Labour Reform: Few Tips For Manmohan Singh

Dear Dr Manmohan Singh, few people realise it, but the fate of labour law reform lies in your hands. The government wants to amend the Industrial Disputes Act to permit retrenchment and closure without official permission for companies with less than 1,000 workers, against the current limit of 100 workers. But the government lacks a majority in the Rajya Sabha, and needs your co-operation.

Now, you yourself pushed for labour reform when you were Finance Minister. But you are duty bound as Leader of the Opposition to say that the bill is flawed, and will help neither industry nor labour. This is in fact true. So go on the offensive and propose an amendment providing for unemployment insurance.

The current law forbids retrenchment or closure without state government permission, which in practice is not given. This supposedly safeguards labour. In practice it drives companies in trouble into bankruptcy: They cannot downsize and revamp, as in other countries.

Trade unions in the 1970s and 1980s were happy to push their companies to bankruptcy, confident that the government would take over. Those days are long gone. Bankruptcy now means unemployment.

The law may forbid retrenchment or closure, but in practice owners simply stop paying salaries or running mills. In law, the mills are still open and the workers still entitled to wages, but this is a fiction.

Owners prevented from downsizing see no point in putting any more money or effort into a revamp. Instead they strip the assets of their ailing companies, leaving nothing for their workers or creditors. India is now a vast graveyard of industrial skeletons, all formally forbidden to close or retrench.

The law has protected neither labour nor honest owners. It has only encouraged dishonest owners to milk their companies. Nobody wants to invest in labour-intensive industry although this is where India’s comparative advantage lies.

Instead of hiring staff directly, companies now outsource drivers, gardeners, canteen staff, etc. This is reflected in the growing casualisation of labour: The size of the organised sector has remained stubbornly below 30 million for ages.

This is a tiny fraction of the total workforce of almost 400 million. Within the organised sector, the private sector accounts for barely 8.5 million workers, the government for the rest.

So the existing labour law helps only the labour aristocracy, represented by the big trade unions, and discourages companies from hiring millions more. Thus the labour aristocracy unwittingly exploits the vast majority of workers.

In China, companies can hire and fire. Competition in the global market is fierce, and for survival companies must be able to cut labour whenever sales fall. If they cannot, as in India, they will not invest at all.

This is why millions of jobs have gone to China and not India. Ideally all export-oriented units in India, whether or not in export processing zones, should be exempted from the 1,000-worker ceiling in the labour law.

We need labour flexibility. But is the government’s proposal the right way? Not at all. Shout that from the rooftops, Dr Singh.

The government wants to increase compensation for retrenchment or closure from 15 days to 45 days wages for each year of service. This is supposed to be fair to both labour and industry.

Dr Singh, please declare that this will be fair to neither. Indeed, it will be almost as farcical as today’s situation.. The average worker has 20 years of service. Compensation at 45 days wages for each year worked implies 900 days wages for each retrenched worker, or roughly 2.5 years salary.

Now, companies in trouble can barely pay the next months wages. How on earth will they provide 2.5 years salary upfront? A few rich companies have the resources, but not the hundreds in real need.

In practice, businessmen will probably retrench without paying, and the resulting disputes will be tied up in labour courts for years while they milk their companies dry. That will not be very different from the current situation.

Dr Singh, we must not base labour reforms on the ridiculous assumption that companies with no money can pay record sums as compensation. The money must come from an independent fund. This is best provided by a formal scheme for unemployment insurance.

Let every worker in the organised sector pay Rs 10 per month into an unemployment insurance fund, and let every employer make a matching contribution. Rs 10 is a small sum: Even a pack of Wills cigarettes costs Rs 43 these days. If 28 million workers contribute Rs 10 each, that means Rs 28 crore per month.

With matching contributions from employers, the sum rises to Rs 56 crore a month. Even allowing for some defaults, that is sufficiently large and sustainable to take care of retrenchment compensation, and probably to provide a surplus that will help cut the fiscal deficit!

Unemployment insurance can provide retrenched workers with 100 per cent of basic wages for six months, falling to 75 per cent, 50 per cent and 25 per cent in the next three six-month periods.

That will support workers for up to two years while they find fresh jobs.

Unemployment insurance shifts the burden of financing from companies who cannot pay to the whole business community, which is as it should be. With unemployment insurance in place, true flexibility will return.

Industries will be able to downsize without facing an impossible financial burden. Owners will revive companies instead of milking them dry. And retrenched workers will get a reliable safety net.

Best of all, this safety net will cover organised sector companies with less than 100 workers, who get no labour law protection at all today. So, this labour reform will actually extend benefits to millions of new workers.

Dr Singh, you need to present this as a pro-labour idea. It will help you steal the thunder of the CPM and of dinosaurs within your own party. Reform must not only benefit workers, it must be seen to benefit them too.

What do you think?