A PROJECT REPORT

ON

RISING TREND OF UNEMPLOYMENT IN INDIA

DAMAGES AND REMEDIES

ECONOMICS MINOR
3RD SEMESTER
B.A.LL.B. (Hons.)

SUBMITTED TO: SUBMITTED BY:

DR. BRINDPREET KAUR KUSHAL KEDIA
ASSISTANT PROFESSOR OF ECONOMICS ROLL NO. 16105
Contents
INTRODUCTION .................................................................................... 2

UNEMPLOYMENT .................................................................................................... 2

SNAPSHOOOT OF MANUFACTURING SECTOR OF INDIA .............................. 3

CONTRIBUTION OF MANUFACTURING TO EMPLOYMENT IN

INDIA......................................................................................................... 6

2.1 Manufacturing plays a crucial role in absorbing surplus agriculture labour..... 6

ROLE OF MANUFACTURING IN EMPLOYMENT

GENERATION ....................................................................................... 15
REMEDIES ............................................................................................. 18
CONCLUSION ....................................................................................... 20

1
INTRODUCTION

UNEMPLOYMENT

The unemployment rate is a measure of the prevalence of unemployment and it is

calculated as a percentage by dividing the number of unemployed individuals by all
individuals currently in the labor force. During periods of recession, an economy
usually experiences a relatively high unemployment rate. 1According to International
Labour Organization report, more than 200 million people globally or 6% of the
world's workforce were without a job in 2012.2

A significant change in inequality in income and wealth is possible only in a longer

term prospective. Employment structure of an economy is the normal instrument that
can cause a change in inequality either way i.e. an increase or a decrease in inequality.
Since the government functions within the administrative and fiscal constraints, the
target group programmes normally have a marginal impact on income redistribution.
Income of labour enables flow of resources across income classes of people and
across the social and ethnic groups. Flows of income across locations are influenced
both by assets available and modes of creating employment opportunities. However,
income generated by employment of migrant labour, facilitates flow of resources
across regions of a given regional distribution of capital assets. Employment and
equity of income across classes of people and across regions are therefore, closely
related to each other in the long term.

From 1983 till 2011, Unemployment rates in India averaged 9 percent reaching an all-
time high of 9.4 percent in December 2010 and a record low of 3.8 Percent in
December 2011.3 In India, the unemployment rate measures the number of people
actively looking for a job as a percentage of the labour force. The number of
unemployed people in India decreased to 39963 thousand in 2009 from 39974
thousand in 2007. Unemployed persons in India and Kenya averaged 36933 thousand
from 1985 until 2012, reaching an all-time high of 41750 thousand in 2001 and a
record low of 24861 thousand in 1985. In India, unemployed persons are individuals
who are without a job and actively seeking to work.

1
The Saylor Foundation. "Unemployment Rate." pp. 1
2
"Global employment trends 2013" (PDF). International Labour Organization.
3
The India Skills Report 2014

2
SNAPSHOOOT OF MANUFACTURING SECTOR OF INDIA

The manufacturing sector is crucial for employment generation and development of an

economy. Historically, the development process has witnessed a trend of people
shifting from agricultural to non-farm activities such as manufacturing and services.
This renders manufacturing crucial for India’s development and employment
objectives. It is especially true given that agriculture comprises a minor share of GDP,
but accounts for a disproportionately large share in employment.

In coming years, India is expected to witness significant demographic growth and a

disproportionate expansion in the working age population. To absorb much of this
labour force, the manufacturing sector would need to play an important role.
Currently, the sector accounts for 12 per cent of the total employment in the country,
well below its true potential.

Manufacturing holds a key position in the Indian economy, accounting for nearly 16
per cent of the real GDP in FY12 and employing about 12 per cent of the country’s
labour force. Growth in the sector has been strong, outpacing overall GDP growth
since the past few years. For example, while real GDP expanded at a CAGR of 8.4 per
cent over FY05–12, growth in the manufacturing sector was marginally higher at
around 8.5 per cent over the same period. Consequently, the sector’s share in the
economy increased (albeit
marginally) to 15.4 per cent from
15.3 per cent. Expectations from
India’s manufacturing sector are
high. These include, among other
objectives, job creation, exports
and a force that will drive future
economic growth.

