The Indian Economy Blog

November 22, 2006

Demographics And Labour Law Reforms

Filed under: Business — Naveen @ 8:07 am

Jo Johnson has a very readable post Engaging India: Demographic dividend or disaster? It focuses on the consequences of not adopting sound economic policies “a good investment climate, in terms of regulation, law and order, physical infrastructure and availability of skilled human capital” in the face of the demographic boom. Quoted below is the part I liked.

… because of strict labour laws, industry is no longer the sink for low-skilled labour that it once was but has gone ultra high tech. … I recently asked Baba Khalyani, … to explain why employment elasticities continue to decline in Indian manufacturing. “Manufacturing jobs will get created but it will not be like before, when unskilled labourers from rural areas got work,” he said. “What makes Indian manufacturing competitive today is technology, not cheap labour. We tried it the other way around before and it didn’t work.” India will need to create jobs in large-scale, labour-intensive manufacturing to stop … protest movements from turning into something more serious. Only when there are massive Chinese-style factories making Barbies, Kickers and Gap shirts for a global market will there be jobs for those potentially otherwise tempted by extremism. Yet to get there will require the government to relax labour laws that penalise large scale manufacturing and that force companies to use expensive labour-substituting technology rather than the cheap manpower that India has in abundance.”

Ever heard of the Law of unintended consequences?


  1. On the topic of the political-economy of India’s growth story, the FT article by Jo Johnson and Sonia Gandhi’s recent warning about the national ‘obsession’ with super-power status [hum superpower kabh banenge?] are a timely reminder of the massive potential for: 1)a backlash against the ongoing cyclical growth uptrend, and 2) a nipping in the bud of an incipient structural underpinning of future GDP growth (the demographic basis of higher labor forces, savings/investment, etc).

    Reform and state sector downsizing have not yet entered the lexicon of popular politics; they are still topics of ‘elitist’ discussion (including IEB). But that could all change sharply as 60+% of our population stagnates in an economic sector that has shrunk to 20% of GDP (and continues shrinking).

    Meanwhile, the health stats and demographic imbalances (north vs. south, and i would add – males vs. females) is quite worrying and nothing to gloss over.


    Comment by Aninda — November 23, 2006 @ 12:02 am

  2. Good one on – Law of UnIntended Consequences. Although – in India’s case it is often intended. Crores are being kept unemployed at the cost of Thousands (Trade Unionism, Labour Laws – the writing is on the wall but mishief makers do not want to read).

    Comment by Apun Ka Desh — November 26, 2006 @ 9:15 pm

  3. [...] Indeed.Would that we saw more of the above, and less of this. For more on labor reforms, read Naveen’s post or Nitin and Ravikiran’s points of view. [...]

    Pingback by The Indian Economy Blog » Markets Work…IF You Let Them, That Is… — December 3, 2006 @ 1:00 pm

  4. [...] In its lead article, the Economist challenges two big notions that have been raised on IEB: one is the idea of the demographic dividend, and the other is the idea that Indian productivity has seen a step-function increase in the early part of this decade. “Many Indian economic commentators say that further structural reforms, though desirable, are not essential to keep the economy growing at 8% or more because of the “demographic dividend”.” Even our own Edward Hugh, perhaps the biggest proponent of India’s demographic dividend that I have come across, probably would not sign on to this. As I have repeatedly stressed here, the Economist is making a political judgment: ‘reforms are essential; and the government (and the, ahem, optimistic economic commentators) don’t realize this.’ “Yes, the economic reforms of the early 1990s spurred competition, forced firms to become more productive and boosted India’s trend—or sustainable—rate of growth. But the problem is that this new speed limit is almost certainly lower than the government’s one. Historic data would suggest a figure not much above 7%—well below China’s 9-10%.” [...]

    Pingback by The Indian Economy Blog » An Overheated Debate About India Overheating — February 2, 2007 @ 9:33 am

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