Did India’s economic reforms generate jobs? Essays on economic liberalisation, labour market flexibility and employment in the Indian manufacturing sector (1990-2006)

Whether economic liberalisation generates employment in developing countries remains a matter of debate in academic and policy circles. This thesis explores the labour market implications of a series of liberalising product market reforms initiated in India in the 1990s. The analysis of Chapter 2 indicates that declines in input tariffs are associated with increased formal firm employment across all Indian states, while FDI reform is associated with increased (reduced) formal firm employment in states with flexible (inflexible) labour markets (1990-1997). The FDI effect holds for permanent employment in both groups of states but only affects casual (contract) employment to a significant extent in states with flexible labour markets. The evidence is supportive of the baseline results being driven by product market competition within the formal sector. Chapter 3 reveals that tariff liberalisation is not associated with significant changes in employment in informal enterprises, possibly because these enterprises rarely engage in international trade. However, on average and ceteris paribus, delicensing (FDI reform) is associated with statistically significant increases in informal employment and informal enterprise numbers in states with inflexible (flexible) labour markets (1990-2001). There is some evidence that the delicensing effect is attributable to increases in product market competition in delicensed industries in the post-reform period. The mechanism underlying the result associated with FDI liberalisation is more uncertain and could be one or a combination of competition and collaborative linkages between informal and formal manufacturers. Chapter 4 examines the impact of a post-1996 policy reform (‘SSI dereservation’), which liberalised product markets that had long been reserved for small businesses, on employment in informal manufacturing enterprises. On average and ceteris paribus, dereservation is associated with increased employment in larger informal ‘establishments’, but not in tiny household enterprises (1995-2006), attributable in part to increases in product market competition with large formal firms.