3
Rapid growth in the manufacturing sector has been accompanied by higher
productivity and profitability of Indian manufacturing companies. As per a study4 by
the Reserve Bank of India (RBI), productivity of companies was 24 per cent higher in
2005 vis-à-vis 2000. The study also identified that Indian companies achieved higher
growth in profits during the same period. Although profits were expected to decline
during the downturn in 2009, manufacturing companies were resilient and are
returning to the pre-crisis levels or even higher—the automotive industry has reported
strong growth in business activity on an increase in domestic demand and exports.

The rising competitiveness of India’s manufacturing companies is reflected in the

country’s second position in the world in terms of competitiveness as per the 2010
Global Manufacturing Competitiveness Index5 (GMCI) prepared by the US Council
on Competitiveness and Deloitte. The index considers market dynamics and policy
issues that influence the sector. India is ahead of several developed and emerging
economies such as the US, South Korea, Brazil and Japan. GMCI expects the
country’s competitiveness score to improve to 9.01 (out of 10) by 2015 from 8.15 in
2010.

4
“Profitability of Indian Corporate Sector: Productivity, Price or Growth?”, Reserve Bank of India
Occasional Papers, Vol. 28, No. 3

4
5
These developments have significantly bolstered India’s manufacturing prowess. As
per the United Nations Industrial Development Organisation (UNIDO), after China,
the country is currently the largest producer of textiles, chemical products,
pharmaceuticals, basic metals, general machinery and equipment, and electrical
machinery. The sector’s prominence in the domestic and global economies is set to
rise in FY12 as a combination of supply-side advantages, policy initiatives and private
sector efforts set India on the path to becoming a global manufacturing hub.

CONTRIBUTION OF MANUFACTURING TO EMPLOYMENT IN INDIA

2.1 Manufacturing plays a crucial role in absorbing surplus agriculture labour

The manufacturing sector is critical for the economy’s growth as it employs 12.0 per
cent of the country’s labour force as well as provides a transitional opportunity to the
labour force in agriculture. In addition, the sector has a multiplier effect for job
creation in the services sector. According to National Manufacturing Policy 2011,
every job created in the manufacturing sector creates two-three additional jobs in
related activities.

6
Textiles and garments, leather and leather products, and food processing are among
the major employers in the manufacturing sector. As depicted in the exhibit 5, there is
a significant variation in terms of volume and requisite skill sets across various
industries in the manufacturing sector. For instance, the paper and wood products
industry tends to be more labour-intensive compared to the electrical machinery and
transport equipment industry.

According to a CII-BCG report on manufacturing6 , the average capital efficiency

(revenues/invested capital) in the manufacturing sector is nearly 2.4 (based on an
analysis of registered sector data); however, across sub-sectors, it varies from 1.4 for
non-metallic products to 3.5 for food products. The average labour efficiency
(revenues in INR10 million/ 1,000 workers as reported by the Annual Survey of
Industries) is nearly INR480 million/1,000 workers. However, there is a wide
variation across different industries with paper & wood generating INR70
million/1,000 workers and the basic metals industry generating INR3, 400
million/1,000 workers. India’s industrial output has declined or grew at very low rates
in almost every month after July 2011. The index of industrial production (IIP)
provides data on organized manufacturing, that is, on factories, which employ 10 or
more workers (20 or more if run without electricity). Less known but more acute,
however, is the crisis that has hit the smaller industries in the unorganized sector—the
sector that employs 80% of all manufacturing workers in the country.

6
CII BCG Report, Indian Manufacturing:The Next Growth Orbit, January 2010

7
But, first, about organized manufacturing, which was indeed one of the bright spots in
India’s economic growth during a good part of the 2000s. Rapid rates of growth were
registered in this sector, particularly in the manufacture of metals, machinery and
automobiles. India has been a favourite investment destination for global automakers,
especially for the makers of low-cost cars.

More importantly, this was not merely an expansion of output, but an impressive
growth in employment too. More than three million new jobs were generated in
India’s organized manufacturing between 2004-05 and 2009-10. That was in marked
contrast to the near “jobless” growth that characterized this sector for the two-and-a-
half decades since the 1980s.

India’s organized manufacturing rebounded impressively after it slowed down during

2007-09 at the height of the global economic crisis. The recovery was led in particular
by the auto industry, with the domestic production of passenger cars rising from 1.5
million in 2008-09 to 1.9 million 2009-10.

