Recent disruptions to global trade have brought into focus the need for holistic policy reforms in India – aimed at enhancing productivity, innovation, and competitiveness in economic activity. Against this backdrop, this post highlights I4I content pertaining to exit barriers faced by manufacturing firms, India’s data workers in global AI supply chains, and broader challenges that the country faces in creating ‘good’ jobs.

Enabling “creative destruction” in manufacturing 

Writing on strategies for emerging markets within the ongoing global reset involving tariffs, trade diversion, and technology, Sajjid Chinoy emphasises the importance of “letting capital and labour move more seamlessly from sunset to sunrise industries”. In India, however, several institutional barriers exist that make it difficult for unproductive or distressed firms to exit. These include labour laws around firing of workers, red tape, and long-drawn-out and costly bankruptcy procedures. For instance, even in cases where firms are fully compliant and there is no litigation in the mix, voluntary closure takes 4.3 years on average (Economic Survey of India, 2020-21). 

In new research, Chatterjee et al. (2025) hypothesise that these exit barriers are a key reason behind the country’s unusual structural transformation wherein labour abundance has not commensurately translated into labour-intensive manufacturing success. To study the impact of exit barriers on manufacturing firms, the authors exploit the variation in institutional environments across Indian states – with some being more business-friendly than others. A positive correlation emerges between firm entry and exit rates at the state level, implying that when there is greater uncertainty or cost associated with exit, this may also discourage potential entrants. Hence, these settings are characterised by a higher degree of resource misallocation and unproductive firms remaining operational longer than they should. 

Based on a model of firm behaviour and simulation of policy reforms, the researchers conclude that: (i) raising exit rates by reducing direct exit costs alone (via bankruptcy reform) can increase both value-added and employment, making it a more political feasible approach than only reducing firing costs; (ii) the gain from such reform can be amplified by making the supply of capital more elastic, such as through foreign investment; and (iii) if bankruptcy reform is implemented prior to labour regulation reform, overall efficiency can be improved while safeguarding jobs. 

Building a resilient, ethical AI workforce 

According to a recent Forbes India report, India has become one of the world’s fastest growing hubs for data annotation, which refers to the monotonous but essential task of labelling or tagging raw data to make it understandable and usable for artificial intelligence (AI) models. For example, annotators may be required to mark pedestrians in thousands of dashcam images so that self-driving algorithms can tell the difference between a person and an object. Estimates suggest that India’s annotation market could exceed US$7 million in the next five years and employ over a million workers. These workers are typically based in smaller cities such as Patna and Jaipur, rather than the IT corridors of Bengaluru or Hyderabad. 

In her I4I post, Neha Arya contends that “data workers are the backbone of AI systems, ensuring their functionality, accuracy, and safety – ironically while themselves working in precarious, fragmented, and often invisible conditions”. As businesses increasingly rely on gig workers in the AI supply chains to meet cost-efficiency goals, there is a need to mainstream the issues pertaining to the emerging categories of data workers within India’s gig and platform economy. 

To fully leverage AI’s potential to generate decent employment, Arya makes the following policy recommendations: (i) updating the National Classification of Occupations (NCO) to include AI data-related jobs and identifying such work via digital labour registries, (ii) establishing AI-focused skill development hubs and promoting the upskilling of workers, (iii) regulating gig work in the AI supply chain, and (iv) promoting AI-related R&D in an equitable and inclusive manner. In sum, India has both an opportunity and responsibility to connect these low-wage workers with the wider benefits that they generate.  

Spurring gainful employment 

Last month, data from the Periodic Labour Force Survey (PFLS) for July was released by the Ministry of Statistics and Programme Implementation, showing that India’s unemployment rate has fallen by 0.4 percentage points from 5.6% in June. Over the last few years too, the overall unemployment rate has been on the decline among India’s working-age population (15-59 years). 

A new I4I blog based on a Policy Discussion Paper of the Isaac Centre for Public Policy at Ashoka University, notes that despite some positive trends such as the above, there are key challenges to the creation of good-quality jobs in the country. Six insights are provided about the jobs and employment landscape in India today. First, job creation has been unbalanced across economic sectors. The stagnation in manufacturing together with services growth remaining limited to a few segments, has resulted in India having a non-agricultural workforce that is smaller than countries with similar GDP (gross domestic product) per capita. Second, growth in real wages and worker productivity have not kept pace with GDP growth. While workers in the formal sector earn more, on average, than those in the informal sector, the growth in wages has been lower within high-wage, high-productivity jobs. Third, the mismatch between qualification-based aspirations and skill-based job market realities manifests in open unemployment among highly educated youth. In FY2023-24, two-fifths of 15-24-year-olds with at least a graduate degree were out of work. Fourth, the vast majority of the workforce lacks social protection and operates under precarious conditions. Formal jobs typically provide social protection and the share of the workforce employed in formal jobs in India is substantially lower than in other countries with similar levels of GDP per capita. Fifth, although female labour force participation is increasing, it continues to be low and behind other lower middle-income countries like Bangladesh and Vietnam. There are several constraints on women’s work on both the supply and demand sides. Sixth, the rate of structural transformation or the proportion of workforce in non-agricultural sectors varies significantly across Indian states. In terms of regional averages, the West is in the lead, followed by the South and the North, with the Eastern, Northeastern, and Central states lagging. 

To navigate these challenges, the report calls for deliberation on the most impactful solutions to unlock job-rich growth, improve job quality, enhance job-readiness of workers, and expand access to opportunity across regions.