LABOUR COMPETITIVENESSSTATES IN INDIA :LABOUR COMPETITIVENESSSTATES IN INDIA Group Members:- 1- Anshi Gupta 2- Amit pal 3- Reshu 4- Pravesh 5-Abhishek


Slide 3:What is Competitiveness? Competitiveness is determined by the productivity with which a nation uses its human, capital, and natural resources. Productivity sets a nation’s or region’s standard of living (wages, returns to capital, returns to natural resource endowments) Productivity depends both on the value of products and services (e.g. uniqueness, quality) as well as the efficiency with which they are produced. It is not what industries a nation competes in that matters for prosperity, but how firms compete in those industries Productivity in a nation is a reflection of what both domestic and foreign firms choose to do in that location. The location of ownership is secondary for national prosperity.


Slide 4:The productivity of “local” industries is of fundamental importance to competitiveness, not just that of traded industries Devaluation does not make a country more competitive Nations compete in offering the most productive environment for business The public and private sectors play different but interrelated roles in creating a productive economy


Slide 5:Innovation and Competitiveness Prosperity Productivity Competitiveness Innovative Capacity Innovation is more than just scientific discovery There are no low-tech industries, only low-tech firms To become an advanced economy, a nation’s firms must move from assimilating technology to creating new technology


Slide 6:Determinants of Productivity and Productivity Growth Macroeconomic, Political, Legal, and Social Context for Development Sophistication of Company Operations and Strategy Quality of the Microeconomic Business Environment Microeconomics Foundation Of Development


Slide 7:A sound macroeconomic, political, legal, and social context creates the potential for competitiveness, but is not sufficient Competitiveness ultimately depends on improving the microeconomic capability of the economy and the sophistication of local companies and local competition


Slide 8:Perspectives on Firm Success Internal External Competitive advantage resides inside a company or in its industry • Competitive success depends primarily on company choices • Competitive advantage (or disadvantage) resides partly in the locations at which a company’s business units are based • Cluster participation is an important contributor to competitiveness


Indian Economic Performance 2004 :Indian Economic Performance 2004 Economic reforms in the post-1991 period have delivered economic growth rates of about 5% annually India’s ranking in the Global Competitiveness Report has improved significantly in the last few years The Indian IT cluster has emerged as leading competitor in the world market, transforming the perception of India as a competitor


Slide 10:However, there are signs that the 1991 reforms are reaching the limits oftheir effectiveness The growth trend has fallen Total factor productivity growth has slowed The public sector’s fiscal position has again weakened International market success is still dominated by a few sectors The disproportionate success of the IT cluster is as much an indication of weaknesses in India's business environment as a metaphor for India overall


Slide 11:Competitiveness Agenda for India Macroeconomic and Social Context The need for public sector reform Integration of social and economic policy Enhancing agricultural competitiveness Microeconomic Business Environment Barriers to competition Weaknesses in physical infrastructure Financial markets Limited cluster development Enhancing India’s innovative capacity Economic Policy-Making Process Shifting roles in economic development Economic strategies at the state level Roles in economic development


Slide 12:Public Sector Reform The Indian public sector accounts for an important part of the country’s modern economy 12m employees of 27m total in the modern economy are public sector Employees Public sector activities have often been used as an instrument of social policy Deteriorating public sector balances threaten macroeconomic stability Current attempts to control public deficits by curbing public investment will have detrimental effects on growth


Slide 13:Economic Policy-Making Process Shifting roles in economic development Economic strategies at the state level Roles in economic development


Slide 14:Barriers to Competition Barriers to foreign competition India’s tariff levels have come down substantially to a 35% average, but are still significantly higher than in peer countries Non-tariff barriers have become more important; India is now the second most proliferate user of anti-dumping measures Barriers to foreign direct investment (FDI) remain substantial and have significantly limited inflows of capital and know how


Slide 15:Barriers to domestic competition The level of bureaucratic red tape, corruption, and regulatory distortions remains high despite recent improvements Government ownership of companies remains widespread,and privatization is moving at glacial speed Corporate boards provide only limited governance Reforms in India need to become far deeper and more widespread to keep pace with reforms in other countries


Slide 16:Other Physical Infrastructure India’s weaknesses in physical infrastructure are as much the result of distortive regulations as of low investment Power supply is scarce and unreliable, with rate regulation reducing the incentives to invest in better plants Railroad infrastructure is deteriorating, and price distortions to subsidize personal travel work against the efficiency of the railroad network for goods transportation Improvements in the regulatory environment would have a significant impact on removing bottlenecks in the physical infrastructure


