India unreformed

Every now and then, the Indian state shows itself up as the proverbial leopard that cannot change its spots. By asking General Motors (GM) how it can announce the closure of its Halol plant without following ‘set procedures’, the department of industrial policy and promotion has revived memories of the days of the licence-permit raj, when businesses needed prior governmental approval for everything, from starting a business to how much capital they could put into it or even when they could exit it. If our economy has to grow rapidly and generate jobs, this mindset needs to go. India, despite making some investor-friendly noises and moves, is ranked 142 out of 189 countries in terms of ‘ease of doing business’. It is bad enough that it takes 27 days to start a business in India, as against 5-10 days in many other countries; what’s worse is that the process of exit can drag for months, even years. The government’s reforms push has so far focused on easing procedures for setting up a concern and running it — but reform of the relevant provisions of the Industrial Disputes (ID) Act on closure need to be taken up as well. The law demands that a firm provide 60 days’ prior notice of its intent to close down its unit if it employs over 50 workers, and give reasons for taking such a decision. The latter is a potential instrument of harassment. The Rajasthan government has amended its ID law to say that units employing less than 300 workers, against 100 earlier, need not seek prior government approval for layoffs or closure. Yet, a bigger unit may have to explain why it wants to close down. The law must recognise that a decision to close a factory ought to vest in the unit alone. The government may enquire into whether the workers’ interests are being protected in the event of closure, but its remit should end there.

India’s labour laws, principally the ID Act, Factories Act and Contract Labour Act, have given rise to macroeconomic distortions. First, they have disincentivised units from expanding and reaping economies of scale. Second, large units prefer to substitute capital for labour, which explains the phenomenon of ‘jobless growth’ in recent years. The employment intensity of organised Indian manufacturing is lower than in China and Vietnam.

However, moves to ease the mobility of labour and capital can invite political and social resistance in the absence of a safety net in the form of a higher retrenchment compensation, and more importantly, comprehensive pension, provident fund and insurance cover. A ‘National Renewal Fund’ type of initiative begun by the Narasimha Rao government with World Bank support should be revisited for its potential to redeploy and retrain the existing workforce. The GM episode reminds us of the forces that discourage investment in India, or at any rate compel investors to employ as few workers as possible. It runs against the ‘Make in India’ spirit.