Will Construction Sector Create Jobs that India Badly Needs?

India-Real-Estate-Market

Several estimates made by economists and analysts suggest that around one million Indians are entering the workforce every month.

That means around 1.2 crore individuals are entering the workforce every year. And it is expected that the trend is likely to continue over the next couple of decades. The number of jobs being created are nowhere near what is needed.

The government has tried to address this situation through doles. This has meant distributing food grains at a cheaper price, distributing kerosene at a cheaper price, distributing fertiliser at a cheaper price and even trying to create some work for citizens under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA).

The problem with these doles is that they are extremely leaky and on many occasions they do not reach those they are intended for. In the process, the government loses a lot of money. The leakages have other serious consequences as well (which I have talked about in the past and which I will keep talking about in the future).

Also, there is a fundamental problem with this approach—it doesn’t create the badly required jobs. Take the case of MGNREGA. The scheme is mandated to “provide at least 100 days of guaranteed wage employment in a financial year to every rural household whose adult members volunteer to do unskilled manual work.[1]

It is widely believed that MGNREGA pushed up rural farm wages, during the second term of the Manmohan Singh government. The idea behind this was that MGNREGA set a sort of a minimum wage, and if farmers wanted workers to work on their farms, they had to offer more money than the government was offering through MGNREGA.

In a research paper titled Rising Farm Wages in India: The ‘Pull’ and ‘Push’ Factors, published in April 2013, Ashok Gulati, Shweta Saini and Nidhi Satija point out that: “At all India level, the results reveal that a 10 percent increase in lagged GSDP (overall), GSDP (agri) and GSDP (construction) leads to 2.4 percent, 2.1 percent and 2.8 percent increase in farm wage rates respectively. This indicates that the growth in construction sector GDP has somewhat stronger influence on farm wages than the growth of overall GDP or even agri‐GDP. Impact of MGNREGA is also significant but is 4 to 6 times less effective than growth variables since 1990‐91.” (GSDP = Gross State Domestic Product).

What does this mean? It basically means that when the construction sector is doing well, the farm wages grow the fastest. In comparison, MGNREGA has a much smaller impact on farm wage growth. What this basically means that real economic activity leads to faster wage growth in comparison to the government trying to create some work through MGNREGA.

When the construction sector is doing well, a section of the farm workers drift towards jobs on offer, and this in turn pushes up wages for those who remain.

What also works in favour of construction is the fact that the jobs generated in the sector cater to India’s comparative advantage, which is the abundance of low-skilled labour. In fact, only 14.4 per cent of employees in the construction sector have secondary education.[2] As the Economic Survey of 2015-2016 points out: “Aggregate services employment grew faster than that in registered manufacturing and a number of service subsectors—transport, real estate and construction—registered substantially faster employment growth.”

This is not surprising given that the jobs in the construction sector cater to those with low-skills. In fact, it can continue to be a major creator of jobs in the days to come. A recent KPMG report titled Urban Indian Real Estate—Promising Opportunities expects the construction sector to be the largest employer in India by 2030. KPMG expects the sector to employ more than 7.5 crore Indians by then. The expectation is that at a size of one trillion dollars, the Indian construction sector will be the third largest in the world by 2030.

Like all reports put out by consultancies, this one also sounds good in theory. Nevertheless, many other things need to happen for India’s construction boom to take-off. Let me try and list a few here:

a) The mess that prevails in the area of land acquisition needs to be sorted out. Any construction happens only when there is some land. The Modi government (including the prime minister Narendra Modi) took a serious shot at this last year, but turned out to be unsuccessful. I don’t see the government spending more political capital on this any time soon.

b) One major factor that hinders the acquisition of land in this country is the lack of title records. This is something that needs to be addressed, if easier land acquisition, where the government role is limited, has to become the order of the day. The Rajasthan government has made a start on this front. Other states need to follow.

c) For any infrastructure boom to take off, banks should be in a position to lend. The government owned public sector banks are currently in a mess. The last thing they would want to do is to lend to infrastructure companies and infrastructure projects The gestation period for infrastructure projects is very long and there are many things that can go wrong in between.

d) To reduce the dependence of the infrastructure sector on banks for borrowing, India needs a well-functioning corporate bond market. (This is something that people have been writing about for the last 25 years). A well-functioning corporate bond market has the wherewithal to finance long-gestation infrastructure projects.

e) What does not help is the fact that the infrastructure sector in India is full of crony capitalists. And that stems from the fact that given the way the system functions, only a crony capitalist can perhaps manage it. This is like a chicken and egg story. Also, these crony capitalists in the past have had the habit of siphoning off the money lent to them by banks for infrastructure projects.

f) The construction sector can really take-off once the real estate sector takes off. The real estate sector has forward and backward linkages with 250 ancillary industries.[3] This basically means that when the real estate sector does well, many other sectors, right from steel and cement, to furnishings to paints etc., do well. The multiplier effect is huge.

