Home / Opinion / Columns /  Opinion | Labour restrictions hold the informal sector back too

In the recent hard-hitting movie Ajji, a child is raped near a slum. A local politician’s son is the rapist, and the local police on the beat is both complicit and corrupt. When the family tries to file a complaint, the policeman asks the mother what she does for a living. She says she cooks breakfast for local office goers. Oh, does she have a hawking licence? No. What does the father do? He works in a local garment-making sweatshop, working 15 hours a day. Oh, does the factory have permission for two shifts? Is it paying overtime? It is breaking labour laws and the job itself may be illegal. The policeman threatens to put them in the slammer. They fear for their very livelihood. Thus intimidated, the parents give up their attempt to go through the formal police process. Even a doctor’s service is denied to them. The rapist might go scot free, as he always has. The movie is powerful in its portrayal of a raw reality with all its brutality.

But this small incident in the movie also portrays rather vividly the situation of the working class who live precariously in the twilight zone of legality. They are making an honest living, but have to forever live with the fear of running afoul of the law. More than 90% of India’s workforce is in such a predicament called the “informal sector". It means that their employment, most often, is not covered by a written contract. It does not include health insurance or retirement benefits. Less critical features like a notice period, overtime payment or sick leave are largely absent. The minimum wage law, even when applicable, applies mostly in the breach. This is the unregistered sector.

For the second innings of the National Democratic Alliance government, which just won a thumping majority in the national elections, labour reform is the big-ticket idea. India needs to capitalize on the one big resource it has, which is the size of its workforce. The country’s demography, skilled or not, is its big opportunity. We need to encourage many labour-intensive industries and create jobs on a mega scale. The recently published employment report, after a considerable delay and much controversy, confirms that we are in the midst of jobless growth. Particularly badly hit is the informal workforce and female labour force participation. The impact of demonetization on the informal sector was particularly harsh. Since a majority of the jobs are created in the informal or unorganized sector, how does one energize that sector? Are labour laws the impediment? But they apply mostly to the organized sector, not the informal one, so how can they hinder growth here? For instance, household helps, who are mostly women in many urban households, have practically no labour laws governing their employment. Even a hint of minimum wage legislation for them is likely to meet with stiff resistance. The same is true for most drivers employed without a written formal contract. Incidentally, drivers constitute the single largest profession in annual job creation in India. So clearly, labour laws are not the main hurdle, as also confirmed by surveys of many industries and entrepreneurs.

But this conclusion is wrong. It is not true that since labour laws apply only to the formal sector, they are not an impediment to large-scale job creation. It is wrong for a very obvious reason. Once an organization reaches a particular size, a maze of laws including the Shops And Establishment law, the Industrial Disputes law, the Employment Provident Fund (EPF) law and others begin to apply. Firms choose to remain small mostly to escape scrutiny and the nuisance if not tyranny of these laws and the inspectors who enforce them.

If you draw a chart of the number of firms versus the size of a firm, it reveals a stark story. The curve shows a sharp drop in the number of enterprises above a size of 10 workers. So the labour laws designed to protect labour and create employment have in fact had quite the opposite effect. They kept companies small and they prevented them from exploiting big economies of scale. They kept Indian companies out of large global value chains, which need large-scale operations for relatively low value adding activity. They have proven to be anti-labour. The fear of the proverbial EPF inspector is well known and legendary. Even the incentives of inspectors are perverse. Anecdotally, it is said that an inspector will not leave until he finds a breach. It is as if his aim is to uncover at least one law or sub-clause of a law which has been broken, be it a spittoon spotted in a factory, or the position of a water cooler in an office. This is what’s called the inspector raj.

It is thus imperative that in a country with a large informal labour force, labour laws have to be rewritten from scratch. The law must be a simple code of a few pages that emphasizes welfare and protection of the worker, not the job. The code should allow notions of flexible contracts and hours, three shifts of work both for men and women, possibilities of working from home and contracts with short tenures.

Labour market flexibility is an absolute must for the economy. Just ask Bangladesh, whose labour market indicators are far ahead of India’s. India must be the only country where staffing companies have become large-scale providers of flexible workers. Their growth is a manifestation of the country’s dysfunctional labour laws and they are simply making arbitrage gains on the anomaly. We need light-touch regulation, not rules that empower inspectors and nasty policemen, as shown in the movie.

Ajit Ranade is an economist and a senior fellow at the Takshashila Institution

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