Roadblocks to more jobs and less poverty

More often than not, the struggle for reform is a battle against mindsets rooted in the past. In sector after sector, where old and archaic rules have been jettisoned, progress has been quick and benefits palpable. In the late ?80s, no-changers vigorously argued that import liberalisation and deregulation of the foreign exchange market would make India bankrupt and lose its ?self-reliance.? A decade and a half after the reform, the surge in India?s forex reserves has clearly shown that the reality has turned out to be dramatically different than what it was during four decades of import and exchange controls. An India open to forces of globalisation is far more self-reliant than it ever was as a closed economy.

One area where old mindsets continue to thwart India?s progress is the legal framework that governs employment in organised industry. Once again, no-changers continue to argue that any change in the laws that provide strong protection to labour would create unemployment. The reality is perversely different. The fact is that India?s inflexible labour laws have been one of the biggest roadblocks to growth in employment. These laws effectively protect less than 8% of the total workforce and over two-thirds of these are in the public sector. Their resistance to flexibility in conditions of employment continues to block the entry of millions of jobless who yearn to earn two meals a day. The inequity wreaked by this protection of the few at the cost of the majority cannot be more telling.

The Acts that govern employment in India are now relics of a distant past. The Industrial Disputes Act (IDA) dates back to 1947, the Trade Union Act to 1926, and the Factories Act came into existence in 1926. The economic conditions that existed then have long become history, but the Acts remain. For four decades after independence, India remained isolated from the global economy and efficiency and productivity in manufacturing was not critical. A less efficient worker could easily rep-lace an efficient one and nothing changed as a manufacturer could still make a buck in a controlled market. He had little incentive to retain his workforce and could exploit it if he wanted to. Skill formation, training and many of the HR practices aimed at retaining workers that are ubiquitous now did not exist, except in some isolated islands of excellence.

The competitive reality now has unleashed new elements and subjected enterprises to new pulls and pressures that, at times, tend to work in opposite directions. Today, a manufacturer who does not nurture his workforce would be consigned to history by the ruthless forces of competition. With the market consistently demanding better quality at lower costs, a strong partnership between the workforce and management is the cornerstone of success. No employer today can afford to lose an employee who is trained, efficient and a good team worker.

Having said this, it is also true that employers would like to get rid of workmen who are not up to the mark, or reduce the productivity of their enterprise. Further, with increased competition, the risks of doing business have increased manifold and many a time enterprises that are unable to withstand pressures of competition have to either downsize, or close altogether. Businesses that operate in global markets are particularly sensitive to these pressures. Exporters, for example, are susceptible to seasonality of orders even in good times, let alone the periods when they become victims of slumps in the world market.

Not surprisingly, faced with inflexible labour laws, organised businesses, particularly in manufacturing, are reluctant to hire more labour even during phases of expansion. They know that section 5A of the IDA can land them into trouble when the need to retrench, or replace unwilling workers arises. Numerous studies have shown that despite the labour cost advantage that India enjoys, employers resort to labour-saving technologies and capital-intensity in Indian industry has been rising. Our labour laws are one of the key reasons why India has failed to emerge as an outsourcing location for light engineering and other labour-intensive manufactures, such as textiles and apparel. In contrast, China, with its flexible labour laws, has succeeded in creating far more employment in its manufacturing industries than India.

The trends in India?s software and IT- enabled services industry provide a good illustration of what flexibility in labour laws can do and how the current context is radically different from what it was 50 years ago. Without being subject to the Factories Act and the IDA, this sector has emerged as a strong engine of job-creation in the economy. Such is the demand for trained people in call centres that, today, some of our leading BPO operators face an attrition rate of nearly 80%, as employees are being constantly lured away by competitors. A number of BPO companies are so desperate that they are recruiting and training retired citizens and housewives.

A number of other sectors present similar opportunities for creating millions of new jobs, provided employers are assured they are not saddled with employees without work when forced by competition to curtail business. Textiles is the most obvious example. Our apparel makers run fragmented operations, because of rigidities in labour rules. It is a similar case with auto components, leather, food processing and light engineering industries, where global markets and flows of foreign investment seeking low-cost manufacturing destinations present a huge opportunity. India today can seize the global opportunity as China and Asean countries have done in the recent past. The earlier we recast our labour laws, the faster we can reduce poverty.

The writer is an advisor to Ficci. These are his personal views