The new Labour Code on Industrial Relations that was tabled in Parliament last week aims to rationalize the terms under which companies employ people in India, and makes space for a long overdue reform that could ease an old constraint on hiring, and thus spur the generation of jobs. If approved, the code will replace a bunch of socialist-era laws that allowed workers to disrupt work rather too easily and made it nigh impossible for medium and large firms to adapt the size of their workforce to business exigencies. The most notorious of these relics is the Industrial Disputes Act, which stipulates that a manufacturing firm with 100 or more workers cannot dismiss anyone without prior government approval. While India’s economic reforms of 1991 opened up product markets, drew in plenty of investment, and rid companies of various strictures on their operations, the exercise left major rigidities of the labour market untouched—perhaps in fear of a political blowback.

No matter how well-intended, a law that protects formal jobs could have perverse consequences for the country as a whole. Companies that cannot downsize their staff are unlikely to recruit more than the least number needed to conduct their business, preferring to use capital-intensive methods of production even in a country of cheap labour. India’s experience has borne this out. Job availability has been low even as output rose. Corporate India has only been too pleased to deploy machinery designed in the labour-scarce West to minimize the employment of human beings, a trend that has got accentuated in the so-called information age. While markets for products and services became dynamic after the liberalization of 1991, the job market has simply failed to keep pace. Business fortunes have shifted among companies, with some going down and others up, but the permanency of jobs meant that workers could not swiftly get reallocated by market forces from poor performers to ones that could make better use of their skill sets. Policy-warped practices at the level of firms have resulted in overall inefficiency across sectors.

Another effect of the lay-off bar has been the widespread use of labour with temporary contracts or without formal induction. Legally, this falls in a grey zone. The new code, however, proposes to regularize that practice so long as such employees are not deprived of the usual corporate benefits. Crucially, the minimum staff size for retrenchment restriction—100 at present—shall be subject to change via government notifications. This could enable quiet policy shifts that finally grant companies the latitude they need to calibrate their employee strength in accordance with business conditions. If hiring does indeed pick up and the gains of flexibility are clear, it would surely win public approval. Given the current economic slump, though, the risk is that tales of downsizing may draw more public attention. In general, a “hire and fire" paradigm is likely to find far less popular resistance if workers have a safety net. All that India has so far is a rural job guarantee that offers subsistence wages. What the country needs is a universal basic income that even better-off citizens can rely upon in case they are laid off. The prospect of a job loss should never cause panic. It should be seen for what it is: a signal from the market that the skills one has to offer would add greater value to the economy if used by another employer.

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