While the Congress manifesto promises to deepen the revival in India?s manufacturing sector and focus on labour-intensive manufacturing, a research paper by the finance ministry?s chief economic advisor Arvind Virmani says the country?s factory output cannot grow without reforms in archaic and restrictive labour laws.
Virmani?s arguments are expected to give fresh ammunition to the Centre to push ahead with reforms in rigid labour laws?which, according to Prime Minister Manmohan Singh, ?are still hurdles in India realising its chosen destiny.?
Though the UPA couldn?t proceed with any labour law reforms, thanks to its Left fetters during its first innings, the Left?s exit from the UPA and the economic slowdown could give it some leeway to move forward this time around.
The Index of Industrial production (IIP) grew by a paltry 2.4% in 2008-09 compared to 8.5% in the previous year. The manufacturing sector makes up for 80% of the IIP. For the Eleventh Plan period, the Planning Commission has set a target of 12% annual growth in manufacturing in order to attain an average GDP growth of 9%.
?The key to unshackling growth in output as well as employment lies in doing away with the rigidities in labour law,? Virmani notes in a paper, ?Factor Employment, Sources and Sustainability of Output Growth,? co-authored with Danish A Hashim of Indian Council for Research on International Economic Relations. While the authors have said the paper does not represent the views of the ministry, the issues it flags do concern the government.
Labour accounted for 12% of the total output of the manufacturing sector, against 82% by capital in 2000-01.
The input of labour in the manufacturing sector deteriorated to 9% during 1992-01, from 28% during 1973-79
Given that extant labour laws impose more restrictions and higher compliance costs on larger employers, the organised manufacturing sector stayed away from employing labour, increased capital infusion at 4.3% a year till 2001. As a result, the sector accounted for only 13.9% of employment though it provided 75.2% of the total gross value added.
The working paper, part of a series initiated by the department of economic affairs, argues that stringent labour laws have reduced demand for workers in factories. Examining the manufacturing sector from 1973 till 2002, the paper concludes that industry employed more capital as it could not substitute it with labour irrespective of the technological advantages. It also shows that this trend was more acute in the unorganised sector.
Since labour cannot be replaced by capital beyond a point, the growth of production has been consequently affected. The manufacturing sector provides the strongest avenue in the economy for employment of labour, once they migrate from agriculture. The sector accounts for about a fifth of the GDP, but unlike the services sector, it can employ even poorly qualified labour in the production process.
According to the Industrial Disputes Act of 1947, no company employing more than 100 employees is allowed to retrench labour without government permission. Further, the Contract Labour Act forbids employment of contract labour in core activities of the company. There are 43 central labour laws with differing applicability norms and myriad compliance requirements.
In its first innings, the UPA?s Common Minimum Programme had rejected the idea of ?automatic hire and fire? but promised reforms in laws that create an inspector raj . But even simple reform measures to reduce labour law compliance for small firms were scuttled by the Left. While the labour ministry expects no change in the stance on ?hire and fire?, it hopes to make progress on reforms in contract labour. The ministry will seek to ensure social security and retraining facilities for workers before its grants more flexibility to industry on labour.
