For over 25 years, India has been in the process of integrating itself into the global economy through liberalisation of trade and investment. But, unfortunately, India, unlike China, has not yet been able to obtain the full benefit of globalisation through more productive and better paying manufacturing jobs for its large young population. This accounts for the stark difference with China which, starting from the same level in 1990, now has five times the per capita income of India and virtually no poverty.
In the global market for goods and services, there has been a market failure in India as far as low wage manufacturing jobs are concerned, while the market has worked efficiently for high wage IT jobs. The major factor contributing to this paradoxical outcome is that the IT sector units are governed by the Shops and Establishment Act and not the Factories Act. There are over 40 labour laws which regulate factories. These impose too onerous a burden. Large firms can easily deploy the manpower and other resources to meet the transaction costs required for record keeping, reporting and managing the regulatory regime.
Small firms and start-ups find this too heavy a burden. They, therefore, have an incentive to remain small rather than grow. The unfortunate result has been that job growth in the organised sector has been extraordinarily disappointing while it has been taking place in the unorganised sector at a much faster pace. This is the opposite of what happens in any rapidly industrialising economy.
In a market economy, jobs are created primarily by private market participants. If the regulatory regime is coming in the way of job creation by market players, its review and reform should get the highest priority. Long neglected, a beginning was made a few years back with the drafting of four labour codes to consolidate, rationalise and reform the over 40 labour laws. These have been in the public domain and stakeholder consultations have also been undertaken.
Retaining the substance of the present regulatory framework with four simpler codes, which also provide for digital record keeping and reporting, should be easy enough. Introducing credible third party certification should also not be difficult. This easy minimum reform would give great relief. Opposition from the existing labour bureaucracy who would see an erosion of their rent-seeking powers would be natural, but should certainly not be insurmountable.
Viable middle ground
On substantive changes, a viable middle ground between incrementalism and radical overhaul should also not be difficult. One such could be to retain the existing structure and bargaining power of the trade unions but dispense with the need for prior permission for reducing the workforce. But, surprisingly, this key reform of having just four labour codes did not get political priority and no effort was made to enact legislation.
In reform policy discussions, this has not been getting sufficient attention. The underlying premise has been that no government would have the political will to attempt labour reforms as the trade unions would not permit it and they were politically far too powerful. This is an unnecessarily timid view. India has been successfully undertaking major reforms, including the dilution of the fiscal autonomy of the States by amending the Constitution to introduce GST. The organised labour movement has been naturally apprehensive of the import of the American ‘hire and fire’ culture and the emasculation of the trade unions and their collective bargaining power that ‘labour reforms’ connote. It would be useful to look at the social market economy conceptual framework of Germany and the Scandinavian economies, their social welfare systems and lower levels of inequality.
Economic realities have also been changing in India where de facto labour market flexibility has become a reality with the widespread use of contract labour, including by government itself. Since the overwhelming majority of workers are in the unorganised sector, democratic forces across parties and regions have been nudging the polity towards putting in place the basic features of the social welfare state; healthcare, unemployment relief and old age pension.
Unemployment relief in rural areas was provided through MNREGA and there is now some talk of putting in place something similar for the urban areas. Universal healthcare and old age pension schemes have been initiated.
For the organised sector, the paradigm of joint contribution by the employer and the worker has been the universal operating principle from the early days of industrialisation. But in India, this ends up acting as a disincentive for low wage workers and their low profit employers to enter the organised sector.
To encourage employment generation, there have been two strands: one, to increase the threshold of the number of workers over which labour laws would apply, and the other, to give some financial relief to those who generate new jobs.
Social security
But the most radical approach would be to have a state funded comprehensive floor level social safety net covering unemployment (minimum income), universal healthcare and old age pension for all workers in the unorganised as well as organised sectors, exempting both employees and employers from contributions for this and to fund it fully with increases in corporate and personal income tax rates, which are presently far lower than in Northern Europe.
A softer version would be for the state to fully fund employee and employer contributions for wages up to a prescribed level and for employer and employee contributions to kick in thereafter to supplement what the state provides. The benefits of higher productivity of the workforce flowing from a comprehensive social safety net are not adequately appreciated.
The real advantage of this would be to do away with the distinction between the worker in the organised and unorganised sector and to create a regulatory regime which provides for a smooth transition from a micro to small, to medium, and finally to a large enterprise. These are complex issues that need serious discussion. Given the severity of the challenge, radical approaches for job creation are now unavoidable.
The writer is former Secretary, DIPP, and Distinguished Fellow, TERI