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Far from Sunny Optimism

Kenneth R. Weinstein

By 2050, India’s economy could be the third largest in the world, surpassed only by China and the U.S., according to a study undertaken by Goldman Sachs. In a 2003 analysis, Goldman Sachs economists Dominic Wilson and Roopa Purushothaman painted a dramatic picture of the future international economy. By 2050, they argued, the combined Gross Domestic Product of Brazil, Russia, India and China (which economist Jim O’Neill had grouped into the acronym BRIC in 2001) could surpass the combined GDP of the current richest economies. Central to the rise of the BRIC, the two economists agreed, would be the rise of India.

Indeed, at the time, India’s trajectory seemed stratospheric. Even when buffeted by the winds of financial crisis in 2007-2008, it managed to sustain growth and helped avert global economic depression. India, many analysts noted, possessed key components of what it would take to become a global economic power: a strong civil society, favourable demographics (including a relatively young workforce), an increasingly educated populace, and vast natural resources. Noting these and other factors, on his first trip to India in 2010, U.S. President Barack Obama declared, “The United States does not just believe, as some people say, that India is a rising power; we believe that India has already risen.”

Impediments to growth

Within four years, however, the situation has changed dramatically. The pace of reform had screeched to a standstill; rather than moving the country forward, the Congress became entangled in mismanagement and a series of corruption scandals, and resorted to economic populism to sustain its rule. Economic growth slowed to below five per cent.

In turn, many of those who had envisioned India’s future as a great economic power saw their projections fail. Far from the sunny optimism of the early 2000s, the country’s turn to failed statism naturally led to large-scale corruption and sclerotic growth.

Today, an opportunity exists for India to reclaim its future. In order to achieve the economic growth its people deserve, it must seize the moment by modernising its labour market.

Some of the current labour market regulations are a legacy of Fabian Socialism and colonial rule; others are a product of postcolonial bureaucracy. Either way, they are a clear disincentive to employment and growth.

Despite a large population, labour participation in the formal economy remains low. Women still play only a disproportionately minor role in the economy, large segments of the population remain cut off from the global market, and government mandates stifle labour sector growth.

In short, the regulatory burden is incompatible with building a modern society. For example, the Industrial Employment Act requires employers to submit information such as work hours and wages to the government ahead of time for approval. Moreover, the Act’s regulations constrain employers by providing little flexibility in updating employees’ work hours, training, or pay. Similarly, the Industrial Disputes Act (IDA) requires businesses to obtain government approval before firing large numbers of employees. In many instances, the process of doing so is lengthy and features copious red tape.

Foreign companies are also discouraged from investing in Indian enterprises by laws like the IDA. As a result, they prefer to take their businesses to other labour hubs that offer greater employment flexibility and fewer regulations.

Reform under way

Yet India’s potential should not be underestimated. As Prime Minister Narendra Modi has emphasised, further reform may be on the way. Moreover, some reform has already begun at the state level, with Rajasthan leading the charge as a regional leader in labour reform. Under the leadership of Chief Minister Vasundhara Raje, the State has passed a number of measures aimed at decreasing corporate regulations that inhibit efficient business practices. This liberalising impulse will make hiring, training, and firing easier for employers.

Whereas in the past the IDA required that government be notified if more than one hundred workers were being terminated, if the Rajasthan reforms are enacted, companies in the future will be able to terminate up to 300 employees without government approval. Moreover, representative trade unions will be held to stricter standards, with worker membership requirements doubling from 15 per cent to 30 per cent. The effect should be a more productive and dynamic workforce.

Rajasthan is also pushing regulatory streamlining through reform of the Contract Labour Act, which aims to put contract labourers on a similar footing as employees; and the Factories Act, which closely regulates operations of factory businesses. In Rajasthan, smaller and mid-sized businesses will be exempt from these regulations, allowing them to compete more effectively in the marketplace.

On a national scale, Bharatiya Janata Party (BJP) leaders hope that Mr. Modi will succeed in strengthening federalism, providing individual States more opportunities for reform. Progressive States like Rajasthan, or Mr. Modi’s own Gujarat, which put in place significant changes under his leadership, will not only be free to move forward with pro-employment measures but hopefully can act as a catalyst for the rest of the country too.

The BJP’s election manifesto promised to focus on national economic reform and development, with an emphasis on manufacturing. In his 2014 Independence Day speech, Mr. Modi invited global economy players to “‘Come, make in India,’ ‘Come, manufacture in India.’ Sell in any country of the world but manufacture here.” In an attempt to capitalise on India’s vast human resources, Mr. Modi also appealed to India’s large youth population.

In order to unleash the potential of the labour force, Mr. Modi has already pushed for a number of reforms, including the doubling of the hourly overtime limit. Also, in order to keep pace with global technological advances, the government has sponsored initiatives to increase Internet access across the nation, thereby augmenting business connectivity and improving technological literacy.

Though India has not lived up to some of its more optimistic development scenarios, its economic potential remains vast. With the right kinds of reforms mobilising its relatively young workforce, it can enjoy a prosperous future.

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