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The following OECD assessment and recommendations summarise chapter 4 of the Economic survey of India survey of India published on 9 October 2007.
Economic growth could be made more inclusive by achieving faster growth in regular employment, as opposed to casual and self-employment. Although regular employment has risen, it still represents only 15% of total employment and its growth has been almost exclusively in the smaller, least productive enterprises. Employment in firms with more than ten employees accounts for only around 3¾ per cent of total employment (one quarter of regular employment) and has been falling. Indeed, India has a much smaller proportion of employment in enterprises with ten or more employees than any OECD country. The number of workers has also fallen in the manufacturing sector where the share of labour income in value-added is low compared to other countries and capital-intensity is relatively high. Such developments indicate that India is not fully exploiting its comparative advantage as a labour-abundant economy.
The level of employment protection needs to be reformed in order to increase employment, particularly in larger companies, which are the only ones covered by this legislation, and to remove barriers which hinder firms from exploiting economies of scale. New indicators presented in this Survey show that 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 (but not from establishments in the service sector). On the other hand, the extent of protection for people working on temporary or fixed-term contracts and for smaller firms, all areas where regular employment is increasing, is similar to the OECD average. Moreover, indicators of labour regulations at the state level suggest that states that have introduced reforms have more fluid labour markets. Some reduction in the stringency of employment protection laws is needed and could be balanced by an increase in the extent of accrual-based severance payments. At the same time, a consolidation of the 46 central and around 200 state labour laws should be considered. These reforms would remove an important barrier to the expansion of smaller companies and would increase employment, productivity, real wages and the number of social benefit recipients, as well as facilitating the movement of labour out of agriculture to more productive areas.
Employment protection legislation is strict
Regular employment (restrictions on indefinite contracts)
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations. The complete edition of the Economic survey of India 2007 is available from:
For further information please contact the India Desk at the OECD Economics Department at firstname.lastname@example.org. The OECD Secretariat’s report was prepared in the Economics Department by Richard Herd, Paul Conway and Sean Dougherty, under the supervision of Willi Leibfritz. Research assistance was provided by Thomas Chalaux.