The real estate sector has now been in the doldrums for more than five years. The simple reason for this lies in the fact that most Indian real estate has been unaffordable for a while now. For this anomaly to be corrected the nexus between politicians and builders needs to end. The system of electoral financing needs to evolve and move away from the way it currently is. And this is easier said than done.

[1] NREGA FAQs

[2] A.Amirapu and A.Subramanian, Manufacturing or Services? An Indian Illustration of a Development Dilemma, Working Paper 409, Centre for Global Development, June 2015

[3] Urban India Real Estate – Promising Opportunities, KPMG, August 2016

The column originally appeared in Vivek Kaul’s Diary on August 24, 2016

All is not well on the employment front

narendra_modi

One of the perils of writing on the Indian economy is that the access to data and numbers continues to remain very poor. Given this, every time I come across some new data on the Indian economy which is regularly generated, I try and write a column around it.

Some time back, thanks to a story in the Business Standard newspaper, I realised that the government of India puts out employment numbers as well. The Labour Bureau based out of Chandigarh puts out a quarterly report on changes in employment in selected sectors.

Interestingly, the bureau has been doing this for some time now. The surveys started in the aftermath of the financial crisis which started in late 2008. As the latest survey report released by the Labour Bureau earlier this month points out: “A need was felt to have an indication about the impact of the Global Financial Crisis on employment situation in India on quarterly basis. The Government of India therefore entrusted the task of conducting the Quarterly surveys on employment changes in selected sectors to Labour Bureau.”

The first survey was carried out for the period October to December 2008, immediately in the aftermath of the financial crisis breaking out, with the investment bank Lehman Brothers going bust in mid-September 2008. The latest report is the twenty-fifth in the series and concerns the period January to March 2015.

The latest survey covers a total of 2013 sample units in eight selected sectors. These sectors are textiles, leather, metals, automobiles, gems & jewellery, transport, IT/BPO and handloom/powerloom.

While the number of sample units at 2013 is not very big, it does give us some flavour of the employment scenario in the country. Also, it is worth remembering here that unlike a number like gross domestic product or index of industrial production, an employment number is not a totally theoretical construct.

So how do things look like? The eight sectors added 64,000 jobs between January and March 2015, in comparison to December 2014. Of this, 49,000 jobs were added in the contract category and the remaining were direct workers. The bureau defines a contract worker as: “a workman who is hired in or in connection with the work of an establishment by or through a contractor, with or without the knowledge of principal employer.”

The IT sector added 37,000 jobs during the period. The textiles sector came in next with 24,000 jobs and automobiles added 20,000 jobs during the period. A simplistic conclusion we could draw here is that the IT sector added close to 58% of the total jobs (37,000 expressed as a proportion of the total 64,000 jobs).

But that would be incorrect.

Allow me to explain. As Jordan Ellenberg writes in How Not to Be Wrong—The Hidden Maths of Everyday Life: “For example, say I run a coffee shop. People, sad to say, are not buying my coffee; last month I lost $500 on that part of my business. Fortunately, I had the prescience to install a pastry case and a CD rack, and those two operations made $750 profit each. In all, I made $1000 this month [$750 each from the CD rack and the pastry case plus a loss of $500 on the coffee part of the business] and 75% of that amount came from my pastry case.”

So far so good.

Saying that 75% of the profit came from the pastry case makes it sound like pastries are bringing in almost all the money. But that is not really true. As Ellenberg writes: “It’s just as correct to say that 75% of my profits came from the CD rack. And imagine if I’d lost $1000 more on coffee—then my total profits would be zero, infinity percent of which would be coming from pastry!”

This is a very important concept that needs to be understood. As Ellenberg puts it: “Negative numbers in the mix makes percentages act wonky.”

Now getting back to the employment data. The IT sector added 37,000 jobs, the automobile sector added 20,000 jobs, the metals sector added 1,000 jobs and the textiles sector added 24,000 jobs. In total, these four sectors added 82,000 of the 64,000 jobs. Hence, these three sectors added 130 % of the jobs.

