Let us prioritize employment over labour protection
In a trip to Vietnam, while travelling by road from Hanoi to Ha Long Bay, I noticed contiguous factory buildings for more than a mile bearing the name Canon. My tourist guide told me that these are outsourced manufacturing units. It is reported that 60% of Samsung phones are made in Vietnam, and last year, the brand’s products accounted for about 20% of this country’s exports. It is intriguing how a war-torn country has become a bigger success than even China in reducing poverty, which has dropped from 60% in 1990 to 10% today. My six days in Vietnam encouraged me to believe that it has been possible on the back of flexible labour policies, physical infrastructure and efficient supply chain links.
In India, land and labour reforms are emotive issues. The Narendra Modi government, at the start of its first term, did attempt land reforms; it promulgated nine ordinances, one after the other, which eventually lapsed after failing to get Rajya Sabha approval. Recently, Parliament legislated a new labour code, amalgamating the provisions of several acts. Provident Fund benefits have been extended to temporary/contract employees. In fact, there have been some coordinated efforts between the Centre and some states to liberalize the engagement of labour.
Labour reforms tend to have political consequences. The vice-chairman of NITI Aayog, while talking about labour reforms, has been clear that there would be no “hire and fire” policy. While wages in India are low, the cost of labour is higher than in other Asian countries. Improving labour productivity, which is a serious impediment to the expansion of manufacturing, warrants investment in technology and scaling up the size of Indian enterprises.
Currently, the Indian economy is going through a bad patch. India’s quarterly gross domestic product (GDP) growth has fallen to 5% in the first three months of the current fiscal year, with obvious consequences. The country now faces the challenge of low aggregate demand—caused, inter alia, by rising unemployment. While the Code on Wages, 2017, which stipulates a national floor minimum wage, has the potential to mitigate the effects of declining demand, without large-scale employment generation, its benefits cannot be realized.
Trade wars between the US and China, and Japan and Korea, have combined with demographic issues in those geographies to inspire significant shifts in manufacturing locations, particularly away from China. This offers an opportunity to welcome factories to India and join global supply chains. The Modi government has taken the bold step of bringing down corporate tax rates to a level comparable with other jurisdictions, especially in Asia. Though this decision is expected to aid the economy in the medium to long term, its full benefits can be reaped only if manufacturing units move to India.
At a point in time when employment opportunities are being generated at less than half the rate of new entrants to the job market, labour protection measures have very little meaning. Labour laws protect employees against exploitation by employers. But the question is: If there is no employment, whom do we protect? Currently, 95% of employment in India is generated by agriculture, businesses in the informal economy, and micro, small and medium enterprises (MSMEs). No aspect of India’s labour protection law, except perhaps the minimum wage, applies to them.
This is not to suggest giving a complete go-by to labour protection laws. However, employment may rise if companies could hire well beyond 300 people without worrying about restrictions on layoffs during downturns. Let firms hire freely. Ask an unemployed person whether he wants a job or job protection, and most likely he would want a job first. Once adequate employment opportunities are created, the government can deal with welfare issues. It could create a fund from the extra tax revenues, for example, for the purpose. Simply put, the order should be reversed from “first protect and then employ” to “first employ and then create welfare measures”. This is exactly what China, Vietnam, Cambodia, Bangladesh and other Asian Tigers have done to attract global manufacturing.
With a view to experiment and not radicalize the national order, China created special economic zones and allowed businesses complete freedom to perform, with no conditions imposed. This attracted hordes of investors. The model has since been replicated countrywide. India’s Special Economic Zones, in contrast, have largely been tax-saving and land-grabbing exercises.
Sometime in 2004, when I visited China as chairman of the Securities and Exchange Board of India (Sebi), the then Indian ambassador had given me a paper to read, and one of the observations in it was that more than 80% of the export of manufacturing goods from China was done by enterprises that were 100% foreign owned. China has benefited from the employment of Chinese labour and the value addition involved. It would be worthwhile to explore a similar approach.
The earnestness of the Modi government to enhance the economic prosperity of India is undoubted. It has taken bold steps to improve the fundamentals of India’s economy. However, without land and labour reforms, the speed of economic growth cannot be accelerated, nor can the country’s demographic dividend be maximized. Every opportunity has a timeline. And the daring harness it optimally.
G.N. Bajpai is former chairman of Sebi and LIC, and columnist and author