But that revival seems to have been short-lived. India’s automobile industry has
entered a phase of stagnation, and so too has organized manufacturing as a whole, as
shown by the recent numbers on IIP growth.

Employment and unemployment surveys conducted by the National Sample Survey

Organisation (NSSO) shows that the total manufacturing employment in the country
declined absolutely, by three million, between 2004-05 and 2009-10. It is to be noted
that this decline in overall manufacturing employment occurred despite a revival in
employment in the organized sector. Clearly, it points to a sharp absolute fall in
unorganized manufacturing employment in the country by the late 2000s.

The latest NSSO survey indicates some revival in manufacturing employment

between 2009-10 and 2011-12. Nevertheless, the survey shows that the generation of
unorganized manufacturing employment in India has decelerated markedly: from 12.6
million new jobs between 1993-94 and 2004-05 to just a little over a million new jobs
between 2004-05 and 2011-12.
While capital- and skill-intensive industries such as metals, petrochemicals and
automobiles dominate organized manufacturing, India’s unorganized manufacturing

8
consists mainly of labour-intensive industries such as food products and textiles. The
deceleration in India’s labour-intensive industries began in 2006-07. The appreciation
of the Indian rupee that occurred during this time affected the growth of export-
oriented industries such as textiles, garments, leather, and gem cutting. As the global
economy plunged into a crisis by 2008-09, these industries were hit further, by the
downturn in export demand from Western countries, resulting also in large-scale job
losses. Further, the growth of India’s textile industry has suffered due to the volatility
and the generally high level of cotton prices in the country since the late 2000s.

A factor that has consistently been at the top of the list of constraints to Indian
manufacturing has been the shortage of power and other essential infrastructure.
Power demand-supply shortages have been reported from a majority of Indian states.
In the industrial town of Coimbatore, where this author has been carrying out a field
study, there have been acute power shortages for approximately eight months every
year since 2007. As a consequence, industrial units in this city have had to operate at
50% or even less of their actual production capacities. The crisis in the infrastructure
sector is on account of the decline in public investment in India beginning in the
1990s, aggravated by the fall in private corporate investment too after 2007-08.

Micro and small industries are hurt due to inadequate access to bank credit. Advances
to small-scale industries as a proportion of non-food gross bank credit in India fell
from 15% in 1990 to around 6% during the second half of the 2000s. According to a
survey conducted by the NSSO in 2005-06, only 3.6% of unorganized manufacturing
enterprises in the country obtained loans from institutional sources.

After the mid-2000s, there has been a marked increase in the share of imports in the
domestic output of machinery and transport equipment industries in India. This too
has depressed the growth prospects of small-scale industries, as rising imports deny
them the opportunities for the manufacture of components and ancillaries.

The IIP figures for recent months suggest that a sustained revival of India’s organized
manufacturing is still some distance away. And this is worsening the crisis that has
plagued unorganized manufacturing in the country. Clearly, there is an urgent need for

9
greater domestic investment and well-directed industrial policies for achieving a
widespread renewal of Indian manufacturing.
The economic census, conducted since 1977, is an enumeration of all establishments
in the country (except certain sectors such as public administration and defence), and
is significant as it includes both organised and unorganised sectors in all sectors of the
economy. The fifth census was undertaken in 2005, and the sixth one from January
2013 to April 2014. The period 2005-2013 was volatile for the manufacturing sector,
which displayed growth rates as high as 18 per cent in 2007-08 and as low as a
negative 0.8 per cent in 2013-14.

The 6th EC finds a total of 10.3 million establishments* engaged in manufacturing in

India, and these employed 30.4 million workers. While the number of establishments
increased by 28 per cent over the eight years, the number of workers in the sector rose
by 19 per cent. This shows that establishments are getting smaller with a decline in
average employment per establishment.

Second, both establishments and employment in manufacturing lost share in the

aggregate numbers during this period. Although the decline in share is just about two
percentage points for both indicators, it reflects the challenges facing the sector. In
fact, the expansion in number of people employed in manufacturing at 19 per cent is
just half the pace of employment growth experienced for all establishments
enumerated in the EC.

Third, where is the growth in employment actually taking place? The EC report shows
that the total number of workers finding a livelihood in enumerated establishments
across all sectors went up by 35 million to 131 million in 2005-2013. Increase in
manufacturing employment contributed just 5 million to this growth. Comparing with
the 5th EC, it is found that workers in livestock farming shot up by 10 million over
these eight years. This trend is particularly disturbing as it indicates that
manufacturing was not able to create a large number of jobs.

