapidly growing labour force unless some dramatic reforms are undertaken. According to a Crisil study, while India’s working age population will have swelled by over 85 million in seven years to FY19, around 51 million will be seeking employment. Yet, the employment elasticity—the percentage rise in employment for every percentage point rise in GDP—fell from 0.52% in FY00-05 to 0.38% in FY05-12. In the automobile sector, for instance, while production at Maruti rose 3.4 times, employment rose just 2.5 times; in some other companies, employment actually fell while output rose. As a result, Crisil estimates that on a business-as-usual basis, since industry—that’s manufacturing and construction—can only absorb 20 million people in FY12-19 as compared to 31 million in FY05-12, around 12 million people will have to shift back to agriculture in FY12-19; to put this in perspective, during FY05-12, around 37 million people moved off the farm to industry and services. Given this reality, it is imperative that large-scale labour reforms be undertaken. Indeed, as a recent McKinsey analysis found, states that had flexible labour laws had 35% of their work force employed in the organised sector as compared to just 23% in states that didn’t have flexible labour laws. The greater the number of people employed in industry/services and in the organised sector, the higher the growth in wages and in poverty reduction.
Which is why the Prime Minister’s Office (PMO) has done well to remind the chief secretaries of states that they would do well to change their labour laws along the lines of what has been done by the Rajasthan government. Rajasthan has raised the limit of workers—from 100 earlier to 300—below which firms do not require government permission to retrench labour. Similarly, firms have been given more flexibility in handling apprentices and the proportion of workers that are needed to form a union has been raised from 15% to 30%. As the PMO has pointed out, it was up to the states to take the lead in this respect—labour is a concurrent subject, so even if the Central law were to change, this is meaningless without a commensurate action in individual states. The good news here is that other states like Gujarat and Madhya Pradesh are following in Rajasthan’s footsteps—it is up to other states to see the light as well. The states that have more flexible labour laws are the ones that will attract greater investments.