Globalisation and Labor Market in India pdf

1 Pratyush Pratap Verma (pratyushorshivam@gmail.com)
GLOBALISATION AND LABOUR MARKET IN INDIA
by Pratyush Pratap Verma
Institute for Financial Management and Research, Chennai
INTRODUCTION
The process of globalisation has its origin in the nineteenth century which was an era of
colonial expansion, scientific discovery and industrialisation. With industrial development,
colonial expansion and technological change, the advantages of the international trade were
realised in many countries. During twentieth century, global interconnectedness continued to
intensify. The number of transnational companies grew, as did the number of transnational
NGOs (Non-Government Organisations). The United Nations grew into an immense
conglomerate of sub-organisations with offices in nearly all countries. International travel and
communication became easier and more common. In the 1960s, Canadian media theorist
Marshall MC Luhan coined the term the global village to designate the new media situation
where especially television was promoting mutual knowledge between people across the globe.
The nature of globalisation may be economic, technological, social, cultural and/or political etc
influencing the related aspects of a country. The following analysis is concerned with economic
form of globalisation.
When we consider economic aspects, the term globalisation mainly implies opening up
of economy for world market by attaining international competitiveness. Thus, the globalisation
of the economy simply indicates interaction of the country relating to production, trading and
financial transactions with other countries of the world. Globalisation of the economy has four
parameters:
1.) Creating environment for flow of capital between the countries.
2.) Permitting free flow of goods by removing or reducing trade barriers between the
countries.
3.) Allowing free flow in technology transfer.
4.) Creating environment for free movement of labour between countries of the world.
Under the concept of globalisation nations were integrated within the framework of
World Trade Organisation (WTO).
In India, with the initiation of various measures of economic reforms since 1991-92, the
globalisation of the economy has made the following changes:

1.) The New Economic Policy (1991) has prepared a specified list of high technology and
high investment priority industries in which automatic permission will be available for
foreign direct investment (FDI) up to 100% of foreign equity.
2.) Encouraging high technology in production.
3.) In order to make international adjustment in Indian currency, rupee was devalued in july
1991 by nearly 20%which also stimulated exports, discouraged imports and raised the
influx of foreign capital.
4.) Indian rupee has been made partially convertible in 1992-93 budget and fully convertible
in 1993-94 budget. Unified market determined exchange rate system was introduced.
5.) All restrictions and controls on the external trade were removed and market forces were
allowed to play a greater role in respect of export and import.
6.) In order to bring the Indian economy within the ambit of global competition, the
government has reduced the custom duty to a considerable extent. (The peak rate of the
customs duty has been reduced from 250 percent to 25 percent in 2003-04 budget)
7.) In order to meet the international competitiveness, the government has taken steps for
correcting its balance of payment deficit and also to increase share of India in
international trade.
Besides globalisation the new economic policy (1991) made provisions for liberalising
the economy against unnecessary controls and regulations. Trade and industry were liberalised
from unwanted restrictions. The new industrial policy (1991) has abolished the system of
industrial licensing for all industrial undertakings except for short list of 18 industries on the
grounds of security, social and environmental concerns. Investment ceiling for small scale
industries and ancillary units was raised from Rs 60 lakh and 75 lakh respectively to Rs. 3 crore
and that for tiny sector has also been raised from Rs 5 lakh to 25 lakh. The new economic policy
also adopted the policy of promoting privatisation. Number of industries reserved for public
sector was reduced from 17 to 8. Priority has been given to modernisation (introduction of
modern technologies in production) of industries. Financial reforms and fiscal reforms (reducing
the fiscal deficit through reducing government expenditure) are also the features of new
economic policy. The efforts to promote international trade and capital inflows were boosted by
the enactment of Foreign Exchange Management Act (FEMA) 1999, which replaced the Foreign
Exchange Regulation Act (FERA), 1973. Major institutions were set up to facilitate FDI
inflows, such as Foreign Investment Promotion Board (FIPB) and Foreign Investment
Implementation Authority. FDI policy is now reviewed on a regular basis and changes in