Four, it is noteworthy that during 2005-2013, manufacturing emerged as the largest

employer in the non-agricultural sector, overtaking the retail trade sector. This must
be seen in the light of other trends to examine if it is a positive or a negative trend.

10
From other characteristics of the manufacturing sector as delineated in the census, it is
possible that the increase in workers engaged in manufacturing establishments may
not altogether reflect strengthening of the sector.

Five, this is corroborated by the finding that of the 5 million increase in employment,
close to 3 million arose in establishments that did not hire any workers. Such units
may be households and comprise about 70 per cent of all units. Thus, it is evident that
small single-person operations continue to have a significant presence in the overall
manufacturing sector, with over a third of all workers working in such tiny units.

However, the average firm which does employ workers hires 6-7 of them, the third
highest average among non-agricultural sectors. Since the top two sectors hire much
smaller numbers, it is important to encourage larger manufacturing firms as they are
better job creators.

Manufacturing may be the Achilles Heel of India’s economy. Twenty years after the
momentous economic reforms of the 1990s -- the removal of controls on industry and
the reduction of import tariffs — Indian consumers are enjoying a great variety of
products, many imported. But India’s manufacturing sector has been languishing at 16
per cent of its GDP, whereas China’s is 35 per cent. And a lot of what passes as
manufacturing in the country is assembly of imported components.
Ever since E.F. Schumacher, a British economist, published in 1973 his book Small is
Beautiful, implying that small units are better in terms of performance indicators and
labour absorption, several studies have endorsed the same idea and argued in favour
of promoting small units. Stretching the argument a little further, it may be
emphasised that small units are the epicentres of pro-poor growth.

In the context of the manufacturing and agriculture sectors, the debate on small versus
large dominated the intellectual space for several decades. Small units are usually
thought to be efficient in terms of resource use and management, and technically more
efficient. However, small units do not have access to several kinds of resources,
particularly in relation to credit and marketing facilities, and are not able to reap the
economies of scale. Thus, large units may reveal better performance indicators and
may have an edge in market competition.

11
The unorganised manufacturing sector, which includes both household and non-
household units, accounts for a large majority of total manufacturing employment in
India and the units in this sector are by definition small in size. To ensure decent
wages to the workers in this sector and to ensure pro-poor growth, the units in this
sector have to be made economically viable. Enhancing the technological capabilities
of such units and getting them integrated into national and regional value chains is
obviously important to ensure their economic viability.

Industries (ASI), suggests that employment in the sector decelerated over FY97–
FY05; thereafter, there has been a continuous rise in employment. In FY09, the latest
year for which ASI data is available, there was a constant increase in the number of
people employed. This is in sharp contrast to the anecdotal evidence and various
surveys that indicated a decline in employment in the organised manufacturing sector.
While there was an increase in the capital employed per unit of labour and output per
unit of labour during the same period, growth in labour absorption was at a faster rate
LIBERALISATION of the economy has had contradictory effects on employment and
labour. Gains in industries that expanded due to low tariffs or removal of licensing
were partly offset by losses made in formerly protected industries facing competition
from new entry.

Gains in the three boom years — 1993-04 to 1995-06 — were partially wiped out in
the recession that followed. What was the net overall effect on manufacturing
employment?

Until recently, the data to measure net employment effects of the reforms were not
available. Whereas employment in registered factories — the organised sector — is
available annually, no up-to-date estimate of unorganised (unregistered) sector
employment was available.

Yet, the unorganised sector played a large role in the story of India's structural
adjustment. Recent National Sample Survey (NSS) studies redress that gap greatly.

12
The organised sector: Employment in the organised sector industry grew from 8.3
million in 1991 to 10.2 million in 1996, or at over 4 per cent annually. There is no
previous episode of such high growth rates sustained for five years. It is also clear that
the rate of growth of average real wages slowed down greatly in the 1990s, and the
rate of growth of real productivity (value-added per worker) increased.

These trends represent a big contrast to the 1980s, which saw quite opposite trends:
Rapid increase in real wages, moderate increase in productivity, almost no change in
employment. These features were named the syndrome of `jobless growth' and have
been, along with the contrast to the early-1990s, matters of debate.

