THE DETOX: 12 Steps To Fix India’s Economy
Bad labour laws and misplaced concessions have dented India’s manufacturing sector
By Jaithirth Rao
THE STORY of India’s political economy has a big dead elephant in the middle of the room, which we all try not to talk about. It is the strange set of labour laws that we have. The Industrial Disputes Act, the Bombay Industrial Relations Act and so on, are not only antiquated, but anti-poor and harmful for the country. These laws have been maintained and manipulated for shortterm, political convenience of those in power — they do not exist for the benefit of labour or for the welfare of the unemployed, under-employed, temporarily employed and other marginalised sections of our population.
As early as the 1950s, labour leader VV Giri resigned from the Union Cabinet because the government of the day was not promulgating fair and transparent labour legislation. We never introduced the concept of secret ballots and fair elections for labour unions. Instead, we created an executive Czar called the Labour Commissioner who was required to “verify” union support and membership. This sleight-of-hand mechanism enabled the Congress party and its affiliated union, the Indian National Trade Unions Congress (the INTUC), to gain an upper hand in situations where they would have lost in free elections.
The concept of the padrone-client relationship, the essence of clientelism, was introduced into the labour arena. Unions and union leaders were promised occasional goodies and the protection of an overarching political party, if they adhered to the patron’s wishes. The devil’s pact included a tacit agreement not to bother about the rights and needs of the non-unionised workforce and to bother even less about the unemployed. The result has been the creation of an overpaid, underworked, unionised aristocracy and the systematic denial of employment opportunities for the “excluded”.
Unfortunately, over the years, all political parties have imitated the Congress party. All of them pander to such small groups of unionised employees at the expense of the larger population. In government offices, this unionised aristocracy has been given the special privilege of not working if they don’t want to, and of extracting tributes in the form of bribes from the citizenry. Some 50 percent of the unionised teachers in government schools do not even bother to turn up at work. But their patron “protects” them. Some 80 percent of these worthies send their own children to private schools — the ultimate indictment of the system that they are duty-bound to run efficiently.
Even a leftist union-lover like Amartya Sen has had to concede that government schoolteachers play truant with greater vim and gusto in schools in underprivileged neighbourhoods, where the enrolment of Dalit children is high. A greater travesty of claims to “inclusive growth” is difficult to conceive of.
There are no clear rules for lay-offs. In order to lay off workers, an employer needs the “approval” of the government in power. And, of course, such approval is never given as the unions do not tolerate it. Paradoxically, this situation results not in worker protection, but in employers deciding that they will minimise the number of workers they need. In a capital-scarce country, which has plenty of labour, the signal given to potential employers is that they are better off adding machines than workers.
Added to this are the ridiculous tax incentives given to Indian companies to invest in capital equipment. Stalinist gigantism was what informed our policies in the ‘50s, ‘60s and ‘70s. Companies were encouraged to invest in machines by means of accelerated depreciation schedules and the infamous “development rebate reserve”. Machines were — and to a large extent still are — considered an end in themselves. Some readers may remember a Hindi film song of the 50s encouraging children to make Bharat a “Mashinon ki Nagari”.
INDIAN EMPLOYERS responded positively to these signals from the government. They over-invested in capital equipment, kept hiring to a minimum, tried to cosy up to the INTUC wherever possible, treated the unionised aristocracy with kids’ gloves, outsourced as much labour-intensive activities as possible and employed as many “temporary contract” workers as they could. If we had clear rules for lay-offs (so many months’ salary, some percentage of last drawn salary and so on — anything simple and transparent), employers would ironically have hired more workers, not less.
Instead of subsidising capital equipment, employers had been allowed a double-deduction for provident fund payments to permanent workers, just as an example, they would have hired more permanent workers. But sensible measures were discarded in favour of the mutual protection pact between select unions, their leaders and the State.
Let us consider some other perverse and pernicious measures. ‘Small’ establishments were exempted from these suffocating labour laws. So, we have the strange situation of lots of uneconomic units being set up — and guess what? The exploitation of labour in such estab is much worse there than in large establishments!
In China, companies are in a position to establish garment and other factories with thousands of employees. Such factories achieve globally competitive cost positions. In India, we are forced to set up numerous ‘small’ sheds, which ensure that our companies remain uncompetitive. We could not have done a better job if we had consciously wished to help the Chinese economy at the cost of our own.
