November 11, 2014
Updated: November 11, 2014 01:34 IST
Women still play only a disproportionately minor role in the economy. Picture shows women labourers on their way to work in Kochi. Photo: K. K. Mustafah
Some of India’s labour market regulations are a legacy of Fabian Socialism and colonial rule; others are a product of postcolonial bureaucracy, disincentivising economic growth
By 2050, India’s economy could be the third largest in the world, surpassed only by China and the U.S., according to a study undertaken by Goldman Sachs. In a 2003 analysis, Goldman Sachs economists Dominic Wilson and Roopa Purushothaman painted a dramatic picture of the future international economy. By 2050, they argued, the combined Gross Domestic Product of Brazil, Russia, India and China (which economist Jim O’Neill had grouped into the acronym BRIC in 2001) could surpass the combined GDP of the current richest economies. Central to the rise of the BRIC, the two economists agreed, would be the rise of India.
Indeed, at the time, India’s trajectory seemed stratospheric. Even when buffeted by the winds of financial crisis in 2007-2008, it managed to sustain growth and helped avert global economic depression. India, many analysts noted, possessed key components of what it would take to become a global economic power: a strong civil society, favourable demographics (including a relatively young workforce), an increasingly educated populace, and vast natural resources. Noting these and other factors, on his first trip to India in 2010, U.S. President Barack Obama declared, “The United States does not just believe, as some people say, that India is a rising power; we believe that India has already risen.”
Impediments to growth
Within four years, however, the situation has changed dramatically. The pace of reform had screeched to a standstill; rather than moving the country forward, the Congress became entangled in mismanagement and a series of corruption scandals, and resorted to economic populism to sustain its rule. Economic growth slowed to below five per cent.
In turn, many of those who had envisioned India’s future as a great economic power saw their projections fail. Far from the sunny optimism of the early 2000s, the country’s turn to failed statism naturally led to large-scale corruption and sclerotic growth.
Today, an opportunity exists for India to reclaim its future. In order to achieve the economic growth its people deserve, it must seize the moment by modernising its labour market.
Some of the current labour market regulations are a legacy of Fabian Socialism and colonial rule; others are a product of postcolonial bureaucracy. Either way, they are a clear disincentive to employment and growth.
Also Read: Reforming labour laws, creating livelihoods
Despite a large population, labour participation in the formal economy remains low. Women still play only a disproportionately minor role in the economy, large segments of the population remain cut off from the global market, and government mandates stifle labour sector growth.
In short, the regulatory burden is incompatible with building a modern society. For example, the Industrial Employment Act requires employers to submit information such as work hours and wages to the government ahead of time for approval. Moreover, the Act’s regulations constrain employers by providing little flexibility in updating employees’ work hours, training, or pay. Similarly, the Industrial Disputes Act (IDA) requires businesses to obtain government approval before firing large numbers of employees. In many instances, the process of doing so is lengthy and features copious red tape.
Foreign companies are also discouraged from investing in Indian enterprises by laws like the IDA. As a result, they prefer to take their businesses to other labour hubs that offer greater employment flexibility and fewer regulations.
Reform under way
Yet India’s potential should not be underestimated. As Prime Minister Narendra Modi has emphasised, further reform may be on the way. Moreover, some reform has already begun at the state level, with Rajasthan leading the charge as a regional leader in labour reform. Under the leadership of Chief Minister Vasundhara Raje, the State has passed a number of measures aimed at decreasing corporate regulations that inhibit efficient business practices. This liberalising impulse will make hiring, training, and firing easier for employers.
Whereas in the past the IDA required that government be notified if more than one hundred workers were being terminated, if the Rajasthan reforms are enacted, companies in the future will be able to terminate up to 300 employees without government approval. Moreover, representative trade unions will be held to stricter standards, with worker membership requirements doubling from 15 per cent to 30 per cent. The effect should be a more productive and dynamic workforce.
Rajasthan is also pushing regulatory streamlining through reform of the Contract Labour Act, which aims to put contract labourers on a similar footing as employees; and the Factories Act, which closely regulates operations of factory businesses. In Rajasthan, smaller and mid-sized businesses will be exempt from these regulations, allowing them to compete more effectively in the marketplace.
On a national scale, Bharatiya Janata Party (BJP) leaders hope that Mr. Modi will succeed in strengthening federalism, providing individual States more opportunities for reform. Progressive States like Rajasthan, or Mr. Modi’s own Gujarat, which put in place significant changes under his leadership, will not only be free to move forward with pro-employment measures but hopefully can act as a catalyst for the rest of the country too.
The BJP’s election manifesto promised to focus on national economic reform and development, with an emphasis on manufacturing. In his 2014 Independence Day speech, Mr. Modi invited global economy players to “‘Come, make in India,’ ‘Come, manufacture in India.’ Sell in any country of the world but manufacture here.” In an attempt to capitalise on India’s vast human resources, Mr. Modi also appealed to India’s large youth population.
In order to unleash the potential of the labour force, Mr. Modi has already pushed for a number of reforms, including the doubling of the hourly overtime limit. Also, in order to keep pace with global technological advances, the government has sponsored initiatives to increase Internet access across the nation, thereby augmenting business connectivity and improving technological literacy.
Though India has not lived up to some of its more optimistic development scenarios, its economic potential remains vast. With the right kinds of reforms mobilising its relatively young workforce, it can enjoy a prosperous future.
