Reflections 
To mark the achievements of working men and women in India, let us take stock on this Labour Day. We must begin by acknowledging that 83 percent of India’s labour force remains informal, despite 25 years of modest growth in a seemingly liberalized economy.
What makes matters really complicated is our deep-rooted legacy of complex and inflexible labour regulations coupled with easy access to subsidized credit that has led to production technology moving further away from labour intensive towards capital intensive in most sectors of the Indian economy.
We must also accept that advances in robotics, machine learning and artificial intelligence will usher a new age of automation that will challenge existing paradigm of labour market and employment in India, like the rest of the world.
Most jobs created in the high growth period of the last decade have been informal in nature, even in the organized sector. This implies that the benefits of Indian economic growth are concentrated among a few, while there is a growing proportion of the population that have been relegated to living as working poor.
The most authentic estimates of the size of informal labour market in India is from the National Sample Survey. The data shows little has changed over the years in the nature of employment, as size of the informal labour market remained significantly high and predominant in the overall economy. In 2004-05, the composition of organized vs unorganized was 13:87; while in 2011-12 this had changed to 17:83.
The growth in organized employment was, however, overwhelmingly informal in nature. So even within the organized sector of the Indian economy, formal employment declined significantly and informal employment rose with time. Within the unorganized sector, nearly all the increase in employment was, expectedly, informal in nature.
If we dig deeper, we find some troubling truths about our growth story. While share of agriculture in total employment has fallen from approx. 60 percent to less than 50 percent and share of manufacturing remained largely unaffected at approximately 12 percent, it is the share of non-manufacturing sector (construction) which has nearly doubled from 6 to 12 percent and share of services sector which rose from 23 to 27 percent. Informal employment in the non-agricultural sector increased by 27 percent.
Most jobs created in the high growth period of the last decade have been informal in nature, even in the organized sector. This implies that the benefits of Indian economic growth are concentrated among a few, while there is a growing proportion of the population that have been relegated to living as working poor.
Routing wages and salaries away from cash payments and towards formal channels such as bank accounts, electronic and mobile payments will create a formal culture of employment
Ironically, India’s labour laws were fundamentally framed keeping only employees’ interests in mind. Empirical evidence over the decades has identified these very laws as the main culprits that have kept employment in India low and informal despite overall growth in the economy. These labour laws must now be changed to encourage entrepreneurship and to give greater impetus to employment generation. Lack of labour reforms have generally meant multiple labour legislations that deter hiring of labour.
Over the last several years, however, the central government and some states (Rajasthan, Madhya Pradesh, Gujarat and Andhra Pradesh) and have been proactive and lowered the stringency of labour regulations and simplified compliance and procedural requirements.
The empirical evidence on this leads us to a fundamental puzzle: even in those states of India that achieved high labour reform index, the jobs that were created were overwhelmingly informal in nature. The lesson, then, is that labour reforms are a necessary condition, but not a sufficient one. There need to be serious efforts at facilitating a widespread environment that will develop a formal culture of accountability and transparency in India’s labour markets.
The massive digitization efforts in the country led by the central government, across sectors in the economy will facilitate this movement towards formality. Despite high growth, most sectors chose to employ labour informally because it lowered their overall costs of production.
Routing wages and salaries away from cash payments and towards formal channels such as bank accounts, electronic and mobile payments will create a formal culture of employment, but in the process obviously lead to higher costs for firms. But this must be viewed as a correction of a distortion in the labour markets in India. Much like the NREGS which effectively enforced the minimum wages legislation in a labour abundant economy like ours. It is important to remember that India had minimum wage legislations long before the NREGS was conceived, yet its implementation was lacking for obvious reasons of enforcement.
Digitization effort of the government is forcing employers in the country to reconsider employment contracts.
When the flagship rural jobs scheme was implemented across the country, rural wages saw significant increase as a result of this. There is sufficient robust empirical evidence in economics literature to support this rise. We also saw that the wage increase was higher in states where the NREGS was ‘better’ implemented such as in Andhra Pradesh. Everyone who employed rural labour would now have to compete with or match the minimum wages paid at the NREGS worksites.
The private labour market was deeply affected, and this meant that the costs of production rose for most micro, small and medium enterprises in the rural economy if they employed labour. This was a new equilibrium being wrestled between a welfare state enforcing minimum wages in a labour surplus economy, and a rapidly growing private sector that provided jobs and higher incomes to millions of Indians.
While radical labour reforms and greater digitization of labour payments and contracts will make labour markets in India more efficient, the long-term effects of automation need to be addressed
Digitization effort of the government is forcing employers in the country to reconsider employment contracts. There needs to be simultaneous push from the formal financial institutions such as banks, payment interfaces such as National Payment Corporation of India and existing private firms to ease the processes and facilitate adoption of new payment methods. Each firm will have to assess their internal fundamentals to evaluate what the short-term costs of going formal entail. But each firm will also try hard to achieve operational and dynamic efficiency to remain in business in the long run.
While radical labour reforms and greater digitization of labour payments and contracts will make labour markets in India more efficient, the long-term effects of automation need to be addressed. Greater automation of jobs will provide opportunities for the Indian economy to benefit from productivity growth, but we need to put in place policies that will encourage investments and incentivise innovation.
For private businesses, the benefits of automation are relatively clear, but the labour market pressures will raise several challenges for policy-makers. We must evolve and innovate policies that will help Indian workers and institutions to adapt to new employment paradigm. This is likely to include rethinking our education and training policies and designing innovative income support and safety nets.
Dr. Shamika Ravi is a Senior Fellow of Governance Studies Program, at Brookings India and Brookings Institution Washington D.C.
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