Column: India needs a new labour contract

Written by Arindam Bhattacharya | Updated: Mar 2 2012, 07:43am hrs
For the first time, all central trade unions jointly called for strike across the country on February 28. Their main grouse was against the growing contractualisation of work and that the contract workers should be paid at par with regular workers. Is this collective decision by unions representing the organised labour justified How should we view this incidentis it a one-off strike call or reflecting growing labour militancy, even as the economy slows down and companies are faced with margin pressure

The unions have used an emotive issue of contract labour to justify the call for the strike. On the surface, the facts seem to support them. Anecdotal evidence supported by statistics on growth in organised sector employment clearly points to growing use of contract workers who can constitute 50% to 75% of the employees in the manufacturing plants. However, the reason offered for this trend differs depending who you ask. The unions will allege that businesses have adopted this approach to reduce their wage costs and not have to pay statutory dues to the workers. Business leaders, on the other hand, will tell you that they are forced to take on contract workers not so much to reduce wage costs but more to address the rigidities imposed by our labour laws, and out of fear of dealing with larger unions.

This has led to two consequences, one direct and the other indirect. The direct consequence concerns the lack of growth of organised employment in manufacturing sector. While the 1990s saw hardly any growth in manufacturing employment, the last decade saw a growth but only in the unorganised sector. As a consequence, unorganised labour constitutes nearly 90% of the 60 million manufacturing employees, a situation that the unions would clearly like to change. Our Prime Minister pointed this out in a recent speech when he said that there was a need to modernise our labour laws to promote employment.

The indirect consequence has been on labour productivity. To achieve our aspiration of becoming one of the leading manufacturing nations in the world, we have to significantly improve our labour productivity growth from the current level of 3-7% per annum. As a comparison, Chinese manufacturing labour productivity grew annually at 12-13% in the last decade as it became the largest manufacturing country in the world. Having such a large share of contract employees in each plant is a big roadblock to any productivity improvement drive. So, despite a significantly lower wage rate, Indian labour cost adjusted for productivity is still higher than China, which continues to attract higher level of FDI. Ironically, as the Chinese wage rate grows rapidly and population ages in the next decade, India

will have its best opportunity to seize the title of factory for the world from its neighbour.

This raises a fundamental question in my mind. What should be the objectives of our labour policies Is it to

generate organised and fair jobs and improve manufacturing labour productivity, or to protect worker rights through maintaining status quo Unless we openly debate this fundamental question, we will not shake up the mindset that locks us into the status quo. At the same time, we have to also recognise that the labour unions have legitimate fear that changing the laws to make it easy to hire and fire can lead to their misuse. Understanding this fear and addressing it squarely has to be a critical part of any solution. The second mistake we make is to see the labour issue as a simple fight between greater labour flexibility for businesses and maintaining worker rights. It is clear that if we want to break this labour conundrum, we have to look beyond the simplistic description of the problem as labour flexibility versus worker rights trade-off.

To break this compromise, a solution should have four inter-related sets of policies measures. The first set of measures should be focused on driving manufacturing employment. This could include creating mega-manufacturing zones by implementing the proposed National Investment and Manufacturing Zones (NIMZ) in the National Manufacturing Plan (NMP) to policies that make it easier to set up MSMEs through effective micro-credit programmes and institutions that help them reduce cost of compliance. The second set of measures have to focus on improving employability through better training and skill development programmes, which is the core objective for the Prime Ministers National Council for Skill Development (and various ministries with skill development programmes and agencies like the National Skill Development Corporation). The key is to align their activities with the other labour policies and not run them as independent initiatives. The third set of measures should deal with protection of worker rights in an environment where businesses have greater flexibility in managing their labour under changing market conditions. These could include institutional arrangements to provide direct cash support, job-loss insurance and re-training and re-deployment. The final set of measures should be to create a more efficient way to match demand and supply by completely revamping our employment exchanges.

This is not to say that the government has not taken steps in the above four policy areas. However, in my view, these initiatives suffer from two problems. First, they end up as half measures from a two-step forward and one-step back approach, and second, they are often formulated independent of each other, the victim of our governance model where each central ministry and state government seems to go their own way. If we want to achieve the aspirational target of increasing the manufacturing sectors contribution to Indias GDP from 16% to 25% and creating 100 million new jobs as set out in the NMP and articulated by our leaders, we have to break the current mindsets that lock us into the status quo of lack of growth in organised sector employment, low productivity growth and growing labour militancy. A new contract with our labour has become the critical imperative for the country. Neither the industry, nor the government, can do this alone. Together, we have a chance to succeed and stay globally competitive.

The author is managing director, the Boston Consulting Group, India. These are his personal views