This is an absurd result. And we are getting this absurd result because there are negative numbers in the mix. If jobs were gained in some sectors, they were also lost in certain sectors. In total, 18,000 jobs were lost in leather, gems and jewellery, transport and handloom/powerloom sectors.

Hence, whenever negative numbers are also involved, expressing in terms of percentages is incorrect.

Also, between March 2014 and March 2015, there has been a growth of 5,21,000 jobs with the IT sector adding 2,34,000 jobs. The textiles sector comes in a close second adding 2,21,000 jobs. 18,000 jobs were lost in the leather sector.

Narendra Modi came to power in late May 2014. Hence, the 5,21,000 jobs that have been created are a reflection of the performance of his government.

The question is how many jobs were created between March 2013 and March 2014 when Manmohan Singh was the prime minister and the Congress led United Progressive Alliance was in power. During that period a total of 2,76,000 jobs were created. Hence, Modi’s performance looks much better than that of Singh.

Nevertheless this comes with a caveat. Of the 5,21,000 jobs created between March 2014 and March 2015, the maximum of 1,82,000 jobs were created between April 2014 and June 2014. Manmohan Singh was in power through much of this period. If we were to adjust for this, Singh’s performance looks a little better.

But even with this adjustment Modi’s performance has been better than that of Singh, on this front.

Another point that needs to be made here is that the number of jobs being created since March 2014 has been falling in every quarter. As mentioned earlier, 1,82,000 jobs were added between April and June 2014. The number fell to 1,58,000 jobs between July and September 2014. It fell further to 1,17,000 jobs between October and December 2014. And finally collapsed to 64,000 jobs between January and March 2015.

The initial euphoria around Modi’s election as the prime minister being good for the business as well as the economy is getting wiped out. And this is clearly a reason to worry.

The column originally appeared in The Daily Reckoning on October 28, 2015

No jobs, no sales: Everything is going wrong with real estate

India-Real-Estate-Market
After a brief break, I am back to writing on by favourite topic of real estate. In The Daily Reckoning edition published on January 22, 2015, I had discussed the job creating potential of real estate.

The construction sector benefits tremendously if the real estate sector is doing well and creates a huge number of semi-skilled jobs. This works the other way round as well. When the real estate sector is not doing well, there are not enough jobs going around in the construction sector.

And this is precisely what seems to be happening. A Reuters news-report points out that “more than half a million workers let go from sites around India’s capital in the last 18 months.” In fact, many labourers who work on construction sites in Delhi are migrant labourers who essentially come from the poorer states of Uttar Pradesh, Bihar and Jharkhand.

As the Reuters reports: “In Patna, the state capital, eight out of 20 labourers contacted by Reuters had this year made the 1,000 kilometre (600 mile) trip back from Delhi because they could not find work – pressuring salaries in a region where wages are already low.”

What is happening here? The real estate consultant Knight Frank in a recent research report had pointed out that there were around 7 lakh unsold homes in eight cities (Delhi-NCR, Mumbai Metropolitan Region, Bengaluru, Pune, Kolkata, Chennai, Hyderabad and Ahmedabad).

“Current unsold inventory levels stand at over 7 lakh units; would take over 3 years to exhaust,” the report pointed out. Liases Foras, another property consultant, puts the inventory in the major cities as of the end of June 2015, a little higher at 41 months, up 24% from last year.

Given the fact that homes are not selling, new launches have declined by 40% to 95,400 units during the first six months of 2015.
And this possibly explains why there is a job crisis in the construction sector. When real estate companies are not able to sell what they have already built, there is no point in continuing to build new homes. With new homes not being built at the same rate as they were in the past, the total amount of construction has come down dramatically, leading to a job crisis in the sector.

How can this disconnect be corrected? How can jobs be created in the construction industry that services the real estate sector? For this to happen new homes need to be built, only then can construction jobs come back in the real estate industry.

For new homes to be built, the unsold homes in the eight big cities and all over the remaining part of the country need to be first sold. And for that to happen prices need to come down so that homes become affordable. A major reason why homes are not selling right now is because they are exorbitantly priced and way beyond what most people can afford.

The real estate companies are not willing to accept this and cut prices. In a recent press release, the real estate lobby, the Confederation of Real Estate Developers Association of India (CREDAI) said: “it would be prudent to say that from the developers side a substantial reduction in prices has already happened across the country and any further decrease in sale prices would be a deterrent for the growth of a sector that contributes so much to the economy and employment at large.”