And then we came up with the Board for Industrial and Financial Reconstruction (BIFR), which was supposed to “rehabilitate” companies. The trouble is the BIFR always kicks in too late. By the time a company is referred to the BIFR, its net worth has usually been wiped out and there is no money left to pay overdue taxes to the government or loans due to secured creditors like banks. The poor workers of the un- rehabilitated company end up getting little or nothing. Even their contractual dues can stretch out for years, sometimes forever. For years, economists have been pleading with the government to introduce a proper bankruptcy code, where companies can go through an orderly process much before their financial meltdown happens. If that happens, then the biggest beneficiaries will be the workers. But the government has remained deaf.
Our labour laws exist for short-term political gain. They do not address the welfare of the labour class
Closely linked to the perverse situations of not giving permission to companies to lay-off workers, not permitting unprofitable factories to be shut down and not allowing an orderly bankruptcy process to function is the issue of valuable land. Most factories, be they in Kanpur, Vadodara, Howrah, Chennai, Delhi or Mumbai are located on land whose value has appreciated considerably over the years. If these factories are economically unviable, then the land can be sold, all creditors paid and the laid-off workers given adequate compensation. But something as simple and logical as this is beyond the scope of our government. State governments will not give permission for re-zoning or sale of land until it is too late. By then, the accumulated tax and secured credit arrears (interest keeps piling up) mean that the workers get cheated again. Incidentally, the beneficiaries of the final land transactions include corrupt company managements, powerful politicians and acquiescing union leaders.
There is no simple transparent process by which companies can lay off workers; they need state government approval, which is never given. There is no simple transparent process to shut down an unviable factory; state government approval is again required and is never given. There is no simple process to sell land and pay off workers’ dues; state government approval is required here too and is given so late that workers are effectively cheated of their dues. There is no orderly bankruptcy process; the attempt is to rehabilitate companies when it is too late, not revive them when it is still possible. Small firms are exempt from labour laws; in fact, they are tacitly encouraged to maintain exploitative working conditions. Large factories that can compete in the global marketplace are discouraged. Tax incentives are given to companies that purchase labour-saving machines. There are no tax incentives to hire permanent staff.
There is a devil’s pact between the State, union leaders and a small unionised aristocracy. There is absolutely no concern for the unemployed, who might want factory jobs. Are we surprised that Indian manufacturing has not taken off and where it has, it is consciously not labour-intensive? After all, our companies want to be good corporate citizens. They are only following the instructions of our government.
Whenever there has been talk of changing our absurd laws and regulations, we are told that the Ministry of Labour objects. This worthy department of our worthy government is not interested in the growth of our economy or the welfare of poor citizens; it could not care less if Indian companies are rendered uncompetitive or if Chinese companies are supported by our policies. Above all, it simply does not care whether productive jobs are created for our citizens or not. This department has been entirely captured by the representatives of the unionised labour aristocracy that does not care about what happens to the country at large, as long as their position is protected and their cozy featherbedding practices are allowed to flourish. Rather than being a defender of the country, this department is a lobbyist for a small section of the populace that has obtained disproportionate power to block progress and job-creation in the country.
The other culprit is the Ministry of Finance, which keeps giving tax-breaks for capital and none for employment creation. This obsession with capital investment and the mechanical algebra of Incremental Capital Output Ratio (ICOR), a vague mechanical leftist pre-occupation, means that these tax breaks are seen as growth-friendly and not as distorting factor prices in a way that, frankly, is none of the government’s business to mandate.
AS WE survey the current scene, is there any hope that a pro-growth, pro-poor, pro-employment environment will emerge? If that is not possible, can we at least get rid of the extremely anti-poor anti- employment policies that are strangling and emasculating us? One cannot be optimistic. Given the inability of our leaders acting in patriotic, rather than sectarian interests — two notable exceptions have been Narsimha Rao and Atal Bihari Vajpayee — we cannot hope for much. We are going to have to be content with getting around the laws, playing the usual Indian games of finding loopholes and forever ending up with suboptimal solutions.
Union labour reps scarcely care what happens to the country as long as their positions remain protected
The phenomenon of temporary contract workers will continue even as ill-informed leftist academics keep ranting against it; our factories will remain small and globally uncompetitive; our companies will go in for highly automated robot-run factories; we will not see the surge in manufacturing employment that we as a country deserve. Unionised government employees are likely to get lazier, less punctual, more oppressive and more corrupt. Our political leaders and our government in Delhi and in the states will continue to insist on discretionary powers of approval — in order to ensure that approvals do not materialise and when they do, the beneficiaries will remain members of a small cosy club.
But we could change these pessimistic predictions and create an ecosystem that encourages job-creation, genuinely protects labour rights and increases the income and wealth of those who are currently unemployed, despite being willing and able to work. Will we? I doubt it!
One of India’s foremost right-wing economic thinkers, Jaithirth Rao is founder and chairman of Value and Budget Housing Corporation, a company in the affordable housing space.