The missing agenda
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In his press conference last week, Prime Minister Manmohan Singh flagged an area of concern: employment in manufacturing has not grown despite high economic growth. This is a longstanding problem in India due to laws that make it difficult and expensive to fire workers and shut down factories. Economic growth has been biased towards services and unorganised industry. India has been unable to fully utilise its enormous labour endowment as a source of growth or benefit from economies of scale.
Changing labour laws, such as the Industrial Disputes Act, is no longer even part of the government's agenda. The last time the government was heard saying it wanted to change labour laws was in Yashwant Sinha's budget speeches in his first two years as finance minister. While the problem of lack of employment growth is not new, its pain is exacerbated during business cycle downturns.
The PMI data on manufacturing shows the Indian business cycle is yet to pick up due to domestic drivers of growth. The clearances given by the government have not yet led to higher investment spending. It is also unlikely that all of these would translate into higher investment, as the balance sheets of companies and of banks have been hit during the crisis years. By all accounts, the improvement seen in the PMI numbers is mainly due to export demand. In the next few months, a pick-up in the US economy will lead to a spurt in exports from emerging economies. But will India be able to take advantage of the growth in US demand? In the years of crisis, the Chinese real exchange rate has appreciated while the Indian rupee has depreciated in real terms. In principle, this could have offered India an advantage as cheaper Indian exports could have substituted for increasingly expensive Chinese exports. But if India does not change its labour laws, it will be unable to take full advantage of the increase in external demand. Unless political parties bring labour laws back on their political manifestos, the next prime minister will also be standing in front of the country and admitting that employment in manufacturing has not grown.
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