Opinion | The latest NSSO report creates opportunity for labour reform

Photo: Priyanka Parashar/Mint
Photo: Priyanka Parashar/Mint

The jobs crisis is a slow cancer but misdiagnosis continues as politicians treat it with quotas, guaranteed income

Demonetization carpet-bombed the economy, while the goods and services tax (GST) created a minefield, arbitrarily killing firms that put a foot wrong. The biggest casualty of this has been jobs. The periodic labour force survey (PLFS), conducted by the National Sample Survey Office (NSSO), reported the unemployment rate at 6.1% for 2017-18—the highest in 45 years. For revealing this terrible news, or rather confirming the reality most Indians were already grappling with, the report has been withheld by the government, leading to much drama with the NSSO. As usual, instead of dealing with the jobs crisis, the Narendra Modi government has shot the messenger.

The crisis is particularly acute for the youth. According to the leaked report, the unemployment rate for young urban men (aged between 15 and 29) is 18.7%. Things are only marginally better for young men in rural areas where the unemployment rate is 17.4%. Unemployment rates among young women (15-29) in urban areas were the worst, at 27.2%. The demographic dividend that India had earned with its large working-age population has turned into a nightmare where almost one in five young men and almost one in three young women entering the labour force cannot find a job in cities.

The leaked report points to the blunders of the Modi government. The PLFS covers the July 2017-June 2018 period and is the first of its scale post-demonetization and post-GST. There is little surprise that demonetization hurt the economy in ways we are still discovering, but loss of jobs is the biggest known fallout of the ill-conceived policy. Demonetization hit the informal sector the hardest, which is usually the only option for unskilled entrants to the Indian labour market. GST imposed very costly formalization on India’s informal and quasi-formal firms resulting in a similar contractionary effect. In India’s complex regulatory system, formalization comes at a high cost, and India’s labour force is paying the price. While India’s regulatory system has always been complex, informality was never attacked with weapons of mass destruction, such as demonetization and a botched GST rollout. During former prime minister Manmohan Singh’s years, unemployment rates were fairly low, reaching their lowest at 2.2% in 2011-12. It seems that Modi did not inherit the acute jobs crisis as much as he created it.

As unemployment rate reached a 45-year high, the labour participation rate also declined. Spikes in unemployment can sometimes be explained by a spike in labour participation rate, where the demand in the labour market is yet to match the increased supply. However, the high unemployment rate combined with declining labour participation is troubling as unemployment rates are not increasing because there is a sudden increase in the entrants into the labour market, but despite people exiting or avoiding the labour market.

The response from the government’s experts is to rubbish the report. They refuse to believe that India can have 7% growth rate without creating new jobs. However, the reality is that for Indian firms to remain cost-efficient and to grow, they must not hire labour. India’s myriad labour regulations have made it exceedingly difficult for firms to hire and fire workers to changing needs. Firms hiring labour are not exempt from the law of demand—as something becomes costlier, one buys less of it. Formal labour contracts become extremely costly and, therefore, only the most skilled workers with the ability to command a high wage are in formal settings. Everyone else, especially the least skilled, must remain in the shadows of the informal sector to be competitive. The government likes to pretend that the laws of economics don’t apply, imposes an enormous regulatory burden on firms, and then admonishes entrepreneurs for substituting labour with capital, creating jobless growth.

That there is a severe jobs crisis in India, especially among the youth, is clear. The solution is also equally obvious—undo the onerous labour regulation. There are about 44 central labour laws, with a few dozen state amendments, that are often inconsistent. Hiring and firing workers, essential to the functioning of a dynamic economy, is made impossible by laws such as the Industrial Disputes Act, 1947, which requires any firm with more than 100 employees to get government permission before firing workers or closing down the firm. The Contract Labour Act, 1970, does not allow firms to hire contract labour at will to meet the changing needs of the firm. This is accompanied by a labour inspection system with weak state capacity, which means that the rules are not well enforced, thus fostering a system of pernicious enforcement and corruption. Consequently, firms either substitute labour for capital, or create informal arrangements, making the labour force more vulnerable. India needs to eliminate the provisions discouraging firms from employing workers and, also, streamline labour regulation.

Often crisis creates an opportunity for reform. The balance of payments crisis in 1991 gave India little choice in liberalizing parts of the economy and unleashing the potential of the Indian economy. The most recent NSSO report rings a similar warning bell and creates an opportunity to pursue labour reforms. Unlike the balance of payment crisis, which was a ticking time bomb that needed to be immediately diffused, the jobs crisis is a slow cancer that will spread to every aspect of the economy and society. However, the misdiagnosis continues as politicians treat the symptoms with reservations and guaranteed income, instead of actually setting India’s employers and workers free. If Prime Minister Modi does not actually tackle the joblessness crisis, he might find himself out of a job.

Shruti Rajagopalan is an assistant professor of economics at Purchase College, State University of New York

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