Missing the point
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In a recent ET Now interview, finance minister Arun Jaitley noted that labour reforms were a delicate area—and justified the government’s lack of progress on this front by arguing that industry reforms such as privatization had not been held up by labour unions.
This is sophistry. The impact of India’s archaic labour regulations goes beyond specific privatization initiatives. Understanding that impact means considering counter factuals such as the potential shape of industry if labour reforms were to be initiated. There is sufficient research that points to the negative effects of restrictive labour laws on companies’ size, with a number of firms adjusting out of regulation by capping their growth below full potential. Corruption arising from evading regulation is another distortion.
Increasing the number of organized sector jobs and improving productivity will require labour reforms. Jaitley is correct that such reforms will be tricky—but the current government with its parliamentary strength is better placed to implement them than any in recent memory.