Trends in Employment Growth within Formal Manufacturing Post-Liberalization

When India’s economy opened up in 1991, it set off a chain of changes that reached deep into its factories and industrial floors. The formal manufacturing sector – made up of registered, organised enterprises subject to government regulation – had long been a laggard in job creation. But the decade that followed liberalisation told a different story, at least for a while. Employment figures shifted, industries restructured, and debates about the quality and sustainability of those jobs began in earnest. Understanding what actually happened to employment in formal manufacturing after liberalisation means looking closely at the numbers, the policies, and the structural contradictions that came with them.

The 1980s: a decade of growth without jobs 🔗

Before examining the 1990s, it is essential to understand the baseline. The 1980s are widely characterised as a period of “jobless growth” in Indian manufacturing. Research from the Indian Council for Research on International Economic Relations (ICRIER) notes that despite the manufacturing sector recording value-added growth of around 7.5 per cent per annum through the 1980s, organised employment grew at only about 2 per cent per year – and growth in unorganised manufacturing employment was even slower, at around 1.7 per cent annually. Output was rising, but the jobs were not keeping pace. The economy was expanding in volume, yet workers in the formal sector were not proportionately benefiting.

This stagnation had structural roots. Prior to 1991, Indian industrial policy was built around central planning, import substitution, price controls, and a pervasive licensing regime that restricted private sector activity and foreign investment. These rigid controls limited competitive pressure and reduced the incentive for firms to expand capacity aggressively, which in turn constrained employment creation. The result was an industrial base that was insulated from competition but also largely unable to grow its workforce at the scale the country needed.

The 1991 reforms and the turn toward growth 🔗

India’s economic liberalisation in July 1991 was a decisive break from this model. Triggered by a foreign exchange crisis, the government – with support from the International Monetary Fund – dismantled the industrial licensing regime almost overnight, slashed import tariffs, removed controls on prices and new firm entry, and opened the door to foreign direct investment. As the Association for Asian Studies notes, the economy responded with average annual growth of 6.3 per cent through the 1990s and early 2000s – roughly double the rate of earlier periods.

For formal manufacturing, this policy shift created new conditions. The Industrial Policy Statement of 1991 explicitly aimed to maintain productivity growth, provide employment, and achieve international competitiveness. FDI limits were progressively raised – from 41 per cent in selective industries in 1991 to 100 per cent in some sectors by 1997 – which brought in new capital and, in many cases, new production activity. Non-tariff barriers on manufactured goods fell from 90 per cent in 1990 to just 36 per cent by 1995, dramatically reducing the wall of protection that had previously shielded domestic industry.

Employment growth in the 1990s: a marked acceleration 🔗

Against this backdrop, employment trends in the formal manufacturing sector shifted noticeably. Multiple studies documented by the International Labour Organization – including work by Goldar, Nagaraj, and Tendulkar – reported a marked acceleration in employment growth in the manufacturing sector during the 1990s, along with slower growth in real product wages. This was a meaningful reversal from the stagnation of the previous decade and suggested that liberalisation had, at least in the short run, helped stimulate demand for workers in organised industry.

The role of trade orientation was central to this shift. Export-oriented industries, in particular, were expected to gain from greater access to global markets. When firms produce for export, they face competitive pressure to scale up output efficiently, which typically increases demand for labour. Research on India’s organised manufacturing confirms that increased exports raised demand for workers, especially skilled and female workers, while import-competing industries faced more complex pressures depending on their ability to restructure.

The role of labor flexibility and labor-intensive industries 🔗

One of the key factors that shaped how liberalisation translated into employment gains was labour market flexibility. India’s labour laws have historically been considered among the most restrictive globally. A manufacturing firm employing more than 100 workers, for example, could not lay off workers without seeking government permission, which is rarely granted. This asymmetry – where firms could not easily reduce headcount during downturns – made them cautious about expanding headcount during upturns.

Studies on India’s state-level manufacturing performance consistently found that labour market flexibility, independent of other policies, had a positive effect on productivity and employment. States with more flexible labour market institutions gained more from both trade liberalisation and industrial de-licensing. This means the employment benefits of the 1990s reforms were unevenly distributed – firms and states that could adjust their workforce more easily were better positioned to capitalise on new market opportunities.

The theory underpinning liberalisation’s employment promise was that India, as a labour-abundant economy, would naturally shift toward labour-intensive industries once protected from distortions. Trade theory suggests that when trade barriers fall, countries tend to specialise in products that use their most abundant factor – in India’s case, unskilled labour. This should logically have directed investment toward industries like textiles, garments, leather goods, footwear, and gems and jewellery. ICRIER’s firm-level survey of labour-intensive manufacturing sectors confirmed that these industries – apparel, leather, gems and jewellery, sports goods, and bicycles – collectively represented a significant share of organised manufacturing employment and were important foreign exchange earners for India.

