Several months ago, I wrote a column describing the phenomenon of a decreasing number of factories in the organised manufacturing sector in India since the early 1990s. This trend, which I label "dis-establishment", has been visible despite sustained, though briefly volatile, growth in industrial production.
Since that article, which was based on data from the Annual Survey of Industries (ASI) until 2003, I have been exploring this issue from a variety of angles. In this piece, with data available for an additional year, I analyse trends in factories, employment and earnings in organised manufacturing.
To provide a macroeconomic backdrop, industrial production and real manufacturing are going to be 2.6 and 2.5 times their levels in 1993-94, respectively. In 2003-04, the latest year for which ASI data are available, they were almost double their levels of 1993-94.
In that year, the number of factories, having peaked in 1995-96 at 1.1 times its 1993-94 level, remained virtually stagnant from then on, clocking in with a multiple of 1.06 in 2003-04. With respect to the number of workers in these factories though, after peaking in 1997-98 at 1.15 times its 1993-94 level, it declined rather rapidly. In 2003-04, it was only 91 per cent of the 1993-94 level.
This pattern clearly suggests "jobless growth", at least with respect to organised manufacturing, which the ASI covers. Whether this is a structural problem or not remains to be seen.
At least during the period under consideration, it is clear that the manufacturing sector went through a rather intense process of consolidation and rationalisation, which allowed the growth momentum to be maintained through significant increases in productivity. Factories of inefficient scale were shut down, while workforces were downsized. The result, as indicated by the numbers cited above, is that labour productivity increased significantly over the period. In 2003-04, real value added per worker in organised manufacturing was about 1.6 times its level in 1993-94.
But, while this restructuring clearly resulted in job losses, one would normally expect that such a significant increase in productivity would translate into real wage increases for workers who retained employment. However, that was not to be. In 2003-04, the real annual earnings per worker were only 97 per cent of their 1993-94 level.
To summarise the phenomenon of dis-establishment, then: more production coming from fewer factories with fewer workers, whose earnings have remained stagnant. Is it possible that this pattern reflected the transition of the manufacturing sector from a predominantly closed economy to a largely globalised one?
In which case, could one expect to see a reversal of the trend in factories and employment as both industrial production and manufacturing GDP have accelerated since 2003-04?
We will have to wait for further data releases for the number of factories, but there is some evidence from recent corporate financial numbers, which suggest that the pattern in employment and earnings persists. For a large sample of listed manufacturing companies, the share of the total wage bill in value added declined from about 45 per cent in 2002 to about 27 per cent in 2006. The corporate sample is a relatively large subset of the ASI universe, so this trend may be representative of the manufacturing sector as a whole. If it is, the trend of stagnant employment and earnings appears to persist beyond 2003-04.
One possible explanation for this is that the surveys are simply not capturing the increasing complexity of organisational structures and contractual arrangements through which work is being done in the manufacturing sector. Virtually all companies have outsourced several functions, effectively transferring all employees concerned to the service sector. So, we should be less concerned with the number of jobs in a particular sector and look at total job creation to determine whether growth is truly jobless or not.
However, other explanations also need to be considered, particularly if the trend is deemed to warrant intervention. One is the familiar argument that the persistence with job security regulations deters employment growth. Considering that trade unions across the political spectrum are the most significant source of resistance to labour market reforms, they should perhaps look at these patterns while formulating their approach.
The employment and wage numbers suggest that not only is the traditional union constituency shrinking, but those who remain are not seeing any improvement in their economic status. How, then, are unions serving their members?
The second factor is that the current policy framework discriminates against start-ups in the manufacturing sector. In particular, the extinction of the Development Financial Institution model, which was the main channel of funds to new businesses, has left a vacuum.
Start-ups in services have a number of options, but those in manufacturing don't. The stagnation in the number of factories suggests that, while incumbent firms have been able to restructure and rationalise, enhancing their productivity and profitability, there hasn't been much by way of new entry.
I am concerned about these patterns for three reasons. One, I think that the profile of jobs in the manufacturing sector is best suited to the level and variety of skills of a very large number of people in this country. It is quite possible that the unorganised sector is absorbing large numbers even as the organised sector stagnates, but this is not a particularly desirable outcome in terms of protection of worker rights, working conditions or productivity and earnings growth.
Two, even if one accepts the inevitability of restructuring and the impact it has on employment, remaining workers do not seem to be getting any, let alone proportionate, benefits from increases in their productivity. This reflects the weakening bargaining power of workers in organised manufacturing, attributable to the fact that there simply isn't enough expansion in the number of particular categories of jobs available relative to the number of people who are willing to do them.
A related point is that job expansion is more likely to come from new businesses than from incumbents. If the former are hindered, either because of finances or for any other factor, this is one more constraint to employment growth in this sector.
Three, again from the perspective of new businesses, they are typically the primary channel by which product and process innovations enter the market. Although this doesn't seem like a big issue in the current Indian context, perhaps we have lost something by tilting the playing field against them.
The author is chief economist, Crisil. The views here are personal.