Congress president Sonia Gandhi unexpectedly raised a sensitive issue at a closed-door meeting of her party’s parliamentary group recently—the need to reform India’s archaic labour laws. Is there a contradiction between her reported view on labour laws and her more well-known views on the need to protect the interests of the common man?
We argue there is no contradiction. Reforming labour laws will help job-creating industrial expansion. We do not argue for freedom to indiscriminately fire workers, but for a regime that allows for flexibility and simplicity.
That India’s growth has not generated enough jobs is now widely accepted. It is only mass-market-led, labour-intensive manufacturing that can lift the surplus labour, currently subsisting on a saturated rural economy, out of poverty. But, and this is the most unfortunate part, over-regulation and the resulting bureaucracies and rent-seeking behaviour have blocked the growth of a vibrant medium-sized firm segment in the manufacturing sector. In a recent paper based on IDRC-sponsored research, Dipak Mazumdar terms this India’s ‘missing middle’.
It is this segment that undertakes the most labour-intensive production and employs low-skilled labour. But it has faced two important regulatory constraints—one was reservation of industries for small-scale enterprises, which ironically created a disincentive for these to grow. More importantly, the combined effect of 45 national laws and around 170 state laws that constitute India’s labour legislation has hurt this segment the most. The 1947 Industrial Disputes Act, for instance, requires firms employing more than 100 workers to seek state approval before retrenching them—but approval is rarely given. Though the IDA stipulates conciliation, there are few effective incentives for that. Mostly, workers go for adjudication, overcrowding labour courts and tribunals, where the average time for dispute settlement is 10-20 years. Mid-sized firms can’t afford the related high transaction costs. And, while it is true inspections under the Factories Act have been reduced in some states, there’s data on how labour inspectors reduce the number of visits in return for ‘unofficial payments’.
The long-pending amendment that Sonia Gandhi referred to is aimed at simplifying some procedures, and was agreed to by the Cabinet in May 2005. But reference to any labour reform faces strong political opposition. Yet, when the Left says less pro-worker laws would hurt the common man, surely, we need to define the common man beyond the narrow constituency of a formal unionized workforce.
The Prime Minister, too, recently commented that the issue is overemphasized, as 90% of our labour is in the unorganized sector, which is not constrained by “unwieldy laws”. True, but do we want a large informal sector (already disproportionately large compared to East Asia) with relatively low productivity, and a formal sector fettered by uncertainties arising from “unwieldy laws”? Others’ arguments that, in any case, large industries have managed to get around the existing regime are no consolation. These laws have created the incentive for informalization, and research shows the impact of regulatory overburden on the incidence of a shadow economy outside the tax net.
The bottom line: We need a simplified regime that protects incomes, not jobs. A system that allows employers to retrench and provide unemployment benefits, retraining, help in redeployment, etc. and significantly lowers transaction costs should be possible. Is the Left really listening?
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