India has one of the highest levels of labour risk in the world (see the graph below); among countries with a similar level of GDP per capita, it has the second highest level of risk. Additionally, India has the highest value of restrictiveness of labor laws in parity with China (you can see this in the second graph). According to the OECD, laws governing regular employment contracts in India are stricter than those in Brazil, Chile, China and all but two OECD countries. A major, but by no means the only, reason for this stringency is the requirement to obtain government permission to lay off just one worker from manufacturing plants with more than 100 workers. It has discouraged the interest of medium and foreign firms to expand and invest (Indian Cases, Economicshelp, 2007).
India and the world. Labour market risk and GDP in 2007 (with data from the Economist Intelligence Unit (2007))
According to International Labour Office (2003), labour risk “occurs as a consequence of the global deficit of decent work that reflects the inequality in different areas of society. The lack of decent work is evident in the employment gap, characterized by widespread unemployment and under-employment. With respect to rights, the lack of decent work is reflected in the widespread denial of labour rights, as well as the lack of social protection, resulting in jobs without social security and secure income.”
The World Competitiveness Year Book (2007) classifies the number of days to start a business in India as a weakness of this economy, and ranks India number 41 out of 61 nations in terms of efficiency of business regulation. The Organisation for Economic Co-operation and Development (2007) identifies India as the country with the most restrictive product market regulations from the OECD countries.
India and the world. Restrictiveness of labor laws and GDP in 2007 (with data from the Economist Intelligence Unit (2007))
Despite the difficulty of appraising the impact of inefficient regulation in economic performance, there is evidence that past reforms and deregulation conducted by the Indian government in different sectors have preceded periods with higher rate of growth. The Economic Survey of India, 2007 provides evidence of the effect of a process of (de)regulation For instance, sectors which regulation has been eased – such as communications, insurance, and information technology – have experienced growth. In addition to this, business performance is better in states with a relatively liberal regulatory environment than in the relatively more restrictive states(OECD, 2008). Critical Reforms in the Indian Economy that have translated into positive economic performance are:
Rupee made fully convertible on trade account as of March 1, 1993 and gradual movement towards capital account convertibility set underway
Abolition of industrial licensing, except in a few ‘strategic’ sectors
Rationalisation of indirect and direct tax structures
Removal of all quantitative restrictions on imports and decontrol of interest rates
Foreign Direct Investment (FDI) allowed in most sectors of the economy, including services. Bulk of this investment allowed through the ‘automatic’ route, not requiring specific Government permissions
Portfolio investments by Foreign Institutional Investors (FIIs) allowed in both equity and debt markets
The Fiscal Responsibility and Budget Management (FRBM) Act enacted in 2003
Foreign Direct Investment (FDI) limits raised in telecom, refining and banking; and permitted in insurance
In this sense, the average Gross Domestic Product (GDP) growth during the period 1992-93 to 2003-04 was a healthy 6.1 per cent as compared to 5.6 per cent during the previous decade. From an international perspective, India figured among the fastest growing economies following the first series of reforms. A trend that the nation has maintained in the last years.
Fastest growing economies between 1990 and 2002 (Source: World Development Indicators 2003, the WB (2004))