Why did jobless growth turn into job-friendly growth in the early-1990s? One answer
is that industrial composition changed in favour of labour-intensive sectors, and many
exportable sectors are intensive in labour, skilled or semi-skilled. This answer lays
more stress on the demand effects of the reform.

A second answer focusses on the dynamics of the labour market, and suggests that the
employment growth resulted from a coincidence of reforms with changes in industrial
relations. Incidence of labour militancy came down in the 1990s, and may have
encouraged more recruitment while slowing down wage growth. There has indeed
been a great deal of adjustments in employment and terms of contract. The corporate
sector has pushed a lot of jobs, formerly integrated, to the service sector. On an
average, the private sector employee seems to work harder for less at 2002 than at
1992.

New firms in the 1990s started without any overhead of surplus workforce and the
option to introduce more flexible work regime. By contrast, employment was sluggish
in the 1980s because of labour militancy, often state-backed, and a great lack of
flexibility. One point missed out in the `jobless growth' debate is that employment
growth is a sum of new jobs created and old ones lost. The debate, by contrast, has
been preoccupied only with the rate of job creation. It is possible to estimate gain and
loss separately for the organised sector.

13
In 1980-90, jobs were lost on an unusually large scale, almost a quarter of the
employment level in 1980. Jobless growth, in other words, was influenced by mass
closures, the most famous examples of which occurred in textiles and engineering. In
1991-96, such mass closures were rare, closures occurred more at the firm level, and
total job loss was small, about 2 per cent of 1991 employment.

The main difference between the 1980s and the early-1990s was not one of `more' or
`less' militancy, but of change in bargaining institutions. Industry-wide unions were in
decline all through the 1980s, making way for firm-specific bargaining. Closures, to
the extent they can be attributed to labour factors such as militancy or wage-rigidity,
also ceased to be industry-wide in the 1990s.

In contrast with the early-1990s, the late-1990s were devastating. In only two years of
recession, 1997 and 1998, job loss was quite significant. Between 1994 and 1999, the
organised sector employment fell from 9.4 to 8.4 million. The real magnitude is
somewhat smaller, for these two figures correspond to two industrial classification
systems. Adjusted for that, the extent of the fall may have been about half a million.

The unorganised sector: There are interesting similarities and contrasts between the
patterns of growth in the organised and unorganised sectors over the 1990s. The major
point of similarity is that both experienced growth in productivity and stagnation in
real wages in much of this decade, perhaps suggesting a kind of convergence in labour
market institutions.. ssign them a unique identity so as to give them social security
benefits including health insurance and old age pension.

All information of such workers will be verified against Aadhaar (or Unique ID)
numbers wherever available to reduce any duplicity, and those who don’t have
Aadhaar will be provided one, according to two government officials who spoke on
the condition of anonymity and a labour ministry document.

Almost 93% of India’s 475 million labour market work in the unorganized sector,
according to government data. And the sector accounts for at least half of India’s
gross domestic product, government data says. The Unique Identification Authority of

14
India or UIDAI, which issues the 12-digit unique Aadhaar number, has so far enrolled
753.4 million people in India.

The unorganized sector is largely made up of proprietorships or partnerships, not

usually incorporated, and which employ fewer than 10 people per establishment.

ROLE OF MANUFACTURING IN EMPLOYMENT GENERATION

The manufacturing sector is widely regarded as the transformational sector, for

agricultural labourers moving from low skilled to more value added jobs. This is
because, historically, economic development has followed a pattern of pulling people
out of agriculture, moving them into non-farm activities such as manufacturing and
services. The importance of the role of manufacturing (industrial sector) in absorbing
surplus labour from agriculture sector has also been proved by the development
experience of many developed countries and lately in various South East Asian
countries. This makes manufacturing extremely important for India, where agriculture
constitutes a minor share of GDP, but accounts for a disproportionately large share in
employment.