The real estate lobby feels that home prices cannot be cut because input prices have risen over the last few years. CREDAI President Geetamber Anand told PTI that “housing prices have gone down by 15-20 per cent on an average in last two years across India, while input costs have risen by 15-20 per cent.”

A similar feeling was echoed by Knight Frank Chairman Shishir Baijal who told the Business Standard that: “Input costs, including that of land, have gone up over the past few years. There is no scope for a serious correction in prices.”

Input costs may have risen, but is that a good enough reason for not cutting prices? The real estate companies may as well continue building homes at prices, which no one will buy. At the end of the day any product has to be priced at a level which the end consumer is willing to pay. This is a basic way in which any business works.

This logic did not apply to the real estate sector up until now because there was massive investor demand. This included people who had black money to park as well as others who were taking on home loans to invest in second and third homes. With returns from real estate more or less remaining flat over the last couple of years, the number of buyers in this category has come down dramatically. The Reuters story referred to earlier points out: “A law to clamp down on “black money” flows that fund as much as a third of real estate deals is further squeezing demand.”

I really don’t know where Reuters got hold of the one-third ratio, but there is enough anecdotal evidence to suggest that investor money coming into the sector has come down dramatically. The real estate consultants have also made this point. Given this, the only prospective buyers left in the market are those who want a home to live-in and they are in no position to pay the kind of money the real estate industry wants them to.

So, as I keep saying, the real estate sector is not going to revive without a massive price cut. Having said that, the CREDAI had an intelligent suggestion to make for once as well. The real estate lobby said in a press release that: “The onus is now upon the state government to rationalise taxes, ready reckoner rates and streamline the approval process to bring down property prices and provide relief to home buyers.”

In many parts of the country real estate transactions are not happening simply because the circle rates are higher than the prevailing market price of real estate. And this has led to the transactions in the real estate market coming to a complete standstill. People are not buying and selling homes because of this.

The area where real estate is bought or sold has a circle rate decided by the state government. The circle rate is the minimum value at which the actual transfer of a property between a seller and a buyer should take place. Hence, the buyer of the property pays stamp duty to the state government on the circle rate.

This is something that the state governments can correct by bringing down circle rates. But the question is will they do that? And if yes, how quickly?

