Policymakers who say that labour laws don’t matter for job creation have obviously never had a child who is unable to find a job despite merit, never been responsible for finding the money in a small organisation to pay salaries and never tried to pass a labour inspection without paying a small bribe. Or maybe they have just never been to a job mela to answer the three standard questions from kids: How do I get a job without work experience? How do I live on half my salary? How do I find a formal job that pays enough for the first six months for me to move to a big city? Job creation is hardly a wicked problem like cancer or climate change but it does require taking on vested interests. This is never painless but when there are no good choices, somebody has to make the hard ones. Thankfully, not all lessons need to be learned experientially; states that care about India’s job emergency can now photocopy Rajasthan’s courageous start in reforming labour laws that choose the old over the young and are written for a colonial, agrarian and stagnating India.
The most obvious cost of India’s labour laws is corruption, because they are written so badly that it is impossible to comply with 100 per cent of the laws without violating 10 per cent of them. But the non-obvious costs are more toxic: manufacturing employment is the same as that of post-industrial US at 12 per cent of workers, 240 million Indian farmers produce the same amount of food as six million Americans, and 200 million Indians in subsistence self-employment want wage employment but the jobs drought means that the poor cannot afford to be unemployed and are therefore self-employed. But the biggest cost is that 100 per cent of net job creation since 1991 has happened informally. Informal employment, the slavery of the 21st century, is a child of our labour laws.
The amendments to the Industrial Disputes Act, Factories Act and Contract Labour Act proposed by Rajasthan represent political, social and economic innovation. Political because the concurrent list of our Constitution creates many policy orphans, since the state and Central government rarely agree on every detail. As Socrates said, a slave who has two masters is free. Social because it is clearly unfair to argue against the thesis that there is no such thing as an Indian labour market and 29 chief ministers should be allowed to create what Chief Minister Vasundhara Raje magnificently called “a fertile habitat for job creation”. And economic because China’s genius in getting 400 million people off farms lay in the decentralisation of job creation. But these bold and creative amendments are only the first agenda item in a multi-front and multi-year war on youth unemployment. This war is about fixing India’s three flawed geographies of work: our physical geography (more urbanisation and more job creation in the north and east of India), our sectoral geography (less informal, agricultural and self-employment and more manufacturing employment) and our firm size distribution geography (most of our companies are dwarfs, not babies, and the missing middle means that 85 per cent of our manufacturing comes from companies with less than 49 employees). The total number of jobs will increase with policy moves in infrastructure, urbanisation and lower regulatory cholesterol. But without labour reform, we will not increase formal employment or take advantage of China running out of farm labour by developing labour-intensive manufacturing.
The most important labour reform for the Central government is getting the precedent-setting presidential assent for the Rajasthan amendments. But the second most important reform for Delhi is fixing a dysfunctional salary confiscation regime that mandates a 49 per cent difference between what kids call chitthi waali salary (gross salary in the appointment letter) and haath waali salary (take-home salary credited to the bank account) for low-wage employees. The next budget should kick-off this reform by giving employees with monthly salaries lower than Rs 15,000 a raise in take home salary, with no fiscal allocation and the option to discontinue the 12 per cent employee contribution to Provident Fund. Other reforms including ending the bankrupt employee pension scheme and reverting to the pre-1991 defined contribution programme for the 12 per cent employer contribution, giving employees two options — paying their contribution to the NPS instead of EPFO (among the world’s most expensive pension programmes) and buying IRDA-regulated health insurance instead of Employees’ State Insurance (among the world’s worst health insurance programmes, with a 48 per cent claims ratio). The next phase must cluster laws and rationalise definitions, for example, wages are defined differently in the Payment of Wages Act, 1936, the Minimum Wages Act, 1948, the Payment of Bonus Act, 1965, the Payment of Gratuity Act, 1972, the Provident Fund and Miscellaneous Provisions Act, 1952, the ESI Act, 1948, the Workmen’s Compensation Act, 1923, and the Industrial Disputes Act, 1947. The Central government must recognise that today’s German manufacturing genius has many fathers (apprenticeships, social norms, “Mittelstand” etc) but an important contribution was made in the 1990s by the Hartz Commission, headed by the former human resource head of Volkswagen, which overhauled Germany’s labour law regime. India needs a similar overhaul.
The transmission losses between how labour laws are written, interpreted, practised and enforced mean a semi-official rate card exists for most exemptions — permissions for 365 working days or extended hours are almost never denied but cost Rs 5-10 lakh in most industrialised states. Our laws must be clearer and fewer but enforced. The 100 million new young voters of 2014, who will be joined by another 100 million new voters in 2018, care more about Ameeri Banao than Garibi Hatao. The only sustainable way to meet their aspirations is a Cambrian explosion of private, non-farm, formal sector, decent-wage jobs. Every virus needs a host or a carrier and Rajasthan’s courage is only the end of the beginning. Our youth desperately needs this virus to spread.
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The writer is chairman, Teamlease Services