Slide 17:FINANCIAL MARKETS India’s financial markets have improved over the last five years However, barriers to efficient, market-driven capital allocation remain The majority of financial institutions remains under government control, with weak incentives for efficient credit decisions Targets for credit allocation distort the flow of capital There is no efficient mechanisms for bankruptcy and recovering non-performing loans The spread between interest rates for loans and deposits remains high The rising government deficits crowd out private investments


Slide 18:Levels of private investment in India remain below the levels in peer countries Private companies are reported to be credit-constrained Conglomerate business groups remain a necessary institutional response to financial market weaknesses


Slide 19:REGIONAL ECONOMIC STRATEGIES IN INDIA India has devolved important economic policy responsibilities tothe state level.However, McKinsey reports that 40% of all regulations and government interventions holding back productivity growth are controlled at the state level The recent deterioration of public sector fiscal balances waslargely driven by a few states The last change of the public financing system has further deteriorated the incentives for states to run sustainable budgets India needs to create a policy environment where states have greater capacity and incentives to take charge of their own economic competitiveness


Slide 20:SHIFTING RESPONSIBILITIES FOR ECONOMIC DEVELOPMENT Government drives economic development through policy decisions and incentives Old Model Economic development is a collaborative process involving government at multiple levels, companies, teaching and research institutions, and institutions for collaboration New Model


Slide 21:Role of the Private Sector in Economic Development A company’s competitive advantage is partly the result of the local environment Company membership in a cluster offers collective benefits Private investment in “public goods” is justified Take an active role in upgrading the local infrastructure Nurture local suppliers and attract new supplier investments Work closely with local educational and research institutions to upgrade quality and create specialized programs addressing cluster needs


Slide 22:Provide government with information and substantive input on regulatory issues and constraints bearing on cluster development Focus corporate philanthropy on enhancing the local business environment An important role for trade associations Greater influence Cost sharing


Slide 23:India’s Potential in 2004 The current and announced reforms in India have the potential to move the country far beyond of what has been achieved in the last decade To achieve success, the reforms need to be widespread and sustained Everything matters for Competitiveness Competitiveness is a marathon, not a sprint Progress on competitiveness will also require a new model of joint private-public efforts rather than a government-driven model India has the best opportunity to improve its economic competitiveness in decades; the country can’t afford to squander this opportunity


Slide 24:Rise of globally competitive Indian companies: Reliance Jet Airways Infosys Wipro Ranbaxy Bharat Forge Tata Motors Hindalco HDFC Bank


SOME KEY FEATURE OF THE INDIAN LABOUR MARKET :SOME KEY FEATURE OF THE INDIAN LABOUR MARKET • Labor force estimated at 406 million in 1999-00 • Segmentation and dualism – Organized sector – less than 8 per cent of the labor force and 40% of output – Unorganized sector – agriculture still accounts for an overwhelming majority of employment (60%) and an urban informal sector – Unorganized sector wages and working conditions significantly worse • Business concerned predominantly with organized sector


CONT...... :CONT...... • Growth of organized sector employment very slow compared with GDP growth – Rate of growth of organized sector employment declined between 1983-84 and 1993-94 to 1993-94 to 1999-00 • Growing CASUALIZATION of the workforce increasing proportion of non-permanent employees – Contract labor as a percentage of total employment grew from 7% in 1984 to 21.6% in 1998


BACKGROUND OF LABOUR LEGISLATION IN INDIA :BACKGROUND OF LABOUR LEGISLATION IN INDIA • Labor is a concurrent subject in the Indian constitution • Multiplicity of laws with overlapping jurisdictions • Extensive legislation aimed at long-term employment but unintended consequences (dualism, slow permanent sector employment) • Enforcement of laws very weak • Major legislation includes Industrial Disputes Act, Contract Labor Act, Trade Union Act, Social security (ESI Act and EPF Act)


BACKGROUND OF LABOUR LEGISLATION IN INDIA :BACKGROUND OF LABOUR LEGISLATION IN INDIA • Labor is a concurrent subject in the Indian constitution • Multiplicity of laws with overlapping jurisdictions • Extensive legislation aimed at long-term employment but unintended consequences (dualism, slow permanent sector employment) • Enforcement of laws very weak • Major legislation includes Industrial Disputes Act, Contract Labor Act, Trade Union Act, Social security (ESI Act and EPF Act)