15
For India—where provision of gainful high-quality employment has been a key
element of goals under successive Five-Year Plans—including the 12th Five Year
Plan (2012–17), robust growth in the manufacturing sector can be a potential panacea
for providing employment to a vast majority of the population. As depicted in the
exhibit below, India is likely to be one of the few countries to witness a
disproportionate expansion in its working-age population by 2020. Nearly 60 per cent
of the population was within the working-age group (20–50 years) in 2007. The
figureis estimated to reach approximately 63 per cent by 2020. The additional three
per cent is expected to translate into nearly 47 million additions to the working-age
population. As per the International Labour Organisation (ILO), the number of people
above 65 years would be 39 per cent in the US, 53 per cent in Germany and 67 per
cent in Japan by the middle of the 21st century. By contrast, in India, just 19 per cent
of the population is expected to be above the age of 60. An abundant supply of people
in the working-age group has the potential to boost manufacturing growth. However,
to absorb much of this labour force, there is a need to lay larger emphasis on building
strong human capital. This is important considering that certain manufacturing
industries, such as transport equipment, petroleum and electrical machinery, require
specialised training, which can be met only by skilled labour force. On a positive note,
the government has set up the National Skills Development Council to encourage
private participation/management of industrial training institutes (ITIs). Among its
objectives, NSDC seeks to contribute significantly (about 30 per cent) to the overall
target of skilling/up skilling 500 million people in India by 2022.

The government has also unveiled the National Manufacturing Policy 2011, which
aims to create to 100 million jobs in the manufacturing sector and increase the share
of manufacturing in GDP to 25 per cent by 2022. To achieve this objective, the policy
proposes to develop National Investment and Manufacturing Zones(NIMZs), which
which will be integrated industrial townships, with world class infrastructure. In line
with China’s policy of building up large economic zones, these NIMZs will be built
on minimum size of 5,000 hectares. Further, to improve the business environment in
the country, these NIMZs will enjoy single window clearance and a liberal exit policy.
This apart, the policy also provides incentives for units in NIMZs such as exemptions
from capital gains tax, and incentives for green manufacturing and technology
acquisitions.

16
Perhaps the greatest unhappiness about the reforms is because the growth process they
have produced has not yielded a sufficient expansion of job opportunities, and the
opportunities created are of poor quality. They may be good enough to pull people
above the poverty line, as when agricultural labour moves into higher paid but
informal jobs in construction, and the resulting tightening of the agricultural labour
market, with some help from Mahatma Gandhi National Rural Employment
Guarantee Act, raises rural wages for those who stay behind. However, these jobs will
not meet the aspirations of younger people who are no longer looking at being pushed
above the poverty line, or even being assured that they will not fall back into poverty.
They are looking for ways of getting on a trajectory that assures a transition to a
sustainable middle-class existence.

MSMEs have consistently registered a higher growth rate vis-à-vis the industrial
sector. There are over 6,000 products ranging from traditional to high-tech
items,which are being manufactured by the MSME’s in India. The sector also
offersmaximum opportunities for both self-employment and jobs in India, after
theagriculture sector.

Rapid growth is certainly necessary for this outcome, but it is not enough. It must be
accompanied by growth in more labour-intensive sectors. Small and medium
manufacturing units are a part of the solution because they are typically more labour
using. However, the objective must be to create an environment in which even large
units in labour-intensive sectors can do well, even as smaller units in the same sectors
expand in size. Policies that discriminate against organized sector units in favour of
unorganized sector production, for example, modern retail formats, need to be
reviewed because they discourage the expansion of the organized labour force.

Some of what is needed has been on the reform agenda for some time and is
uncontroversial, though complex. This includes the provision of good quality
infrastructure to all parts of the country, building an efficient banking system and the
related set of financial sector reforms, including the new bankruptcy code and its
supporting infrastructure, ease of doing business, etc.

Some of what is necessary is controversial, notably labour reform. Leaving it to state

governments could help, but it is important to be sure that states implement the right
kind of reforms. For example, simply increasing the cut-off level of employment at

17
which the Industrial Disputes Act will apply from 100 employees at present to 300,
may not be the best way of providing labour flexibility. It certainly gives owners who
employ between 100 and 300 workers more flexibility, but it exempts them from all
provisions, including those relating to safety. What we need is flexibility of the right
kind, available to firms employing many more workers.