Also read: A new economic agenda
(Kenneth R. Weinstein is President and CEO of the Hudson Institute, a Washington DC-based think tank.)
Reforming labour laws, creating livelihoods
October 30, 2014
Updated: November 4, 2014 01:23 IST
Mukul G. Asher
INCENTIVISING MANUFACTURING: Encouraging the manufacturing sector through initiatives like 'Make in India' is essential to generate productive employment. File photo from October 2011 shows workers fixing accessories at the Maruti plant in Manesar. Photo: Shanker Chakravarty
A consensus on the outcome-based approach adopted by the Modi government to labour reforms is emerging. As the benefits become apparent, more reforms would become feasible
Prime Minister Narendra Modi’s government has exhibited competence in formulating economic reform measures that are small but likely to have substantial positive impact on reviving growth, generating productive livelihoods, and addressing price rise. The government has tended not to view reforms in a particular scheme or a programme narrowly but has tried linking them with other schemes and programs which could positively impact the desired outcomes and create an environment of trust among the various stakeholders.
These welcome initiatives are also evident in the government’s moves to make labour markets more flexible to address employability gaps effectively. The government is explicitly linking labour reforms to improvement in ease of doing business — setting up the business, operating it as a going concern, and exit norms — so that the available human and material assets can be put to more productive use.
This is evident in the phrase used by the Rajasthan Chief Minister Vasundhara Raje to explain the government’s labour reform proposals — creating “a fertile habitat for jobs creation”.
The labour reforms are also, rightly, linked to improving worker benefits — like providing for a minimum pension under Employees’ Pension Scheme; making Provident and Pension Funds portable; and increasing the maximum work hours. There is also stress on easing the compliance burden for small and medium businesses, like by permitting self-certification in some areas; restricting the powers given to labour inspectors, and by modernising labour laws. Also, various initiatives to increase the skilled manpower include the amendment to the Apprenticeship Act, 1961 which was passed by the Lok Sabha in August this year but is pending before the Rajya Sabha and steps to modernise the governance of the Industrial Training Institutes (ITIs).
“Reforming labour laws to bring about moves such as permitting women to work in night shifts would improve gender equality”
Rethinking MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) to provide skills and create productive assets and perhaps linking it to apprenticeship programs in industry, plantations, and agriculture is also consistent with labour reforms, which encourages labour mobility.
The above approach builds support for the reform process, enhances trust in the government; and develops capacities and consensus for far deeper and wider reforms. It is also consistent with modern growth theory and evidence, and with sound public management principles.
The approach also enables the Union government to experiment with the concept of cooperative federalism where outcomes rather than narrow partisan political considerations govern Union-State relations. The decision to let the States retain revenue from proposed e-auctioning of coal blocks is consistent with this.
Demographically favourable
India is in a demographically favourable phase. This implies that the ratio of working age population to total population ratio is on the increase, leading to a need to provide productive livelihoods to the increasing number of young entering the workforce and also to those who are unemployed or under-employed.
India’s total labour force in 2011-12 is estimated to be about 480 million, only about 40 per cent of the total population. In particular, the participation of women is quite low at about one-third of the working age population — that in the 15-59 years category — while for men it is around four-fifth. Thus, reforming labour laws to bring about moves such as permitting women to work in night shifts, as has been proposed, would improve gender equality and, potentially, the economic growth.
Shifting labour from agriculture to non- agricultural occupations is essential and so is encouraging manufacturing — through initiatives such as ‘Make in India’. India’s employment elasticity was negative for the years 2009-10 and in 2011-12. This cannot be allowed to continue if the country’s economic progress is to be sustained and a certain social cohesion maintained.
Under the current constitutional provisions, labour is a subject in the Concurrent List. Individual States can amend labour laws. The Union government’s role is to forward them to the President. If the President assents, the States are free to implement the amended laws. This is the avenue States such as Rajasthan and Madhya Pradesh are likely to pursue to implement labour reforms. Uttar Pradesh, Himachal Pradesh, and Haryana, are reportedly considering labour reforms to attract investments. Also, with a BJP government having been elected in Maharashtra — an important State in terms of the economy as Mumbai is the financial and commercial Centre of the country — labour reforms are also likely to be initiated there.
This avenue of State initiation-Central consent-presidential acceptance permits initiation of context-specific labour reforms and allows experimentation and flexibility, making the costs of policy reversal less severe. It also encourages much needed accountability on the part of State governments in terms of livelihood outcomes.
As the BJP gets entrusted with the responsibility of governing more States, potential for constructive competition among States to produce the economic, social, and political environments necessary to generate productive livelihood increases. This will also help facilitate the passage of Union government’s labour reform legislation in the Rajya Sabha.
Constitutional amendment
An alternative avenue is to amend the Constitution so that labour primarily becomes a State subject. This merits further research and debate.
A consensus on the outcome-oriented approach adopted by the Modi-led government to labour reforms is emerging. As the benefits, particularly to workers and to businesses, become apparent, greater reforms are likely to become feasible. Here it is essential not to let ‘the best’ be the enemy of ‘the good’, and to keep focus on the 500 million workers in the labour force — not on just the workers who are members of trade unions — and on ease of doing business, particularly for small and medium businesses.
(Mukul G. Asher is Councillor at the Takshashila Institution and a Professorial Fellow at the Lee Kuan Yew School of Public Policy at the National University of Singapore.)
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