TCA Srinivasa-Raghavan: The myths and the realities of labour laws

OKONOMOS

Those who blame India's labour laws are wrong. The labour market is more flexible than it seems.

India 's rigid labour laws - it has been propagated for many years now ""are preventing it from industrialising faster. But most people who say this, have never read the Industrial Disputes Act (IDA), never mind the Contract Labour Act.

Aditya Bhattacharjea, a professor at the Delhi School of Economics, is not one of them. In a recent paper* he has shown that those who blame labour laws need to stop talking for a bit and start doing some homework. The Planning Commission, if I may make a suggestion, could start the process.

His paper re-evaluates three things. First, he looks at the widespread notion that the requirement of government permission has impeded capital exit and says "the results are ambiguous", which means you can't make a positive inference this way or that.

I will add my two bits here. Section 25-O of the IDA lays down the procedure for closing down.

Clause 1 requires an employer to seek permission from the government. Clause 2 requires the government to conduct and enquiry and then say yes or no. And Clause 3 says: "Where an application has been made under sub-section (1) and the appropriate government does not communicate the order granting or refusing to grant permission to the employer within a period of 60 days from the date on which such an application is made, the permission applied for shall be deemed (italics mine) to have been granted on the expiration of the said period of 60 days." So what's the problem?

The second thing that Bhattacharjea questions is the widely-used index of state-level labour regulation devised by Besley and Burgess and their method. These two had "shown" "" econometrically, using numbers, data and so on "" that "excessively pro-worker regulation led to poor performance in Indian manufacturing." Not so, says Bhattacharjea.

Lastly, he examines the relationship between the record of labour laws' enforcement, labour flexibility, and industrial employment. He singles out court judgements for special treatment.

Bhattacharjea is especially savage on Besley and Burgess. Calling their index "flawed", he adds "it is not at all clear what exactly the Besley- Burgess 'regulatory measure' actually measures: it seems to capture, for the early 1980s, the inter-state variation in some amalgam of labour regulation, industrial relations, and the investment climate." Ouch! He goes on to say it is practically impossible to construct "an index of the degree to which the workers' interests are enhanced by the IDA alone" because that would need incorporating far too many things whose effects can't be easily measured, if at all. Thus, "one would need to look at the variation between states and over time in the proportion of disputes referred by state governments for adjudication; of pro-worker decisions by state labour courts, tribunals, and High Courts; and of applications for permission for layoff, retrenchment, closure, and prohibition of casual labour that were denied."

So what are Bhattacharjea's own findings? One, that studies on the effect of India's labour laws have been so pre-occupied with labour standards that they have almost wholly academic standards. As I said, how many have read the relevant acts?

He also demolishes a portion in the Economic Survey, which "complained about the inflexibility of labour markets in the organised sector and then in the very next paragraph gives an admiring account of China's drastic labour market reforms." Bhattacharjea says that according to a CII-World Bank survey, Chinese employers are even more critical of their labour laws.

The coup de grace comes when he shows that, in fact, there is "growing flexibility in India despite supposedly restrictive labour laws." In any case he asks, if less than 8 million workers are employed in organised manufacturing, what difference is hire-and-fire "" which is the other name for "flexibility" in the labour markets "" going to make to the overall employment problem?

In the end, the point is this: Politically and on moral grounds, India has to have the sort of labour laws it does. But in practice, the labour market is far more flexible than popularly believed. It is the classic Indian solution.

The point is this: the laws force employers not to pass on the costs of their mistakes to the employees. But what is so wrong with that?

Finally, if I may make a suggestion that could help find a bargaining solution to the problem: permit hire-and-fire but only after you repeal Article 311 of the Constitution which provides cast-iron protection to government employees. No? I thought so.

*Labour Market Regulation and Industrial performance in India :A Critical Review of the Empirical Evidence, http://ideas.repec.org/p/cde/cdewps/141.html