A national problem

Expanding formal sector jobs needs benefits reform

India has a long history of strangling formal employment. The reasons for this are many, but the consequences are unarguable: the National Commission for Enterprises in the Unorganised Sector (NCEUS) said that 86 per cent of the workforce was employed in the informal sector, with all the paucity of benefits and protections that entails. Other similar estimates are equally worrying: that employment growth in the unorganised sector saw a continuous decline from 1972-73 till 2004-05; and that, since liberalisation in 1991, a large portion of the net job creation happened in the informal sector. In other words, the vast majority of Indians in the workforce have no access to minimum wage laws, to safe working conditions, and to basic leave and health benefits. Under the United Progressive Alliance (UPA), the record has been particularly problematic. According to a study by the National Sample Survey Office, only 53 million jobs were created in the UPA's tenure till 2012, compared to 60 million in the years before when the National Democratic Alliance was in power. True, the government has claimed that under the UPA's tenure, the unemployment rate dropped from 8.4 per cent to 5.6 per cent. But, even then, the International Labour Organisation says that most of these were, in effect, informal jobs in the casual sector - ways of getting around labour protections, and a continuation of the casualisation of even the formal workforce.

This is largely a product of government failure. For one thing, existing labour laws are restrictive and only arbitrarily applied. The NCEUS' seven-year-old plan to ensure that contract labour get benefits on a par with regular employees, meanwhile, has foundered on the back of resistance - not just from private employers, but more effectively from the public sector. But another source of distortion is India's benefits regime. As Manish Sabharwal pointed out recently in The Indian Express, it is both regressive and exclusionary. Mr Sabharwal calculated that deductions from a salary of Rs 5,500 a month meant that take-home pay was 49 per cent less than their cost to the company - as against only nine per cent less for a salary for Rs 55,000 a month. Naturally, this will lead to an unwillingness to expand formal employment at the lower end of the pay scale. Forced savings through schemes of provident funds that allow such distortions are a major part of the problem. While provident funds may remain an option, employees should have greater choice in how they save.

It is certainly true that the baseline requirement for a larger formal sector is more up-to-date labour law. The contrast with other countries, with more flexible labour law, that are greedily taking up the jobs that China is losing as the People's Republic increases income, is stark. And political pressure to labour law reform must surely be eroding, even though Congress Vice-President Rahul Gandhi is willing to argue for a change. But, even if making that change is not possible in the short term, at the very least the benefits regime must be examined and reformed. The scandalous state of formal employment in India is a national tragedy.