As you go through life brother, whatever be your goal, keep your eye on the doughnut and not on the hole”, is sage advice. Poverty is the hole in India’s growth story. Much attention is given to its measurement. The best way to keep people out of poverty is to give them decent jobs. Good jobs are the doughnut that policymakers must focus on to reduce poverty rather than hand-outs to people stuck in the hole. Lately, attention has begun to shift to the doughnut with concern about inadequate growth of jobs in spite of impressive gross domestic product (GDP) growth in recent years. For what use is GDP growth to the poor and youth if they cannot be included in it by good jobs?
Manufacturing has not grown commensurate with India’s impressive GDP growth in the last 10 years. Manufacturing must grow much faster to create 100 million jobs in the next 15 years. The principal goal of the New Manufacturing Policy is not to make manufacturing 25% of India’s GDP, which could be achieved with large capital-intensive plants, but to create more jobs. Therefore, implementers of the policy should keep their eye on the doughnut—the rate of job creation, rather than the percentage share of manufacturing to GDP.
Youth must be skilled to be employed. Therefore, the national mission to provide skills to 500 million persons in the next two decades had become imperative. However, there is no use in skilling people if they cannot get jobs. Much more attention must be given to stimulate growth of productive enterprises that will employ more people. Small and medium enterprises (SMEs) are job-making machines. They create more jobs per unit of capital and are more widely dispersed across the country than mega projects. Policymakers must focus on fostering more SMEs and on relieving the constraints on their growth into larger enterprises. A survey of 45,000 firms in 106 developing countries, published in the IFC Jobs Study, revealed that labour market regulations were mentioned by only 3% of the firms as obstacles to job creation, far behind factors such as deficient infrastructure, access to finance and weakness in skill training. Surveys in India reveal that the greatest constraint on the growth of SMEs is the availability of credit. Other big constraints are space for production, power and transport infrastructure, and skilled manpower.
Nevertheless, let us focus on labour laws. They do matter too. Many of our laws are antiquated. There are too many. And they are generally badly administered. Therefore, they must be reformed. The unions are demanding reform of labour laws. They want more safety for workers, more equity within enterprises (which is distorted by the vexatious practice of employing contract labour in large numbers), and social security for all employees including those in the informal sector. Thus, contrary to the impression that unions are only concerned about their own highly paid members, they are taking up the causes of employees in general, especially informal sector and contract workers who are not their members.
Employers also want reform of labour laws. Their demands are often expressed as more freedom to hire and fire. This is changing. The World Bank’s Doing Business Report, comparing regulatory conditions across countries, included an employing workers’ indicator until 2010. Until 2007, this indicator was even called the hiring and firing workers indicator. However, it was found to be a one-sided view of labour regulation and since 2010 this indicator has not been included in determining the rankings of countries.
Growth of employment requires growth of competitive enterprises. Improvement of competitiveness of enterprises requires improvement of their total factor productivity (TFP). Improvement of TFP comes from improvement of management and operational processes. Improvement of processes requires an engaged workforce and collaboration amongst management and workers. Moreover, continuous improvement of processes with participation of workers sharpens and upgrades their skills. Thus, as several international studies have shown, including a recent study in India by the Planning Commission, there is a “win-win” situation for both employers and employees when there is continuity of employment, with employees considered as “appreciating assets” on the balance sheets of enterprises, rather than mere costs on the profit-and-loss account to be quickly hired and fired.
Even though it is not amongst the top constraints on growth of manufacturing enterprises, reform of labour laws is necessary. Overdue labour reforms in India must meet the needs of both employers and employees. The key to labour reforms is collaboration, rather than confrontation. While withdrawing the employing workers’ indicator from the Doing Business Report, the World Bank said a comprehensive approach to labour market policies is needed. Rather than demonizing each other, employers and unions must engage with each other to determine a composite agenda for reforms, and work as partners to implement them. Rhetoric about labour laws is the hole in which Indian labour reforms have been stuck for 20 years. Processes for building trust within enterprises are the doughnut that Indian employers, unions, and policymakers must focus on for India to grow manufacturing enterprises through improvement in their TFP and international competitiveness.
Arun Maira is a member of the Planning Commission.