The column originally appeared on The Daily Reckoning on Aug 28, 2015

Why Modi’s dream of acche din will continue to remain a dream

narendra_modi
Sushma Swaraj, the minister of external affairs, must be one unhappy woman these days. This, coming from the fact that prime minister Narendra Modi among other things is also India’s real minister of external affairs.
Modi is currently touring Germany, after having visited France. In an op-ed in the German daily
Frankfurter Allgemeine Zeitung the prime minister wrote: “We have re-energised the Indian growth engine. The credibility of our economy has been restored. India is once again poised for rapid growth and development…It is the only emerging economy where growth rate is rising. The prospects are even better.”
Prime ministers need to say such “optimistic” things when they go on foreign visits. But things on the ground level in India are not very different than they have been in the past. Take corporate performance for one. In a research note released last week Crisil Research expects “India Inc.’s revenue growth to slip to a 7-quarter low of 2.5 per cent on a year-on-year (y-o-y) basis,” for the period between January to March 2015. This is less than half the growth of 5.4% seen in the period October to December 2014.
Crisil believes that the steel sector will see revenue declines of 10-11%. The petrochemicals industry will see a revenue decline of 20-22% on account of drop in global crude oil prices. “Growth for construction and capital goods sectors’ will continue to remain sluggish due to lower order backlog and slow project execution,” the research note points out.
The revenues of the automobile sector are expected to grow by around 6%. “While sales
of cars and medium & heavy commercial vehicles have picked up, muted growth in international businesses and the two wheeler space will impact the topline.” The two wheeler companies are not expected to do well primarily because of the non-seasonal rains in large parts of the country which will impact the production of the rabi crop. This will dent farm incomes.
As Crisil Research points out: “Domestic consumption and export-oriented sectors are likely to outperform but, here too, sectors heavily dependent on rural consumption such as motorcycles, tractors, and FMCG have been facing severe pressure on volumes as unseasonal weather conditions and slow growth in crop prices have dented farm incomes.”
This will have an impact on the Fast Moving Consumer Goods(FMCG) sector as well. Crisil forecasts this sector to grow at 8-9% during the period January to March 2015. The sector had grown at close to 14% in between April and September 2014, the first half of the last financial year.
What this clearly tells us is that the performance of the Indian companies will remain weak during the period January to March 2015. What is interesting is that before Narendra Modi came to power, corporate performance had been relatively stronger than it is now. During the period April to June 2014 (the first quarter of the last financial year) the revenues had grown by 12.8%. In each of the three quarters before that, the revenues had grown at higher than 10%.
Since July 2014, the revenue growth started to fall and has continued to fall. Modi came to power on May 26, 2014. Corporate growth is a function of many factors and just blaming the Modi government for it is not fair. But the claim that Modi made in Germany that “ we have re-energised the Indian growth engine,” is not correct either. Without growth in company revenues, there is no way the overall Indian economic growth can be re-energised. Both are closely linked.
Further, if sustainable economic growth is to be created jobs need to be created to employ India’s burgeoning workforce. Sample this—Every year up till 2030, 13 million Indians will enter the workforce. This means more than a million Indians are entering the workforce every month. And if enough new jobs are created for them, economic growth will automatically happen.
But is that the case? Are enough jobs being created? The trouble on this front is that India does not have good data on employment. In fact, the latest economic survey makes this point: “The data on longer-term employment trends are difficult to interpret because of the bewildering multiplicity of data sources, methodology and coverage.”
Despite this, some broad inferences can be made by looking at data from multiple data sources. (I will spare you the details here. But anyone interested in the details can refer to
Box 1.3 Employment Growth and Employment Elasticity: What is the Evidence? In Volume 1 of the Economic Survey).
As the Economic Survey points out: “Regardless of which data source is used, it seems clear that employment growth is lagging behind growth in the labour force. For example, according to the Census, between 2001 and 2011, labor force growth was 2.23 percent (male and female combined). This is lower than most estimates of employment growth in this decade of closer to 1.4 percent. Creating more rapid employment opportunities is clearly a major policy challenge.”
This is a major challenge for the Modi government and honestly it doesn’t seem to have done much on this front. Jobs are essentially created by small entrepreneurs as they grow big. The labour laws in India essentially ensure that most firms start small and continue to stay small. For this anomaly to be corrected, India’s labour laws need to be simplified. Nothing has happened on this front at the central level, since Narendra Modi came to power.
Over and above this, the entire process of starting and running a business in India is not easy. As per the Ease of Doing Business ranking India ranks 142 in a list of 189 countries. When it comes to the ease of starting a new business it comes in 158th. When it comes to enforcing contracts India comes in 186th out of 189 countries.
What this clearly tells us is that the entire Indian system works against an individual wanting to establish and run a business. What it also tells us is that in order to run a business in India you need to be well connected and that explains the surfeit of crony capitalists who do well in India.
If jobs are to be created the ease with which a business can be started and operated in India needs to be improved. Sadly, nothing much has happened on that front despite the so called dynamism of Narendra Modi. And unless this changes, the entire dream of
acche din will continue to be just that. 

