Question of the week: Do India's recent reform efforts hit the spot?
A: India’s government has been on a reform drive, with parliament passing a handful of laws in recent weeks to liberalise the agricultural sector and the labour market. The new laws are unlikely to have a material impact on the recovery from the Covid-19 crisis, but they have the potential to elevate the economy’s long-run growth prospects. The Farmers’ Produce and Trade and Commerce Bill, for example, will allow farmers to sell their produce without having to go through state-run wholesale markets, which have led to a cartelisation of buyers, depressing farmers’ incomes. Reforms to the inefficient farming industry are long overdue, and any such policies should expedite the structural shift in agricultural labour into manufacturing and services. Crucially, India has the highest share of agricultural sector workers in employment among major emerging markets, and a mere drop to the middle of the global normal range would unlock a staggering 70M in surplus labour overnight.
The passage of four new labour codes should spur a structural increase in demand for workers, once the current recession passes. From the get-go, the codes will help businesses to better navigate India’s labyrinth of labour market rules, consolidating almost 30 of the 40 central government laws that deal with wages, social security, health and safety, and industrial relations. One of the biggest changes is in the 2020 Industrial Relations Code, which will see an increase in the threshold for when firms have to seek government approval before closing down or laying-off workers. The previous, 1947-era law obliges companies with at least 100 employees to do so, reducing their incentives to expand beyond this size; the most recent Annual Survey of Industries showed that over 80% of factories had fewer than 100 workers. The new code raises the threshold to 300, which is critical as the evidence shows that economies of scale kick-in when factories grow beyond the 200 workers. This change is unlikely to be a silver-bullet for manufacturers, though, as the government’s growing protectionism on trade runs opposite to the broad lowering of barriers in Asia.
Senior Asia Economist