LABOUR LEGISLATION IN INDIA :LABOUR LEGISLATION IN INDIA • Laws applicable to this paper – Industrial Disputes Act • Principal legislation for industrial disputes • Applies to all industries regardless of size • State adjudication of disputes (tripartite system) • Section (V-B) related to lay-offs, closure and retrenchment most contentious in terms of labor market rigidity debate • Firms with more than 100 workers need state government permission before lay-offs, retrenchment and closure • In case of closure, workers entitled to 15 days wages for every year of service • Section V-B amendments – business lobbied for long time for ‘exit policy’


LABOUR LEGISLATION IN INDIA :LABOUR LEGISLATION IN INDIA – Contract Labor (Regulation and Prohibition) Act • Regulates employment of contract labor • Includes measures for prohibition of contract labor where governments consider jobs to be of a perennial nature • With little success in terms of IDA amendments, increasing business demands to amend Contract Labor Act to allow for seasonal increases and decreases • Some state governments have eased contract labor provisions – AP passed law allowing temporary contract labor in core areas and increasing scope of non-core areas – Trade Union Act • Formation and regulation of unions • Ease of formation but no clear rules for recognition of union • No legal compulsion for employers to collectively bargain – Factories Act • Registration and working of factories


LABOUR LEGISLATION IN INDIA :LABOUR LEGISLATION IN INDIA • Employees’ State Insurance (ESI) – Employers and employees have to contribute a certain percentage of monthly income to ESIC to provide for healthcare and benefits in the case of sickness, accident or maternity – Covers all employees earning less than Rs. 10,000 but companies exempt if they are willing to provide greater benefits than required by Act – Healthcare provided through ESI hospitals or designated providers under state government jurisdiction


BUSINESS PREFERENCES AND INFLUENCE ON LABOUR POLICY :BUSINESS PREFERENCES AND INFLUENCE ON LABOUR POLICY • Five aspects of labor policy studied in the paper 1. Labor market flexibility 2. Social security provisions 3. Skills development 4. Reservations or affirmative action in the private sector 5. Unions, collective bargaining and industrial disputes


LABOUR MARKET FLEXIBILITY :LABOUR MARKET FLEXIBILITY • 3 aspects of business demands – Exit policy or ability to close without prior permission (section V-B of the IDA and closure, lay-offs) – Easing of contract labor restrictions including allowing cyclical or seasonal employment – Non-interference in issues such as work hours and firing decisions on grounds of indiscipline


LABOUR MARKET FLEXIBILITY :LABOUR MARKET FLEXIBILITY • Arguments made by business in favor of flexibility – Rigidity of laws has had a perverse effect on employment generation – Rigidity of laws has encouraged sub-contracting and use of contract labor – Undermines competitiveness and rival firms in other countries operate in business-friendly environments • Increased social security provisions in return for flexibility


Slide 35:India’s Average Annual Real GDP Growth Colonical Post Independence Reform Period Period Period 1901-1950 1951-1981 1981-2003 1.0 3.5 6.0


Slide 36:Population Growth (%) 1901 – 1950 1.0 1951 – 1980 2.2 1981 – 1990 2.1 1991 – 2000 1.8 2001 – 2010 1.5


Slide 37:Literacy (%) 1950 17 1990 52 2000 65 2010 80 (proj)


Slide 38:Middle Class % Million People 1980 8 65 2000 22 220 2010(proj) 32 368


Slide 39:PEOPLE BELOW THE POVERTY LINE 1980 46% 2000 26% 2010 (proj) 16% 1% of the people have been crossing poverty line each year for 20 years. Equals 175 million.


