Old ideas for the young

However, before we examine the labour ministry8217;s optimism it is necessary to examine the issue on first principles. Do we have a demographic dividend or a demographic deficit? The dividend argument has been bandied around quite a bit, with populations everywhere aging even in China and India with a median age of 24 years in 2001. Some estimates show that for some East Asian countries, this demographic dividend added around 2 incremental percentage points to GDP growth. Hence, the growth argument is that in addition to whatever happens to savings and investment, human capital inputs will drive Indian trend growth rates to 8 per cent plus. However, there is a double bind. But before that, some startling projections for 2020, based on a recent TeamLease report. If present trends continue, the unemployment rate in India will be 29.5 per cent, with 55.4 per cent in Goa and 40 per cent in West Bengal. To restate the obvious, present trends don8217;t encourage labour usage and consequently elasticity of employment in manufacturing has declined, at least in the organised sector. Without getting into the nitty-gritty of what constitutes the organised sector, around 7 per cent of employment is in the organised sector, and two-thirds of that is in the government including the public sector. The disincentive to use organised sector labour is primarily due to labour laws. Add to that relatively cheaper capital availability since 1991.

The most ardent anti-reformer must admit India8217;s labour market is segmented. The organised sector has labour market rigidities and the unorganised sector has little protective legislation. The legislation that exists isn8217;t enforced. Nor is this in broader interests of labour. Because you don8217;t employ labour in the organised sector and this either means jobs lost, or jobs created in the unorganised sector, without protection. Reforms will break down segmentation and bring the two closer together. Unfortunately, every anti-reformer will push for protective laws in the unorganised sector, without asking if legislation that can8217;t be enforced has any point and without supporting flexible laws in the organised sector. And every reformer will flag the Industrial Disputes Act, without supporting protection in the unorganised sector and without recognising there is more to rigidities than IDA. Thus we go round in circles. Every once in a while, arguments surface about flexible labour laws in SEZs or similar enclaves, even if such arguments are unlikely to be tenable given Article 14 of the Constitution on equality before the law.

If we read the report of the Second National Commission on Labour 2002, we already have the reform blueprint. First, we have a rationalisation and harmonisation issue, including changing and modernising definitions. Second, we need to address rules that lead to an inspector raj and there is sufficient documentation to show that high compliance costs hurt the small entrepreneur relatively more. Third, there are contentious industrial relations-related statutes like IDA, Contract Labour Act and Trade Unions Act. By equating labour market reforms with IDA and perpetually flagging that alone, both reformers and anti-reformers do injustice. If we unbundle labour market reform, life will be easier. But that8217;s not happening and perhaps a bypass strategy may be easier. Today, under the Seventh Schedule, labour is in the concurrent list and that8217;s part of the problem. Neither the Centre nor the states can do anything singly. What happens if we push for a Seventh Schedule change and move labour to the state list? If I remember right, Narendra Modi argued something similar. States that wish to reform, including Chapter V-B of IDA, can simply go ahead. If that increases divergences between states, so be it.

So far, I have touched upon the first bind that transforms a dividend into a deficit. But there is a second one also. More generally, human capital requires better health and education outcomes, such as reduced morbidity in the former and higher skills in the latter. Although there isn8217;t a water-tight compartmentalisation, education has three segments: school, vocational and higher. We know there is a shortage of skills and this has a strong regional angle, which one reason why investments pour into some states and not in others. The Approach Paper to the 11th Plan states: 8220;Data collected in 60th round of NSS shows that only 3 per cent of the rural youth 15-29 years and 6 per cent of the urban youth have gone through a formal course of vocational training of any kind.8221; That8217;s the problem.

And why is the labour ministry8217;s idea not the solution? First, there is no market failure in vocational education. There is state failure, with ministries of labour, industry and HRD all involved. Second, there are ways of subsidising trainees, even if provisioning is private, should there be inequitable access for the relatively poor, something for which there is no evidence. Third, training institutes should be distinct from certifying agencies. Fourth, there is need for regulation, not licensing. If we accept these principles and move to demand-driven market-based answers, we will have the beginnings of a solution. And we should start by scrapping the Apprentices Act.

Stated thus, we do have a demographic dividend. But we don8217;t have a demographic deficit. We have a planning deficit. It is this that turns an asset into a liability. We recognised that controls and licensing ensure the asset to liability transformation in other sectors of the economy and have reformed accordingly. The labour market and vocational education issues are no different.

The writer is secretary-general, PHDCCI