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How to do labour reform

Business Standard | January 04, 2006

Prime Minister Manmohan Singh, speaking at the 78th Annual General Meeting of Federation of Indian Chambers of Commerce and Industry, has once again said that he intends to generate a consensus on labour reforms because labour market flexibility is a must for "unleashing a new surge of investments…

If it requires modifications to our labour policies to provide greater flexibility, which in turn will generate more jobs, we will work with all stake holders to generate a consensus on it".

The Left will grimace and growl but it now seems probable that, once the assembly elections in West Bengal and Kerala are over later this year, it may ease up.

In any case, the CPI(M)'s new general secretary, Prakash Karat, in spite of his public pronouncements, has been protesting first and later quietly co-operating with the government on a variety of issues - the latest being divestment in profitable public sector enterprises.

This could bode well for labour reforms, which have remained stuck at the starting line ever since reforms began in earnest in 1991.

It might be a good idea, however, to bear in mind at least four things. One, it would be naïve to expect a big bang reform of the labour laws. Whatever changes are made to the Industrial Disputes Act and the Contract Labour Act, will have to be made incrementally.

Second, even if it is only for the sake of appearances, a social security programme will have to be devised before the process accelerates. "Social welfare legislation must go hand in hand with labour market flexibility," said the prime minister, rightly.

Third, it is necessary to distinguish between two very important aspects of labour laws. Thanks to some confused thinking about equity and justice, our laws treat the exit of capital on a par with the exit of labour.

Thus, in order to ensure that labour was not downsized, our laws used to make it impossible for capital to exit as well. But that is no longer the case.  Section 25(M)(5) says  "where… an application … has been made and… the specified authority does not communicate the order granting or refusing to grant permission to the employer within a period of sixty days… the permission... shall be deemed to have been granted on the expiration of... sixty days."

In other words, apply, wait and shut shop if you don't hear from the government. But there is a problem: what if the government refuses permission? This is where the politicians enter and demand a pay-off for granting permission.

Refusal to pay ensures a denial of the application, but that is rare because of the comparative pay-offs to the owners of the firm. Clearly, the answer lies in amending the law so that it takes away discretionary power from the hands of politicians. How to do this is what must engage the attention of the government and the Left.

In a capital-scarce country, it makes no sense to pretend that it is abundant. Nor does it help labour to lock up capital in idle units that cannot function. The fourth aspect is how to deal with the remaining assets of a firm that has closed down, and with its creditors.

If capital exit is to be made easier, this aspect also needs to be addressed because at present the subject is a complete muddle. Only then will labour market reform not meet with fierce political resistance. In short, chip away at the periphery and some day the centre will cease to hold.

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