The column originally appeared on The Daily Reckoning on Apr 14, 2015

Jobs, jobs and more jobs is what India needs

jobs
Buried somewhere
in the last financial year’s Economic Survey are some very disturbing data points, which the pink papers do not like to talk about. The usual news reports that you will read in the business newspapers published in the country are about professional colleges (MBA/Engineering) being flush with jobs.
None of the newspapers get into detail about how bad the overall job scenario in India is. The fact of the matter is that we just aren’t creating enough jobs for the youth who are entering the workforce every year.
The
Economic Survey points out that between 1999-2000 and 2004-2005 the employment as measured by the usual status method increased from 398 million to 457.9 million. This was the period when the Bhartiya Janata Party led National Democratic Alliance was in power.
After this, the job growth just came to a complete standstill. Between 2004-2005 to 2009-2010, the employment increased by just 1.1 million to 459 million. The first term of the Congress led United Progressive Alliance was a period of jobless growth, despite the gross domestic product(GDP) registering solid growth. So, the size of the overall economy was growing but the jobs weren’t.
The situation improved over the next two years. Between 2009-2010 and 2011-2012, the number of employed individuals increased by 13.9 million to 472.9 million. Hence, the employment growth between 2004-2005 and 2011-2012 was at a minuscule 0.5% per year. In comparison, the employment growth was at 2.8% per year between 1999-2000 and 2004-2005.
Mihir S Sharma in
Restart—The Last Chance for the Indian Economy looks at the data over a longer time frame and comes up with a similar conclusion: “In the years from 1972 to 1983—not celebrated as a time of overwhelming prosperity—the total number of jobs in the economy nevertheless grew by 2.3 percent a year. In the years between liberalization in 1991 and today, jobs have grown at an average of 1.6 percent a year.”
The trouble is that this is not enough. “13 million Indians will join the workforce every year from now on till 2030…But, if these young people have to absorbed, then jobs must grow at least 3 per cent a year—almost twice the rate at which they have since liberalization. This is simply not happening. In other words, one out of every two youngsters who starts looking for a job next year won’t find one,” writes Sharma.
What makes the scenario worse is that as per the last census nearly 47 million Indians under the age of 25 have been looking for a job, and not been able to find one.
So what is the way out? The
Economic Survey provides what looks like an answer. As it points out: “The defining challenge in India today is that of generating employment and growth. Jobs are created by firms when firms invest and grow. Hence it is important to create an environment that is conducive for firms to invest…The ultimate goal of economic policy is to create a sustained renaissance of high growth in which hundreds of millions of good quality jobs are created. Good quality jobs are created by high productivity firms, so this agenda is critically about how firms are created, how firms grow, and how firms achieve high productivity.”
Theoretically the above paragraph makes perfect sense. But there are several problems with it. India grew at the rate of 7.4% per year between 2004-2005 and 2011-2012. Despite this the job growth came to a standstill. Between 1999-2000 and 2004-2005 the economic growth was around 6% per year. Nevertheless, jobs grew at a much faster rate than they grew between 2004-2005 and 2011-2012.
So, faster economic growth does not always create jobs. Further, the
Economic Survey talks about highly productive firms creating quality jobs. The question is what portion of Indian firms are highly productive or want to achieve high productivity. A significant portion of big Indian firms are essentially run by crony capitalists who are more interested in short term gains rather than building a highly productive organization.
Then there is the question of labour laws as well. Sharma provides a comparison between Bangladesh and India, and how the countries stack up when it comes to their respective textile industries. As he writes: “Before the expansion of trade thanks to new international rules in the twenty-first century, India made $10 billion from textile exports, and Bangladesh $8 billion. Today India makes $12 billion—and Bangladesh $21 billion.”
So what happened here? The textile industry, explains Sharma, needs to turnaround big orders quickly and efficiently. “Really long assembly lines still matter in textiles: in some cases, 100 people can sequentially work to make a pair of trousers in least time. In Bangladesh, the average number of people in a factory is between 300 and 400; in the South Indian textiles hub of Tirupur, it’s around 50,” writes Sharma.
Why is there such a huge differential is a question worth asking? The answer lies in the surfeit of labour laws that firms in this country need to follow. And this ensures that most Indian textile firms start small and continue to remain small.
In their book 
India’s Tryst with Destiny, Jagdish Bhagwati and Arvind Panagariya point out that 92.4% of the workers in this sector work with small firms which have forty-nine or less workers. Now compare this to China where large and medium firms make up around 87.7% of the employment in the apparel sector.
In fact, the Indian Constitution allows both the central as well as state governments to pass labour laws. This has led to a surfeit of labour laws. As Bhagwati and Panagariya point out: “The ministry of labour lists as many as fifty-two independent Central government Acts in the area of labour. According to Amit Mitra (the finance minister of West Bengal and a former business lobbyist), there exist another 150 state-level laws in India. This count places the total number of labour laws in India at approximately 200.”
What leads to further trouble is that these laws are not consistent with one another. This has led to a situation where “you cannot implement Indian labour laws 100 per cent without violating 20 per cent of them,” write Bhagwati and Panagariya.
This explains why Indian textile firms continue to remain small and not enough jobs are created in the process. As Bhagwati and Panagariya write “As the firm size rises from six regular workers towards 100, at no point between these two thresholds is the saving in manufacturing costs sufficiently large to pay for the extra cost of satisfying the laws”.

In fact, the textile sector is an excellent representation of the overall Indian business. Businesses which have less than 10 workers, employ more than 90% of India’s workers. What this clearly tells us is that the government of India needs to start simplifying its labour laws. At the same time this needs to trickle down to the level of state governments as well.
Sharma summarizes it best when he says: “[India] tried to protect workers instead of work; and it failed.” And that needs to change.

The column appeared on www.equitymaster.com as a part of The Daily Reckoning on Feb 13, 2015