View: Labour laws are not the only villain hampering growth as they are made out to be

Economic Times, February 22, 2020

By Arun Maira & Pradeep S Mehta

Overall, the Economic Survey 2019-20 is a good document. However, it simply repeats popular views without analysis of facts in some matters. Glaringly, it seems to squarely blame labour laws for suboptimal entrepreneurial activity, while ignoring other important factors whose impacts it downplays.

For example, the Survey states that entrepreneurial activity in the manufacturing sector in Gujarat, Punjab and Rajasthan is high because of flexible labour laws. Asserting this further, it presents the corollary of West Bengal, Assam, Jharkhand, Kerala and Bihar showing low entrepreneurial activity due to inflexible labour laws.

To further reinforce this point, it presents an aggregate picture from last year’s Economic Survey, which shows that during 2011-19, states with flexible labour laws have performed better in the creation not only of new firms, but also of new manufacturing firms.

The overall sense one gets from these assertions is that entrepreneurial activity is strongly dependent on the flexibility of labour laws. This is not only inaccurate, but also misleading. On closer reading, the Survey disproves its own argument. For instance, while citing the example of the most entrepreneurial districts in Gujarat, it highlights the importance of other critical factors, like economies of agglomeration and labour skills.

Further, while building on the example of Gujarat — which it calls a state with ‘pro-worker’ laws — it highlights the importance of business reforms like ‘ease of doing business’ (EoDB) in developing enterprises.

It would have been better if the impact of these other factors were also analysed in the same detail as impact from labour laws. This would have explained why, say, West Bengal, a state with so-called ‘inflexible labour laws’ according to the Survey, actually registered the highest GDP growth (12.58%) in FY2018-19.

Labour Gain, Not Pain

Given this, it’s perhaps time to challenge a popular narrative that labour laws pull down growth and entrepreneurship. Let us look at three independent studies spread over three different timeframes for Rajasthan.

In 2014, Rajasthan amended the Industrial Disputes Act, 1947, the Factories Act, 1948, and the Contract Labour (Regulation and Abolition) Act, 1970 — these were most cited by some experts as obstacles to businesses. The first one is the 2015 PHD Research Bureau study, ‘Impact of Labour Reforms on Industry in Rajasthan’.

Businesses were not particularly enthused by the reforms for two reasons. First, it was too early to gauge their impact. Second, and more significantly, they were concerned with several other factors that impacted their enterprises’ growth and productivity even more — administrative bottlenecks, unavailability of land, power deficit, availability and costs of finance, poor transportation systems, inadequate water resources, and a complex taxation system.

On the labour front specifically, businesses identified two issues: non-availability of skilled labour force and high wage costs, rather than flexibility in hiring and firing labour. Improvement of skills and productivity (which would support increases in wages) are less likely to come about if labour is not retained and invested in.

The second study, ‘Amendments in Labour Laws and Other Labour Reform Initiatives Undertaken by State Governments of Rajasthan, Andhra Pradesh, Haryana and UP: An Analytical Impact Assessment’, by the VV Giri National Labour Institute in 2017, was published two years after the amendments were introduced. It concludes that on their own strength, the amendments have neither succeeded in attracting investments nor in boosting industrialisation or job creation.

The third one is CUTS International’s ongoing study on ‘Good and Better Jobs’ in key labour-intensive sectors in India. Looking at the textile and garments sector in 2019 — four years after the amendments were introduced — it, too, failed to notice any tangible change on the ground.

The study concludes that in Rajasthan, and across the country, the key costs in the textiles sector affecting the productivity and competitiveness of an enterprise is not labour, but raw material, power and logistical costs.

If these costs can be reduced, particularly raw material costs, even higher wages will not affect the efficiency of an enterprise. These other factors must be the focus of reforms, rather than flexibility of labour laws and suppression of wages.

Higher wages, along with improvement of enterprises’ competitiveness, will increase consumption in the economy, the slackness in which is another factor depressing expansion of enterprises in the Indian economy.

Cut From the Right Cloth

Even though these insights are from the textile and garments sector — a principal sector for increasing employment in India, and also with the potential to increase exports — the CUTS’ study also highlights other factors that have been mentioned in the Economic Survey.

A very important factor is the quality of agglomeration in enterprise clusters. Stronger clusters reduce inward and outward market costs for enterprises. They can also facilitate more rapid skill development.

Labour laws are not the villain hampering growth as they are made out to be. However, whatever the laws are, they must be administered much more efficiently, as must other laws, to make it easy for small enterprises to do business.

(Maira is former member, Planning Commission, and Mehta is secretary general, CUTS (Consumer Unity & Trust Society) International. Abhishek Kumar contributed to this article)

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