The Union Cabinet has approved the first tranche of labour law reforms. The Factories Act is applicable on units employing more than 20 workers. This will now be made applicable to units employing more than 40 workers. This law requires factories to adhere to many conditions such as employing workers only in shifts of 8 hours and installing safety guards on moving machines. Freeing small units from the ambit of this law will give a boost to employment.
However, the big ticket reforms have been put in the cold storage—for the present, at least. The Industrial Disputes Act will continue to be applicable to industries employing more than 100 workers. Industries employing more than 100 workers will not be able to close down without first taking permission from the labour department. They will not be free to dismiss workers whom they find to be inefficient. The Contract Labour Act will continue to be applicable to those employing more than 20 workers as at present. The main problems of industries in generating more employment remain unaddressed.
The small industries generate most employment in the country. The cost of production in small units is more due to use of manual machines and due to the absence of highly skilled engineers. They are able compete with large units mainly based on their lower labour costs. They find it extremely difficult to face labour trouble. I was once running a paperboard factory in UP. The workers were paid nearly three times the wages paid to contract workers. They would relax while keeping their hands on bundles of paper that were to be tied. They would retort, “We are doing the work,” when asked by the supervisor. They were not afraid of being dismissed. They would say, “Pray! Do go ahead and dismiss us. We will go to labour court. A lottery will be opened if we win the case. We will suffer nothing if we lose because we would be doing work on our fields anyways.” I could not manage such obstinate workers and the factory closed down. Nearly 150 workers were rendered unemployed.
Considerable evidence is available that easier labour laws help generate employment. Increased enforcement efforts in the case of Brazil led to more unemployment. Doubling of minimum wages in Indonesia led to a two percent increase in unemployment. Labour market reforms in Germany pushed down German wages relative to other countries, thereby increasing German competitiveness. This was one reason that Germany was able to better able to face recession of 2008. Belgium, France, Greece, Italy, Portugal, Spain and Netherlands have made it easier to dismiss workers taking cue from these experiences.
The petty changes in the labour laws approved by the Cabinet fall much short of our needs twice. First, they do not face the main constraints in generation of employment. Two, the proportion of workers employed in the organised sector is very small in our country. Our population is about 120 crores. Of these, about 60 crores would be of working age. Of these, only three crores are employed in the organised sectors. Of these, two crores are government servants. Only one crore are employed in the private sector where these reforms will have some positive impact. Now, say, the numbers employed by the private sector increase from one crore to two crores as a consequence of implementation of these reforms. That will reduce the numbers seeking jobs from 57 crores presently to 56 crores. It will be a drop in the ocean. It is necessary to directly provide stiff incentives to employment to jumpstart the process of employment generation in the organised sectors.
About Rs 40k crores per year is being spent under the Mahatma Gandhi national rural job scheme today. This money may be used to provide a subsidy of, say, 40k per year per new worker employed in the organised sectors. This will provide a huge incentive to the industries to employ workers instead of machines. About one crore jobs would be created. The total amount spent by the Union Government on various welfare schemes including diesel, fertilizer and food subsidies is around Rs 500k crores per year. Providing this money in form or employment subsidy would create 12 crore jobs. The remaining workers in the unorganiszed sectors will also be benefited because of less availability of workers in the unorganised sectors. The problem is too big in our country to be handled by reforms in the labour law alone.
There is a bigger danger lurking around the corner. Studies show that reforms have directly led to reduced employment even if they have led to increase in employment in the economy as a whole. One study found that workers displaced as a result of privatisation in the cashew sector in Mozambique were thrown into a large pool of the already unemployed, and largely remained so. Another study found that workers displaced due to the closure of textile mills in Ahmedabad typically replaced their moderately well-paid formal sector employment with low-income informal sector labour. A bigger issue is reform of the government. The workers in the organised private sector do undertake some work even if they are slow and careless like the workers in the factory I used to manage. The government workers are more often than not wholly idle. One class fellow of mine was employed in a public sector fertilizer factory in Gorakhpur. The factory closed down but at the time of my speaking with him he had been drawing his full salary for full 15 years without doing any work whatsoever! The need is for the Government to make an external assessment of all two crore government servants and dismiss the one percent who obtain the lowest rankings every year. This will improve the efficiency of the government, reduce financial burden and be the path-breaker for implementing reforms in the private sector. Reforms must start at home — in the Government in this instance.
(Dr Bharat Jhunjhunwala was formerly Professor of Economics at IIM Bengaluru)
Bharat Jhunjhunwala
