Opinion Putting India to work

The recent violence,arson and a lockout at Orient Craft — one of India’s biggest textile manufacturers — joined the many labour unrest incidents in Gurgaon over the last year: Munjal Showa,Honda,Maruti etc. While each case has unique circumstances it is important that these disputes are not about minimum wages,a safe working environment,or social security. In any labour law reform debate,these three conditions should be non-negotiable. But the flashpoint is the informalisation of work (90 per cent of employment) and the explosion of contract labour (30 per cent of employment but about 50 per cent of non-farm employment). The Gurgaon angst is not about jobs but decent jobs. Decent employment is the single most important factor in an economy; poverty,nutrition,social unrest,consumer confidence and spending,income tax revenues,corporate profits,and a host of other variables depend on it.

But lately,some policy makers are developing a dangerous narrative: 1) labour laws don’t matter for job creation because they are a thorn in the flesh but not a dagger in the heart; 2) labour law reform has already happened because of the transmission losses between how the laws are written,interpreted,practised and enforced; 3) trade unions are Left parties are pro-labour; and 4) corporate India will be the biggest gainer from labour reform; 5) our current labour law regime may not encourage job creation,but it does not have any costs.

This narrative is wrong. India’s arthritic labour law regime has five toxic consequences — breeding informality,capital substitution of labour,sub-scale enterprises,politicisation of trade unions and corruption. India’s labour laws make employment contracts perpetual — the corporate equivalent of marriage without divorce. This means that once you hire somebody you can’t get rid of them even if you can’t afford them,don’t need them or they don’t perform. How many of us would buy a house we can’t sell or sign a lease we can’t end? Employers respond to this asymmetric contract by exploding informality and contract employment.

Recognising fixed term employment would greatly reduce the galloping informalisation that is breeding poor jobs. I work for one of India’s largest staffing companies and disagree with cynics who believe that labour law reform will destroy us because we are a child of regulatory arbitrage and companies will no longer hire contract workers. I am not suicidal; saner labour laws will reduce contract workers from 50 per cent of the workforce to 10 per cent but all of them will have minimum wages,provident funds and employees’ state insurances (ESI). The current 50 per cent contract employment of total employment ratio is a child of three compelling services provided by informal contractors: a) if the employee asks for a permanent job I will break their legs; b) I will make the labour inspector go away; and c) gross salary is equal to net salary with no benefits. Labour laws also encourage the capital substitution and sub-scale enterprises. Employment in private sector manufacturing with more than 10 employees has stagnated for 20 years.

Eighty per cent of our textile output comes from firms with less than 10 employees,while 85 per cent of China’s output comes from firms with more than 50 employees. Rana Hasan of the Asian Development Bank compared 19 manufacturing sectors and showed that capital stock per worker in India is consistently higher than in China. Trade union laws are dysfunctional; they allow roles for professional politicians whose political constituency agenda is unrelated to worker welfare. The criminalisation of politics and the politicisation of trade unions are a combustible cocktail; trade unions must stay worker unions. Finally,these laws breed corruption; one of India’s chief labour commissioners told me that he was trying to enforce the unenforceable. But penal provisions like jail for unenforceable laws mean huge “off balance sheet” settlements.

High emotions and toxic myths around labour law reform mean that the traffic jam can only be resolved in two ways. One,by making labour a state subject — allow chief ministers to craft their own fertile soil for job creation. Just like states in the US that have implemented the right to work have higher manufacturing,Hasan finds that Indian states with higher labour flexibility have bigger firms and more labour intensive industries. Second,by separating the labour law reform agenda into plumbing (definitions,law mergers,competition for EPFO and ESI,fixing the apprenticeship regime,rebooting employment exchanges etc.) and philosophy (permanent versus fixed term employment) and starting with plumbing.

My parents retired to live in Kanpur. This shining citadel of India’s textile power is now an open air museum of tragedy with 5.5 million people,only 10 hours of power a day,and thousands of unemployed. Textile is one of the few labour intensive manufacturing sectors left in India. Converting Gurgaon to Kanpur is not the goal of outdated labour laws,but it can be the outcome,because without employers,there are no employees.

The writer is chairman,Teamlease Services