Slide 40:100 Year Trend Colonial Post Independence Reform Period Period Period 1901-1950 1951-1981 1981-1990 1991-2000 GDP growth 1.0 3.5 5.6 6.2 POPULATION 1.0 2.2 2.1 1.8 growth PER CAPITA 0 1.3 3.5 4.4 growth


Slide 41:FUTURE Colonial Post Independence Reform Future Period Period Period Period 1901-1950 1951-1981 1981-1990 1991-2000 2000-2010 GDP growth 1.0 3.5 5.6 6.2 7 POPULATION 1.0 2.2 2.1 1.8 1.5 growth PER CAPITA 0 1.3 3.5 4.4 7.5 growth


LOW COST &SKILLED LABOUR :LOW COST &SKILLED LABOUR INDIA: ONE OF THE LOWEST LABOUR COST IN THE WORLD Maharasthra:Has one of the best available skilled labour force in textile due to the exixtance of traditional textile centers- Mumbai,Sholapur, amrawati etc. Given the need for grater automation, how should the indudtry channelise the skill-base


Slide 43:DEFINATION ‘Economically active children’ covers all economic activities carried out by persons with less than 18 years old, regardless of their occupational status, that earn a wage and/or generate an output that is marketed (wage-earners, own-account workers, unpaid family workers, etc). – It does not include household work, except when it can be assimilated to an economic activity – e.g. if a child works full-time in household chores,so that parents can go to work. Child Labor is a narrower concept than “economically active children”, – It excludes all those children 12 years and older who are working only a few hours a week in permitted light work and those 15 years and above whose work is not classified as “hazardous”.


Causes of Child Labor (SUPPLY) :Causes of Child Labor (SUPPLY) POVERTY – Subsistence (CL may contribute up to 20% of household income). – Credit constraints – Low education of parents. • “According to one study, parents represent 62 percent of the source of induction into employment. Children make their own decisions to work only 8 percent of the time (Syed et al. 1991). Parental education plays a large role in determining child schooling and employment (Tienda 1979).” TRADITION AND NORMS • In certain countries women will not fit into traditional roles if they become educated (Bequele and Boyden 1988). Many families raise daughters for the household duties, to release the mother for paid labor.


Slide 45:• HIGH COST / LOW RETURNS OF SCHOOLING – Poor quality of schools and prospects after education lowers (private) returns to schooling. • But social returns may be larger than private returns: “School provides children with guidance and the opportunity to understand their role in society.” – Child labor as an apprenticeship • Evidence shows that early entrance into labor force does not imply greater earnings through life (Galli, 2001)


CAUSES OF CHILD LABOUR(DEMAND) :CAUSES OF CHILD LABOUR(DEMAND) LOWERING LABOR COSTS – CL receive wages that are 50% below adults • Productivity differentials are unlikely to compensate for this. • However, ‘piece rate’ payment is often the norm (e.g. Sialkot) - in this case there is no cost advantage. – Children are less aware of their rights and more innocent


Slide 47:• SPECIFIC SKILLS OF CHILDREN: “NIMBLE FINGERS” – Studies do not confirm this theory at a large scale. In most cases, there is evidence of substitutability between Child and Adult labor, albeit at a greater cost. • TRADITION AND NORMS – Some entrepreneurs feel compelled to provide jobs for the community


CHILD LABOUR & SCHOOLING: A Complex And Unclear Relationship :CHILD LABOUR & SCHOOLING: A Complex And Unclear Relationship • According to UNESCO, of their respective age groups, 20% (128 million) of children in the world do not get primary schooling; and 50% do not get secondary. • Studies made in Ghana, India, Indonesia and Senegal showed that 1/3 of children work as a principal activity, while the remainder works as a complement to school • A study in Bolivia found that children who were not employed had the lowest educational achievement (UNICEF 1992). • Another study found that only 20 percent of children who dropped out engaged in paid employment (Seetharamu and Devi 1985).


Consequences of child labour :Consequences of child labour • LOWER SCHOOLING – There is evidence that CL keeps children from school and reduces the productivity of those that go to school (substitution). – But this relationship is subject to the availability, low price and quality of schools. – On the other hand, education costs are often only affordable through CL (complementarity). • HIGHER FERTILITY – “A possible reason parents in developing countries have children is because they can be profitable.” (Siddiqi and Patrinos, 1995) • Low Wages for Adults – Studies (in Egypt and Philippines) do not confirm this theory. • Human and social rights of children These effects tend to reinforce poverty!


Slide 50:CHILD LABOUR & CYCLE OF POVERTY LOW EDUCATION HIGH FERTILITY LOW ADULT WAGES CHILD LABOUR POVERTY Policies to stop child labour(and break the vicious cycle) Policies to promote growth and fight poverty


Slide 51:• Child labor has deep economic drivers, mostly on supply side – Poverty (Public Health, Help parents at work, Supplement income) – Low (private) returns, low availability, and high cost of schooling – Demand factors (competitiveness, exploitation) are secondary (?)


Slide 52:THANK YOU