sectoral policy are notified through Press Notes by the Secretariat for Industrial Assistance (SIA)
and the Department of Industrial Policy and Promotion (DIPP).
In 1997, Indian government allowed 100 percent FDI in cash and carry wholesale and
FDI in single brand retailing was allowed 51 percent in June 2006. Since 2012, the government
of India has pursued significant policy reforms relating to FDI to gain the confidence of both
domestic and foreign investors. Some of the major reforms can be mentioned as :
1.) FDI to 100 percent in single brand retailing and 51 percent FDI in multiple brand
retailing.
2.) Allowing international airlines (up to 49 percent FDI) to invest in domestic airlines
3.) Hiking FDI equity from 49 percent to 74 percent in certain broadcasting sectors
4.) Increasing FDI limit in the insurance sector from the current 26 percent to 49 percent etc.
When globalisation with free flow of capital in the form of FDI and technology became
significant feature of the Indian economy, both pro-globalisation and anti-globalisation lobbies
have arisen in the country. The pro- globalisation lobby argues that:
1.) Globalisation brings about increased competition which makes agents production
more efficient through higher investment and use of advanced technology,
2.) Quality of the products improves,
3.) Opportunities increase for everyone directly or indirectly, to raise income and
standard of living.
The anti-globalisation group argues that:
1.) Certain groups of people who are deprived in terms of resources are not currently
capable of functioning within the increased competitive pressure that is brought
about by allowing their economies to be more connected to the rest of the world.
2.) Traditional, unorganised and small scale industries largely suffer.
3.) High proportion of workers, particularly, uneducated and unskilled become
unemployed.
An attempt has been made in the present paper to find out as to what extent the Foreign
Direct Investment (FDI) and Gross Domestic Product (GDP) have been growing in India during
the recent period of globalisation. It has further been tried to analyse the forces of labour market
and growth of employment as related with growth of FDI and GDP. The problem of excess
labour supply and unemployment has also been discussed. The analysis is based on secondary
data mainly collected from Reserve Bank of India Bulletins, National Accounts Statistics

(Central Statistical Organisation), Economic Surveys of India, National Sample Surveys, Census
of India and Reports of the Director General of employment and Training (Ministry of Labour
and Employment, Government of India) etc.
FOREIGN DIRECT INVESTMENT
The comprehensive reform of FDI policy since 1991 has resulted in a substantial
increase in FDI inflows into India. Foreign investment is considered as one of the very important
sources of capital for investment in a capital scarce developing country like India. The foreign
investment flows include the flow of FDI and portfolio investment. International investment in
terms of FDI creates lasting investment of the investor in an enterprise in another country. FDI is
more difficult to pull or sell off. Consequently direct investors are more committed to managing
their international investment and less likely to pull out at the first sign of the trouble. On the
other hand Foreign Portfolio Investment (FPI), representing passive holdings of the securities as
foreign stocks, bonds or other financial assets are much more volatile than FDI. Unlike FDI, it is
very easy to sell off the securities and pull out of the foreign portfolio.
An Indian company may receive FDI under two routs as given below:
1.) Automatic Route: FDI under this route does not require any prior approval either by the
government or the Reserve Bank. The investors are only required to notify the concerned
regional office of the RBI within 30 days of receipt of inward remittances and file the
required documents with that office within 30 days of issuance of shares to foreign
investors.
2.) Government Route/FIPB Route: Under this route FDI approval is made by three
institutions, viz, the Foreign Investment Promotion Board (FIPB), the Secretariat for
Industrial Assistances (SIA) and the Foreign Investment Implementation Authority
(FIIA). Under the approval route, the proposals are considered in a time-bound and
transparent manner by the FIPB.
The response of foreign investors to the liberalisation of the foreign investment regime
has been very encouraging. Table 1 shows that the FDI has recorded fast growth during the
period of 2000-2001 to 2011-2012. The inflow of total FDI increased from US $ 4029 million in

