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India – Labour market stuck in quagmire

20 August 2013

India’s labour market has been stuck for 20 years, with 100% of job growth in the low-quality informal sector, according to Manish Sabharwal, co-founder and chairman of recruitment firm TeamLease Services. In an article for Forbes India, Mr Sabharwal outlined the five primary causes of India’s job crisis.

  • Distrust of the private sector is pervasive in India and manifests itself in thousands of vague, contradictory, and unnecessary regulations that smother enterprise. Without a radical overhaul of the labour law regime – by recognising fixed term contracts, making labour a state subject, and reversing over-regulation and under-supervision – informal jobs will continue to account for 90% of all employment.
  • Employee benefits are deducted from salaries, not added to basic pay. The current law requires employers to deduct -48% of permanent employees’ salaries, for monthly wages up to RUP 6,500 (USD 102.75) to cover the cost of mandatory benefits. The two biggest employee benefit funds are perceived to be of poor value; this in combination with the fact that most employees are unable to live on half of their monthly wage, they opt for informal work with no benefits.      
  • Entrepreneurs are unnecessarily handicapped by the Indian state. They are responsible for generating their own power, providing their own transport, digging for their own water, arranging their own security, and recruiting their own employees. This raises the difficulty level for young people becoming entrepreneurs. The average size of an Indian company is three employees, but the policy focus of the Ministry of Micro, Small, and Medium Enterprises continues to be small companies rather than new ones.
  • Geographically jobs are clustered in high populous regions. India has 600,000 villages, but 200,000 of them have fewer than 200 residents. There are only 50 cities with more than a million residents, compared with 300 in China. India needs at least 100 new urban clusters; such as Bangalore or Gurgaon, that combine low rent but high quality residential and commercial spaces.
  • Removing restrictions on foreign investment would greatly accelerate the creation of the formal job sector. More than 50% of China’s exports and 90% of its high technology exports come from multinational factories. The biggest value these multinationals have brought China is not capital but market connectivity, technology, and management. Removing foreign investment restrictions would also accelerate entrepreneurship and stimulate job creation.

Mr Sabharwal concluded: “Many current politicians say they believe in economic reform but don’t know how to get re-elected once they implement it. This implies that good economics is almost always bad politics. But a narrative around non-farm formal job creation is a compelling political narrative at the intersection of good economics and politics.” 

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