First things first: Boost labour efficiency to spur growth

A chequered poll season is about to end. As the dust settles, the new government at the Centre would find itself with a busy economic agenda. The first in a 5-part series on how to restore the economy’s (faltering) growth capacity.

Jobless growth is a curse, and would dent growth itself. So, improving labour efficiency – and ensuring remunerative wages – are key to boosting the fortunes of the Indian economy, and bolstering the aggregate demand.

Reforms of the labour market are bound to be a top priority for the new government to assume office by mid-June if not earlier. However, rather than keeping average factor cost of labour from rising faster, these reforms must be aimed at enhancing the productivity of the workforce. Labour efficiency, after all, is a function of workers’ skill levels, optimum use of machinery and technology, and wages themselves.

India may still be witnessing a million job seekers every year, but a question on the quality of labour still looms. Experts say the need for the hour is to roll out the labour codes passed by Parliament without any further delay. This shall help in improving working standards of the country’s workforce and easing rigidities of the labour market. But these laws would alo need to be tweaked to enhance labour productivity. MSMEs, the largest job creators, must be incentivised via tax reliefs and other means.

Earlier this month, labour secretary Sumita Dawra said that a focus on “quality employment” is essential to take advantage of India’s demographic dividend and realise the dream of Viksit Bharat. She emphasised on the need to align the country’s labour laws with the present economic milieu to “improve productivity of labour”.

Although India has consistently added more people in the workforce, which is also reflected in the Periodic Labour Force Survey, its labour productivity lags that of the competing economies, including China and its regional peers. A report by Oxford University in 2023 noted that India’s average human capital levels–which define the productivity of its labour force and are determined by a variety of education and health outcomes–currently “rank behind” China and most of its regional peers.

According to a report by the labour ministry, India’s labour productivity (measured by GDP per person employed per hour, in $) stood at 6.46 in 2015, much lower than 10.64 of China, 10.21 of Indonesia, 7.55 of Philippines, and 36.22 of Japan. The United States labour productivity during 2015 stood at 59.77.

The possible factors for India’s labour productivity lagging behind other export-oriented countries, such as China are inadequate skill levels of workers, infrastructural deficiencies, lesser technological adoption in manufacturing and services industries, and complex labour laws, say analysts.Hence, a need to improve labour productivity arises. Experts say that the government should at first “streamline and simplify” complex labour laws to make it easier for businesses to operate while protecting workers’ rights.

“Such reforms should focus on easing industrial relations, ensuring universal & fair wages, adherence to workplace safety standards, access to healthcare & social security for all classes of workers,” said Preeti Sharma, partner, BDO India. “In addition, reforms in our education system are warranted with greater focus on vocational training programs and practical skills development.”

The Narendra Modi government in 2019-20 undertook a “plethora of facilitative reforms” to reduce the multiplicity of labour laws. Labour Secretary Dawra said that 29 labour related acts have been consolidated into four codes with the objective of “reinforcing trade and investment, facilitating ease of doing business and reducing compliances, addressing the issue of decriminalisation, addressing skill development needs, and dispute resolution.”

The government, in 2019-20, had consolidated the labour laws into four codes: Code on Social Security 2020; Occupational Safety, Health and Working Conditions Code 2020; Industrial Relations Code 2020; and Code on Wages 2019. These four codes, although framed, are not yet notified, as the Centre is waiting for the states to pass their respective legislation to enforce these Codes. FE had reported earlier that the government, after the general elections, is likely to implement the codes soon after it assumes office, citing an official.

Labour laws fall under the concurrent list of the Schedule 7 of the Constitution of India. “The state governments are bound to implement the laws formulated by the Parliament and they can’t refuse to do so,” an official had told FE. “The Centre didn’t notify the rules as the intent was to take all the states on board, but some states refused to frame the respective rules, such as West Bengal, but post elections, the codes will be notified,” the official had said.

Suma R V, Partner, King Stubb & Kasiva, said: Considering India’s diverse labour market and industrial scenario, the implementation of new labour codes will be a significant move as it will specifically bring in gig workers, home-based workers, and unorganised workers within the ambit of social security schemes. “While the laws and policies are framed for ease of doing business and to improve the working conditions of the workforce in various sectors, strict implementation of the same at the ground level is very much needed, both in the public and private sectors,” she said.

Needless to say, in the last 10 years, the Modi government has taken a series of initiatives–namely ‘Skill India Mission’, ‘Making in India’, ‘Digital India’, ‘Pradhan Mantri Kaushal Vikas Yojana’–to improve the skill set of India’s workforce, generate employment, and boost economic growth, which to an extent has shown positive results.

The International Labour Organisation in a recent report had stated that India’s labour productivity has consistently increased alongside capital deepening, which indicated that that economic growth was increasingly associated with technological progress and productivity gains rather than employment.

“Labour productivity was the primary driver of per capita gross value added (GVA) growth during 2000–19,” said the report. The rise in capital intensity suggests that growth has been closely linked with technological advancements that favour capital-intensive production, it said.

The ILO reported, however, pointed that during 2000–19, there was a shift in employment from low-productivity agriculture to relatively higher-productivity non-agriculture sectors. But, this transition slowed and then reversed between 2019 and 2022, due to reverse migration of workers amidst the Covid-19 pandemic.