Labour-market rigidities constrain growth in employment. This argument has often been advanced by economists. In the absence of flexible labour markets in the organized sector (less than 8 per cent of the labour force), growth in output does not necessarily lead to an increase in employment, because labour effectively becomes a fixed input. Hence, production becomes artificially capital intensive. In an attempt to protect existing jobs, future and potential jobs are lost. Thus, the system is not in the broader interests of labour either. In addition, labour legislation creates relatively high wage islands in the organized sector, and India's comparative advantage in an abundant supply of labour cannot be tapped.
It is not surprising that most of India's export basket originates in the unorganized sector. Conversely, the unorganized sector (92 per cent of the labour force) has virtually no protection. Nor does it have any social security legislation worth the name. Remember, India's labour force is 400 million. Out of that, only 30 million is in the organized sector. And within that 30 million, 20 million is with the government, including the public sector.
Under Article 246 of the Indian Constitution, labour is in the concurrent list (item 22 on trade unions, industrial and labour disputes; item 23 on social security and social insurance, employment and unemployment; item 24 on welfare of labour including conditions of work, provident funds, employer's liability, workmen's compensation, invalidity and old age pensions, and maternity benefits). There are exceptions like labour and safety in mines and oilfields and industrial disputes concerning union employees that are in the Central list.
This issue is important because there are inter-state variations in labour laws. Consequently, labour-market rigidity or flexibility can also vary from state to state. There is some evidence that post-1991, inter-state disparities have begun to increase. Unless labour market rigidities are eased, labour laws also contribute to an increase in inter-state disparities. Subject to the comment that was made about labour being on the concurrent list, there are 45 Central laws that directly have something to do with labour. If one includes laws that indirectly have something to do with labour, the list is longer. For example, the Boilers Act (1923), the Collection of Statistics Act (1953), the Dangerous Machines (Regulations) Act (1983) and the Emigration Act (1983) indirectly impinge on labour. That apart, there are state-level laws. And at least 16 assorted Central rules, many more at the level of states.
Do we really need 45 and more statutes, not to speak of the rules' Apart from the constitutional angle of the seventh schedule, are special statutes needed for cine-workers, dock-workers, motor transport workers, sales promotion employees, plantation labour, working journalists and workers in mines' Consider also the time-span of the legislation, from the Fatal Accidents Act of 1855 to the Public Liability Insurance Act of 1991. Over a period of time, concepts and definitions have changed. So has the case law, contributing to further confusion. For example, there is a lack of unanimity about definitions of wages, workman, employee, factory, industry and child labour. Case law also differs, causing further confusion. You have a case law whereby the manufacture of bidis is not an industry, but the press and publication departments of Andhra and Osmania universities are factories.
Reforming labour law has many dimensions, and issues like reducing state intervention in industrial relations are identified with an exit policy for labour, and are therefore controversial. But unification and harmonization is an issue on which there should be no lack of consensus. Labour market reform is not only about the Industrial Disputes Act. On that, for understandable reasons, there will be controversy. And Chapter V-B of the Industrial Disputes Act, covering layoffs, retrenchments and closure, will not be changed in a hurry.
The national common minimum programme states, 'The UPA rejects the idea of automatic hire and fire.' People who are against reforming labour markets criticize the government for trying to introduce hire and fire, and those in favour of reforming labour markets criticize the government for not introducing hire and fire. The recently published Economic Freedom of the World 2004 (the Fraser Institute's ranking) is an example. Scores are out of 10 and the higher, the better. India gets an overall score of 6.3. But for flexibility in hiring and firing, the Indian score is 2.0. This is probably largely perceptional rather than real, because it covers only a small segment of the labour force. Here is the complete quote from NCMP about labour laws. 'The UPA rejects the idea of automatic hire and fire. It recognizes that some changes in labour laws may be required but such changes must fully protect the interests of workers and families and must take place after full consultation with trade unions.
The UPA will pursue a dialogue with industry and trade unions on this issue before coming up with specific proposals. However, labour laws other than the Industrial Disputes Act that create an Inspector Raj will be reexamined and procedures harmonized and streamlined.' There should be no lack of consensus about reducing transaction costs associated with the inspector raj. This too, contributes to rigidities in the labour market and leads to corruption.
Each labour legislation has a separate inspector and visits of inspectors are not synchronized across all labour enactments. Barring the Payment of Wages Act, where a maximum period of three years is stipulated, no other labour statute prescribes a maximum period for which records and registers must be maintained. Compliance is thus impossible and visits of inspectors result in bribery and rent-seeking. This system is not distributionally neutral as it tends to hurt the small-scale sector much more than it hurts large-scale industry.
That apart, returns under various labour laws are not standardized, and inspectors insist on maintenance of manual records and registers. There can be a common format for computerization of required records. There should be a single inspector for a given area. Some inspections for site and building and site-plans or testing equipment can be farmed out to recognized private agencies. With the opening up of insurance, some social security provisions can be farmed out. For example, the Employees' State Insurance Act has not worked at all well. There are also several ridiculous inspections that one can mention, all outdated. For instance, under the rules of the Factories Act of 1948, there has to be earthen pots filled with drinking water. Water coolers won't do. There has to be red-painted buckets filled with sand, in case there are fires. Fire extinguishers won't do. Factories must be whitewashed. Distemper isn't good enough.
A draft small enterprises development bill is now doing the rounds. It may be placed before parliament in the winter session. Among other things, this promises that small enterprises (meaning those that employ fewer than 50 workers) will be freed from arbitrary inspections, though not from maintaining and filing appropriate returns. That's fine, but that's not really the point, is it' The point is to exempt all enterprises from transaction costs associated with labour-related inspections. Hence, it is welcome that, at the prime minister's interaction with trade and industry, the issue came up for discussion. According to media reports, the government has promised a committee to look at the issue. That's not the point either.
What needs to be done is already known. We don't need a committee. If not the recommendations of the second national labour commission, let's follow the national labour code, formulated in 1994. No committees please. Let's just do it.