One area of economic policy that deserves attention and rationalisation concerns the large body of laws and codes that regulate India's labour markets. As of now there are 45 such national laws and over 150 state-level laws. They are meant to control conflict and enhance the welfare of the workers. Given that Indian workers are among the poorest in the world and conflict is endemic in our labour markets, this is clearly a case of legal malfunction.
In India, in the year 2004, there were 482 cases of major work stoppages, resulting in 15 million human days of work loss. Between 1995 and 2001, around 9 per cent of factory workers were involved in some kind of work stoppages. The figure for China is close to zero. On the other hand, wages of Chinese workers are rising much faster than those of India's.
The kingpin of our labour legislation is the Industrial Disputes Act, 1947. This law is a British legacy — it became effective a few months before our independence. With the ostensible purpose of protecting worker interests this law makes it difficult for the manufacturing sector to lay off or retrench labourers. And, through a series of amendments, this provision has been strengthened over the years. A 1982 amendment, for instance, makes it mandatory for firms that employ more than 100 workers to seek government permission prior to retrenching workers.
Some economists have called for changes in this law in order to help industry and boost growth. If this was all there was to it, the case for change would be weak. But I believe that this law is hurting workers, those in the formal and informal sectors.
To understand this suppose that, in order to help banks have more cash, a new law was enacted that made it harder for people to take their money out of banks (they have to give reasons and wait for permission, and so on). This may help in the short run, but is bound to backfire in the long run, because people will now be wary of depositing their money in banks in the first place.
Something similar is happening with employment. Despite the boom in the aggregate Indian economy, the industrial sector is not expanding the labour force sufficiently because of the knowledge that, if the demand for goods drops next year, they will not be able to lay off workers. And on top of the labour laws, our bankruptcy regulation does not help. To satisfy all bureaucratic requirements and close a bankrupt firm takes eight months in Singapore, a bit over two years in China and an unbelievable 10 years in India.
Some commentators have argued that India's labour and bankruptcy laws cannot have much of a consequence, good or bad, since most of them apply to only the formal sector. What they fail to realise is that one reason the formal sector has remained minuscule is these laws.
What is needed is not a law that allows employers to fire workers at will but one that allows for different kinds of contracts. Some workers may sign a contract for a high wage but one that requires them to quit at short notice; others may seek the opposite. This would allow firms to employ different kinds of labour depending on the volatility of the market they operate in. This will increase the demand for labour and, once that happens, workers will be able to bargain effectively and get higher wages.
Much of the debate on labour laws has been misconstrued. It bears repeating that we do not need changes in labour laws and policy to elicit sacrifice from organised labour, as some commentators have suggested. Indian workers, whether in the organised sector or the unorganised, are too poor for that. We need changes in order to create greater demand for labour, which will boost wages and employment.
In brief, we need to move to a system that (1) makes room for more flexible contracts in the labour market, (2) has a minimal welfare net for workers who are out of work, and (3) resolves labour market disputes and bankruptcy cases quickly.
The author is Professor of Economics and Director, Center for Analytic Economics, Cornell University.