The capital intensity problem: when technology competes with jobs 🔗

Despite the positive employment narrative of the 1990s, a deeper tension was building inside formal manufacturing. Even as some sectors added workers, the broader trend pointed toward rising capital intensity – meaning firms were increasingly investing in machines and technology rather than people. Research published in the Indian Economic Review attributes this to several interacting causes: pro-worker labour regulations that made hiring risky, lower prices of capital goods due to trade liberalisation itself, and rising real wages relative to the real price of capital equipment.

When imported machinery becomes cheaper while labour remains costly and legally difficult to adjust, rational firms substitute capital for labour. This dynamic played out across much of Indian formal manufacturing through the 1990s and beyond. Organised manufacturing employment grew rapidly between 2004 and 2011, but this growth in the organised sector was offset by a fall in employment in the unorganised sector, especially in labour-intensive, export-oriented industries – a pattern that became more pronounced after the 2008 global financial crisis.

Analysis of India’s post-reform trade structure further shows that tariff reductions tended to favour skill-intensive and large-scale industries rather than labour-intensive manufacturing. As a result, the unskilled labour force that forms the vast bulk of India’s workforce was not able to fully benefit from the gains of deeper global integration. Labour-intensive industries faced structural challenges – infrastructure bottlenecks, limited access to finance, skill shortages – that limited their ability to convert trade access into sustained job creation.

Jobless growth: the persistent paradox 🔗

The term “jobless growth” – strong output expansion with weak employment creation – came to define much of India’s formal manufacturing experience across both the 1980s and the post-reform period. Studies examining organised manufacturing employment trends found that, overall, employment growth in the post-liberalisation period was lower compared to the pre-liberalisation period when measured comprehensively. The deceleration was especially sharp in import-competing industries – those that faced direct competition from cheaper foreign goods after tariff reductions – where firms cut costs through mechanisation rather than expanding headcount.

The share of manufacturing employment in India remained far below comparable economies. As of the mid-2000s, manufacturing accounted for only about 13 per cent of India’s employment, compared to 31 per cent in China and 50 per cent in Malaysia. Despite decades of growth, formal manufacturing had not driven the kind of structural transformation that moved large numbers of workers from agriculture into industrial employment – the path that had powered poverty reduction in East Asia.

Scholars reviewing this period also note that the growth in organised sector employment was accompanied by a significant shift toward contract labour and more casual employment arrangements. Rather than creating stable, long-term formal jobs, much of the employment growth in manufacturing came through workers on daily or periodic contracts – what some researchers have described as the “casualisation” of India’s industrial workforce.

What drove the 1990s surge, and why it had limits 🔗

Taking stock, the employment acceleration observed in formal manufacturing during the 1990s was real but conditional. It was driven by several factors working together: the removal of industrial licensing that freed firms to expand; greater access to imported inputs and capital goods that improved production capacity; FDI inflows that brought new activity in certain sectors; and stronger export demand that incentivised output growth in trade-oriented industries. Industrial de-licensing during the 1980s and trade liberalisation from 1991 together contributed to skill upgrading and productivity improvements in formal manufacturing plants, particularly in states with more flexible labour institutions.

But the same forces also planted the seeds of the employment challenge that followed. Cheaper imports of capital goods accelerated mechanisation. Greater competition pressured firms to cut costs, often by substituting technology for labour. The rigidity of India’s labour laws made employers reluctant to hire on permanent terms. And structural bottlenecks – poor infrastructure, limited credit access for smaller labour-intensive firms – meant that the sectors best placed to absorb large numbers of workers could not scale up fast enough.

India’s broader economic trajectory since independence reflects this tension: a highly productive formal sector that employs a relatively small share of the workforce, alongside a vast informal economy where most workers remain. The formal manufacturing sector’s post-liberalisation experience captures this duality sharply – meaningful gains in output and some employment growth, but a persistent failure to generate the scale of formal jobs that a country with India’s workforce size ultimately requires.

What do you think? Given that labour flexibility and labour-intensive industries were both central to post-liberalisation employment gains, why do you think India struggled to fully leverage its comparative advantage in unskilled labour compared to countries like China or Vietnam? And as automation accelerates globally, what does the capital intensity trend in formal manufacturing mean for developing economies still counting on industrial employment as a path out of poverty?

References

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