2000-01 to US $ 8961 million in 2005-06, US $ 22826 million in 2006-07 and 46553 million in
2011-12. During the year 2011-12, the percentage growth over the previous year was 34 percent.
Such growth in FDI has tended to increase production, profits and gross domestic product
(GDP) in India during the past.
Table:1
Foreign Direct Investment in India during 2000-2012
Foreign Direct Investment (in US $ Million)
Financial
Year (April-
March)
Equity Reinvested
Economy
Other
Capital
FDI Flows into India
FIPB
Route/RBI S
Automatic
Route/
Acquisition
Route
Equity Capital
of
Unincorporated
Bodies
Total FDI
Flows
Percentage
Growth
over
Previous
year (in Us
$ Term)
2000-01 2339 61 1350 279 4029 -
2001-02 3904 191 1645 390 6130 (+)52
2002-03 2574 190 1833 438 5035 (-)18
2003-04 2197 32 1460 633 4322 (-)14
2004-05 3250 528 1504 369 6051 (+)40
2005-06 5540 435 2760 226 8961 (+)48
2006-07 15585 856 5828 517 22826 (+)146
2007-08 24573 2251 7679 300 34843 (+)53
2008-09 31364 782 9030 777 41873 (+)20
2009-10 (P) 25606 1540 8668 1931 37745 (-)10
2010-11 (P) 21306 874 11939 658 34847 (-)8
2011-12 (P) 34833 1021 8205 2494 46553 (+)34
Source: Reserve Bank of India Bulletin, March 2013 (11-3-2013, Table No. 34); P =
Provisional
The country has also become an attractive FDI location for the countries of the world
including Asian transnational countries. Table 2 shows the percentage share of top 15 investing
countries in FDI in flows (in total from all countries) in India. The table demonstrates that out of

total FDI inflows in India during 2000-2012 (from countries of the world), the share of
Mauritius was highest (38 percent) followed by Singapore (10 percent). The shares of U.K.,
Japan, and USA ranged between 6 to 9 percent.
Table:2
Percentage share of top investing countries in total FDI inflows from all
countries (during 2000-2012) and the sectors/industries attracting highest FDI
inflows in India
S.No. Share of countries Share of sectors/industries
Top Investing
Countries
% total inflows from
all countries
Sectors/industries attracting highest
FDI inflows
1 Mauritius 37.68 Service Sector 19.00
2 Singapore 10.07 Telecommunications 7.37
3 United Kingdom 9.33 Construction Activities 6.71
4 Japan 7.23 Computer Software and Hardware 6.58
5 USA 6.20 Housing and Real Estate 6.53
6 Neitherlands 4.17 Chemicals 5.78
7 Cyprus 3.76 Drugs and Pharmaceuticals 5.40
8 Germany 2.71 Power 4.29
9 France 1.72 Automobile Industry 3.97
10 UAE 1.32 Metallurgical Industry 3.55
11 Switzerland 1.22 Hotel and Tourism 1.96
12 Spain 0.65 Petroleum and Natural Gas 1.96
13 Italy 0.64 Trading 1.96
14 South Korea 0.59 Electrical Equipments 1.75
15 Hong Kong 0.56 Information and Brodcasting
(including print media)
1.69
16 Other Coutries 12.15 Other Sectors/Industries 22.60
Total 100.00 100.00
Source: Reserve Bank of India Bulletin, March, 2013

Sector-wise FDI inflows in India (for those sectors attracting highest inflows) are further
shown in Table 2. It can be seen from the table that out of the total FDI inflows for all
sectors/industries in the country during 2000-2012, the percentage share of service sector is
highest (19 percent).
Highest proportion of the total FDI inflows have also been recorded in the industries/
sectors like telecommunication, construction activities, computer software and housing and real
estate etc. The analysis shows that there has been a remarkable increase in FDI inflows in India
during 2000-2012 and the quantum of such inflows significantly vary between the sectors and
industries. Globalisation and enhanced FDI is increasing capital intensity and mechanisation of
industries in India.
CAPITAL INTENSITY AND EMPLOYEMENT: THE HYPOTHESIS
Increasing degree of capital intensity and mechanisation of the process of production
during the previous Five Year Plans in India has not generated the required employment
opportunities for those who are seeking and available for work. It has been observed that
Between 1961 and 1976 in the modern factory sector, investment increased 139 percent and
output 161 percent but employment increased by only 71 percent. Therefore, employment per
unit of gross output decreased by 34 percent and employment per unit of capital declined by 28
percent. (Government of India, 1978, Dholakia, 1979). In a survey made at the Development
Commissioner s Office for about 29 industries in which small, medium and large scale factories
operated, it was found that higher capital intensity is negatively associated with quantum of
employment. Table 3 shows that on an average the smaller factories with lower investment in
fixed assets employed 46 persons, the medium and large factories with higher investment
employed only 29 and 21 persons respectively. Empirically speaking, in a comparative estimate
of the economic advancement of the various states in the country, relative prosperity of some
states is sought to be attributed to the growth of the small scale industries in them with lesser
investment of capital (Agrawal and Rao, 1969)
Table: 3
Employement Provided and Investment Made in Fixed Asssets*
in Small,
Medium and Large Scale Registered Factories in India
Type of Industries Employment Provided Investment Made in Fixed
Assets (Rs. in Lakhs)
Small Scale 46 0.85
Medium Scale 29 1.06
Large Scale 21 3.17
*For a contribution of Rs. One Lakh to National Income