REMEDIES

The sector tends to have a multiplier effect on other sectors in the economy. The
manufacturing sector avails raw materials and services from other sectors in the
economy and in turn supplies them with finished products. Hence stimulating demand
for everything from raw materials to intermediate goods. Its area of influence includes
sectors like software, health, and transportation. As envisaged in NMP, the
manufacturing sector has the potential to provide employment to 100 million people
by 2022. However, before this happens, it is important to bring about certain reforms
in India’s manufacturing and labour sector. Some of the suggestions through which
employment can be boosted in the manufacturing sector are touched upon below –
Encourage growth in labour-intensive industries: Wood, paper productsand textile
industries tend to be more labour-intensive and require a largeworkforce, mostly
unskilled with no special qualifications. By focussing ongrowth in these industries, it
is possible to absorb the rising surplus ofunskilled workers, particularly in less
developed states (such as UttarPradesh and Bihar), where population is projected to
grow 8–11 per centby 2015.
Focus on MSMEs: MSMEs are critical for the country’s economic andsocial
development. They significantly contribute to the GDP,manufacturing output, exports
and employment. In India, MSMEs accountfor eight per cent of GDP, 45 per cent of
manufacturing output and 40 percent of exports. Also, the labour-capital ratio is much
higher in MSMEsthan larger industries. Furthermore, they are considered budding
grounds for entrepreneurs, thus encouraging innovation in the country.Hence, it is
imperative to focus on growth in MSMEs that, in turn, would provide a fillip to the
manufacturing sector as well as raise the level of employment. Globalisation has
resulted in several opportunities, such asaccess to supply chains worldwide, for SMEs
and MSMEs. However, forthe sector to reap benefits from the fruits of globalisation,
it is importantto enhance the sector’s competitiveness. One of the options for SMEs
toimprove competitiveness is to adopt the cluster approach, whichaddresses the
18
general problems of taxation, interest rate or FDI policiesas well as harmonises and
simplifies procedures including those related to labour laws.
It is also important to increase the availability of bank credit for the SMEMSME
sector. Even though the sector falls in the category of priority sector lending, only 8
per cent of the total bank credit finds its way in to the sector. This is miniscule given
the fact that almost 95 per cent of the total industrial sector is in the SME – MSME
sector. Apart from encouraging bank lending to the sector, it is also important to look
at other ways of financing in the sector. One way could be the venture capitalist
funding for SME – MSME sector, which is practised in developed countries. Other
option can be better regulation and monitoring of micro finance institutions. Currently
most of the micro finance institutions operating in India are either too small to make
an impact or are operating with welfare motive.
Labour reforms: A multitude of labour laws exist in India. There are 45 Central
Acts and 16 associated rules that directly deal with labour. In addition, other acts
indirectly deal with labour issues. A number of these acts prohibit companies, with
more than 100 employees, from making positions redundant and firing people for any
cause other than criminal misconduct. An additional 45 national laws, intersecting or
derived from the Industrial Disputes Act of 1948, and about 200 state laws control the
relationship between employees and employers10. Rigid labour laws are potentially
restricting the country’s industrial growth and impacting the very workers they are
meant to protect, by preventing large scale flexible employment. Consequently,
companies are increasingly resorting to outsourcing and contracting of labour. Hence,
it is important to harmonise rules across all of these acts to ensure labour laws are
more flexible.
Improve the quality of training imparted in schools and colleges: Apart from labour
reforms, the government is aware of the human capital challenge and has taken major
initiatives such as setting up the NSDC to encourage private
participation/management of ITIs. However, there is scope for further initiatives such
as: (i) to improve the quality of teaching in schools and colleges; (ii) to increase
provisions for vocational training as well as its attractiveness; and (iii) to expand the
availability and feasibility of vocational education for school dropouts.
Enhance labour productivity: Indian companies have made major strides in
improving labour productivity in recent years. Over the last decade, the country’s
labour productivity has increased significantly, but has been lower compared to China.

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Although India has lower wage rates than China, productivity-adjusted wage rates are
equal in the two countries. India needs to make substantial efforts to close this
productivity gap and remain competitive on a global level by focussing on lean
manufacturing techniques and R&D.
CONCLUSION

The ability of the manufacturing sector to absorb excess labour from the agriculture
sector and shift the same to services renders it the driving force in the development
process of an economy. While, the Indian manufacturing sector has witnessed
remarkable growth in recent years; its contribution to GDP and employment is well
below its true potential.
The manufacturing sector would need to play a crucial role for India to achieve its
goal of employment generation. There is a need for strong commitment from the
government as well as the industry for the sector to enter the next orbit of high growth
and employment generation. Also, there is a need for a robust labour policy, which
strikes the right balance between workers’ rights and competitive needs of the
manufacturing sector. Furthermore, it is important to enhance the productivity of the
labour force by enhancing the quality of training. If the National Manufacturing
Policy achieves its objectives, it has the potential to render the manufacturing sector a
driving force in India’s economic development.

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