Ease of doing business: Labour reforms remain just an intention

A look at ground realities as states are unwilling to deal with the political hot potato

In the huge circulation area of Mahatma Mandir at Gandhinagar capital of Gujarat, stands a series of tall billboards announcing actual investments made by marquee names in earlier editions of the Vibrant Gujarat summit. 

It includes Reliance Industries, Essar Group, Basf, Adani and 14 others. The total actual investment made by them in the state as a follow through of these events stands at a combined Rs 1,59,546 crore. The billboards also announce another data, which is quite sobering. The actual direct employment generated by these 17 manufacturing industries since 2007 in the state from those investments is just 92,357. In other words to generate a job for one person, the companies have spent on an average, Rs 1.73 crore.

The data is significant. Gujarat stands at number three on the state-wise Ease of Doing Business list prepared by the central government. It is also one of the few states that have over the years substantially eased up on labour rules. Despite that, if job creation in the manufacturing sector is so costly here, it is easy to guess how other states lower down the order would stack up on employment creation. 

This is possibly the key reason why at this year’s investment summits no chief minister has mentioned labour reforms as their calling card to attract industry. Instead at each of these sessions that dot the months of January and February, the states have made over-pitched claims for job creation that has no link with the investment memoranda they have signed with glee.

The Gujarat data is a good reality check in this context. Since it is about actual investments made over the years posited against actual employment generated, the data is worth comparing with that of the levels of employment other states plan on getting from their editions of business-government meets. 

The Andhra Pradesh government under N Chandrababu Naidu, at its AP-CII partnership summit last week, has promised to generate 2.23 million jobs from the investments signed on at the meet. Using the Gandhinagar data, the investment needed to secure that level of employment would be about Rs 38.64 lakh crore. Even accounting for the hyper energetic number that states line-up at these events, the promised investment at Rs 10.54 lakh crore this year is less than a third of the sum needed to get those many jobs. 

Next door Karnataka has been holding its Invest Karnataka event for several years. Data from last year’s event hosted on the state government website puts the number of expected employment generation at 670,931. Using the same ballpark the required investment to secure it is Rs 11.6 lakh crore. The MoUs signed were far more modest at Rs 3.08 lakh crore. 

West Bengal under Mamata Banerjee has taken a safe route out to estimate no employment numbers from its promised Rs 2.35 lakh crore of MoUs it has signed this year. It is also the reason Delhi has slipped so low in the ranks. 

A good way for the states to ensure their jobs numbers do improve would be to ease up on labour laws. It is also easy since the laws are all in state domain. As the following table shows states climb up on Ease of Doing Business rank when they have fewer labour laws. Andhra Pradesh, Telangana and Gujarat score correspondingly better, whereas Uttar Pradesh and Karnataka have a long way to go. Both the latter states have cluttered themselves with such laws on their statute books. 

For the manufacturing sector, it matters how labour laws will be handled. Yet despite the nudging by the Centre, the states are largely unwilling to commit themselves publicly to this political hot potato. As the data at Mahatma Mandir shows, this extracts a cost. Extracting a job in the manufacturing sector without making it easy to do business with labour is a very costly exercise. But states are reluctant despite the price tag to try reforms, for a change.