Source: Office of the Development Commissioner, Small Scale Industries Organisation,
Government of India, New Delhi, also see Indian Journal of labour economics vol. XI, no.3-4,
Oct. 1968 & Jan. 1969 p.c-17.
On the basis of above observation one can formulate a hypothesis relating to adverse
effects of globalisation and increasing capital intensity (in the industries) on labour market
conditions in India. Such hypothesis is to be tested under the features of recent economic growth
and employment generation in the country.
FEATURES OF THE LABOUR MARKET
The concept of labour market refers to the forces of labour supply and demand for labour
in a particular region or country. These two forces determine the extent of surplus labour or
shortage of labour. If the quantum of labour supply is greater than the demand, the result is that
surplus labour increases the problem of unemployment. The supply of and demand for labour
determine earnings of the workers and other related benefits at the work place. Under the
conditions of surplus labour supply and the limited demand, the workers are afraid of losing
their job and expect difficulties in finding other comparable paid work. They remain silent if
their wages are low and/or their working conditions are poor. Consequently they are exploited.
In this way labour market conditions influence wages, working conditions, social security
measures, industrial disputes, trade union activities, bargaining strength of the workers and
implementation of the labour laws.
India is an underdeveloped country which is characterised by large proportion of poor
people and high percentage of un-utilised or under-utilised manpower. Above 70% of the
working population in the country is engaged for livelihood in agriculture. Indian agriculture is
suffering from disguised unemployment as observed long time back by Prof. Nurkse (Nurkse,
1954). It seems that everyone is employed, but in reality sufficient full time work is not
available for all. Their marginal productivity is zero. Due to poverty and low income, rural
people migrate to cities in search of job in the industrial sector. Availability of employment in
different sectors of urban centres promotes economic condition of the people as well as the
country. With the introduction of policies related with globalisation, foreign direct investment
(FDI) and accompanying economic reforms since 1991, advanced technologies and capital
intensive techniques of production are used in the process of industrial production which reduces
the quantum of employment and many workers lose their jobs. This unutilised manpower is the
loss for the workers as well as for the nation.

For labour supply, both of its quantitative and qualitative aspects are significant. Broadly
speaking the quantity of the labour supply is the function of population size of the region. The
population is divided in three categories:
1.) Who are gain-fully employed or self employed.
2.) Not gain-fully employed and are available for gain-full employment (unemployed).
These two categories taken together form the labour force.
3.) In-active population or out-side labour force.
The qualitative aspect of the labour supply is determined by education, training and
status of health. For professional, technical and specialised jobs, the supply of educated, skilled
and professionally trained manpower is required.
The demand for labour mainly depends on investment of capital and mechanization. The
industries with capital intensive techniques of production and high technologies need smaller
number of workers. On the other hand in traditional and small scale industries lesser amount of
capital is invested and technique of production is labour intensive. These labour intensive jobs
absorb large number of illiterate, uneducated and unskilled workers and help in solving the
problem of unemployment to a great extent in an underdeveloped country like India.
Due to globalisation of the economy accompanied by liberalisation and privatisation, the
capital intensity of the industries is increasing with greater mechanization and high technologies.
This reduces the chances of acceleration of the growth of the employment. Consequently the
contribution of the corporate sector in employment generation is very poor. Although the GDP
growth rate of the country is increasing, the rise of the growth of employment achieved in the
country is far from satisfactory. It has been argued by many that faster economic growth would
not be relevant unless it is job oriented. The globalisation in the 1990s caused large scale labour
retrenchment of labour through VRS (Voluntary Retirement Scheme) in pursuit of high
productivity. With the aim of right sizing of the firms; creation of the new jobs has been
outpaced by the job loss and surplus labour from the formal sector is being thrown out into the
informal. These features (out-sourcing and lay-off) are increasing the informal economy
enormously, so much so, that today labour in the formal sector constitutes just 6% while
informal sector with its already high rate of growth has acquired the enormous size of the 94%
of the labour force.
The advocates of globalisation, liberalisation, privatisation and FDI are of the opinion
that adoption of these reforms will cause increase in the magnitude of unemployment only in the
short run. With the growing flow of FDI as well as domestic private investment, employment
opportunities will increase and the level of unemployment will be reduced in the long period.

