Fire the non-issue

The reformer’s standard argument is that labour laws make the organised labour market rigid, deter employment creation and increase capital intensity, despite India’s labour cost advantage. Simultaneously, necessary protection doesn’t exist in the unorganised sector. If labour laws in the organised sector become more flexible, more jobs will be created. So far so good. But notice that if I choose to fragment production and stay in the unorganised sector, that’s not only because of labour laws. Absence of a complete VAT (value added tax) and excise exemptions also contribute to distortions. What makes organised labour markets rigid? Contrary to popular perception, it’s not just the Industrial Disputes Act (IDA) of 1947. The 47 central statutes, assorted rules, orders and regulations and 29 inspectors are much more culpable and this inspector raj also plagues the small-scale sector. Flexibility requires standardisation, friendly inspections and reduced avenues for bribery and corruption. Other than inspectors, no one should object to such reforms, least of all the Left. By equating labour market reforms with the ‘‘hire and fire’’ of IDA, we therefore do a disservice to the cause of labour market flexibility.

In most instances, people object to Chapter V-B of IDA. These span Sections 25-K through 25-S of IDA. There are also problems with Sections like 9-A or 11-A, but those don’t usually increase blood pressures. In essence, Sections 25-K through 25-S say there must be permission from the appropriate government before lay-offs, retrenchments, closures. Notice that Chapter V-B hasn’t existed in IDA since 1947. It was inserted in 1976. Before that, there was no evidence that labour was being especially exploited in its absence. Notice also there is a parallel Chapter V-A, part of IDA since 1964. This has sections on layoff and retrenchment, but doesn’t require mandatory permission from the appropriate government before these can take place. Chapter V-B doesn’t apply to all establishments. The work must be non-seasonal and not intermittent. The enterprise must employ 100 workmen ‘‘on an average per working day for the preceding twelve months’’. West Bengal has 50 instead of 100. Orissa has 300 instead of 100. However, 100 is the central norm. Notice that till 1984, the threshold used to be 300, not 100. There is no evidence that labour was especially exploited before 1984.

For IDA to be applicable, you must therefore employ at least 100 workers. Specifically, labour laws have concepts of workmen and employees and to be under Chapter V-B of IDA, 100 workmen must be employed. The latest Annual Survey of Industries (ASI) data are for 1997-98. And in that year, the total number of workers plus employees was 17.53 million. Of these, 5.29 million workers were employed in industrial enterprises that employ more than 100 workers. 5.29 divided by 17.53 is 0.301. The organised sector is 8 per cent (or less) of the workforce. And one-third of 8 per cent is 2.41 per cent. That’s how important ‘‘hire or fire’’ cum the IDA is to the Indian economy.

Besides, what does Chapter V-B say? Permission is necessary from the appropriate government. Whether this is a serious issue or not depends on how easily permission is granted for layoffs, retrenchment, closure. If permissions are granted easily, IDA is not as much of an issue as is made out to be, even though it should become more flexible. Through the Labour Bureau, we have data for 2001 on layoffs, retrenchments and closure and these cover both the private and the public sector and even the cooperative sector. These are actual figures and they don’t tell us how many applications have been refused or how many applications have not been submitted at all, because industry knows it is going to be difficult to obtain permission. Subject to this, in 2001, there were 151 closures affecting 11,599 workers. There were 133 retrenchments, affecting 3,668 workers. There were 236 layoffs, affecting 26,231 workers. Restricting oneself to state-level, as opposed to central permissions, the largest number of workers affected through closures was in UP, Gujarat and Kerala. The largest number affected through retrenchments was in Gujarat, Manipur and Goa. Finally, the largest number affected through layoffs was in Pondicherry, Kerala and UP.

We have subjective notions of which are reform-minded states and which are not. But if you look at the names of states I have just mentioned, permissions seem to have been granted in a variety of states. Are we excited about something that is not much of an issue?