Rethinking labor law reforms.

Date01 July 2014
AuthorMaira, Arun


"If you don't know where you are going, you will end up somewhere else", warned Casey Stengel, a famous baseball player. India needs to create more jobs. For that, it needs to build a competitive manufacturing sector. The drumbeat of (mostly right-wing, free market) economists and employers asserting that India must change its labor laws to permit easier firing of workers is misdirecting the country from its goals.

Do we want a sustainably strong manufacturing sector, or do we merely want to change our labor laws? We must stay focused on our goals of a competitive manufacturing sector and more jobs and not get distracted by a rather shallow presumption that easier firing of workers will lead to growth of competitive manufacturing enterprises. Let us understand the relationship between these two objectives: one supposedly the means to the other.

At the outset, it must be admitted that change in Indian labor laws is overdue. Many are very old and must be up-dated to suit present conditions. There are too many laws and regulations, sometimes are not implemented properly, perhaps because many cannot be implemented in practice, or because the government machinery to implement them is inadequate. Not only are employers demanding improvements in labor laws, unions are too. We will return to the questions of what the thrust of changes should be and how to bring them about. First, let us examine what is required to grow India's manufacturing sector to create more employment.

Constraints on Growth

Labor laws are not the principal constraint, or even amongst the top three or four constraints on the growth of India's manufacturing sector. Many surveys in the past few years, conducted by several industry associations, consulting organizations, and government commissions have revealed this. The principal constraint, for both large and small enterprises, is the quality of the business regulatory environment. India ranks towards the bottom of the World Bank's rankings of countries for ease of doing business and its position has been slipping. Implementation of business regulations is more corrupt, confused, and tardy in India than in other countries. This deters investments from abroad and from Indian investors too. It especially saps the productivity of small enterprises where the owner has to personally respond to the regulators when he is also the manager of the business to which he must give more attention. Since small enterprises are the largest creators of employment in the manufacturing sector (and account for a large share of its production and exports too), political and bureaucratic capacities (which are constrained too) should be applied to address this number one constraint on the productivity and growth of manufacturing enterprises, and not be distracted towards lower order constraints such as the ostensible difficulties in firing workers.

The second, almost equally large impediment for the productivity and competitiveness of manufacturing enterprises in India is inadequate physical infrastructure for transportation and power supply. Indian IT enterprises are not handicapped by these shortcomings and so many have grown to be world-class competitors. However, manufacturing enterprises have to convert stuff and move stuff, and this requires energy and physical transportation. They are severely handicapped by the poor infrastructure: it adds to costs and delays and reduces their international competitiveness.

The third constraint is the availability of skilled manpower. Since the country's objective is to employ more people in manufacturing, and since skilled persons can also improve the productivity and competitiveness of enterprises they work in, this constraint must be relieved very vigorously. A national skills mission has been launched with impressive targets. It needs much more participation of employers for development of requisite skills: more about this later.

Large enterprises and MSMEs have different constraints. In fact, one of the greatest constraints on the growth of small enterprises in India is the availability and cost of credit, whereas large enterprises do not have a problem obtaining loans from banks and at lower rates than MSMEs (though the cost may be higher than in other countries). The distinction between the needs of large enterprises and SMEs must be always remembered while devising strategies to grow India's manufacturing sector. Too much of attention of policy-makers is given to the views of large enterprises, who get the attention of policy-makers through powerful business associations and directly too, rather than the perspectives of SMEs.

MSMEs and larger...

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