This argument relating to the possibility of adequate generation of employment in future has
been examined in the following sections.
GROWTH OF EMPLOYMENT AND GDP
In India, the employment growth has not been adequate in view of a faster growth of
labour force. Employment content of economic growth has shown a decline. Table 4 reveals that
during one decade from 1993-94 to 2004-05, GDP grew at 6.3 percent per annum but annual
growth in employment was only 1.8 percent. During the period of 2004-05 to 2009-10
quinquennnium the GDP growth rate was as high as 9 percent while employment grew at an
insignificant rate of 0.22 percent. The annual growth of GDP which was 5.7 percent during
1988-94 increased to 7.5 percent during 2000-10, while during the same period growth of
employment declined from 2.4 percent (in 1988-94) to 1.50 percent (in 2000-2010). Under the
conditions of the rapidly growing population and labour force in the country, such decline in the
rate of employment is likely to enhance the acute problem of surplus labour supply in the Indian
labour market.
Agriculture, despite a sharp decline in its importance in gross domestic product,
continues to be the largest employer as the non agriculture sectors have not generated enough
employment to effect a shift of work force (Papola and Sahu, 2012). Most of the employment
growth has been contributed by the unorganised, informal sector which is characterised by the
poor wages and poor working conditions. The data published by the Ministry of Labour and
Employment, Director General of Employment and Training demonstrate the employment in
organised sector (both public sector and private sector) increased by only 5 percent during the
long period of 1995 to 2011 with insignificant annual increase (Ministry of Labour and
Employment, 2013).
Table: 4
Growth of Employment and Growth of GDP during 1983-2010 (all
Sectors/Industries)
Period Per Annum Growth of:
Employment GDP*
1987-88 to 1993-94 2.39 5.65
1993-94 to 1999-2000 1.04 6.51
1999-2000 to 2004-05 2.81 5.98
2004-05 to 2009-2010 0.22 9.08
1993-94 to 2004-05 1.84 6.27

1999-2000 to 2009-10 1.50 7.52
* At constant 1999-2000 Prices
Source: i.) NSS data on employment and unemployment
ii.) National Accounts Statistics, CSO, Various Years
iii.) Papola, TS and Sahu P.P., Growth and Structure of employment in India, Institute
for Studies in Industrial Development, New Delhi, 2012
CONCLUSION
Above analysis shows that economic reforms, globalisation, rising FDI, upgradation of
technology in the industries and capital intensive techniques could not generate sufficient
employment to solve the problem of surplus labour in the labour market. With rising FDI, the
increase in employment has been insignificant. The needed attention has not been paid towards
employment content of the economic growth. The study suggests that the policies of
globalisation, encouragement to FDI and use of advanced technology should be formulated
against the background of the characteristics of the Indian labour market. Small scale and
medium scale industries with labour intensive techniques should be established in the small
towns and bigger villages to absorb the surplus manpower of agricultural sector. Strong social
security measures are needed for retrenched workers from the formal sectors. Greater efforts
should be made for human resource development through better educational and training
facilities and promotion of health status of the people so that skilled, healthy and efficient
manpower could be available for higher productivity in different industries.
REFERENCES
Agarwal S. P. And Rao M.S. Prakash. Reorientation of Employment Policy, The Indian
Journal of Labour Economics, Vol. XI Nos. 3 and 4, p. 1-14.
Dholakia J., Growth and Employment , The Indian Journal of labour economics, vol. XXI, no.
4 (1), Jan. 1979, p.21.
Government of India, Planning Commision, Draft Five Year Plan (1978-83), 1978, p.82.
Ministry of Labour and Employment, Director General of Employment and Training,
Employment in Organised Sectors, 2013.
Nurkse R., Capital Formaton in Underdeveloped Countries, Oxford, 1954.
Papola T.S. and Sahu P.P., Growth and Structure of Employment in India (Long Term and Post
Reform Performance and Emerging Challenges), Institute for Studies in Industrial
Development, New Delhi, March, 2012.

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