Think employment: Centre's withdrawal of labour law reform is unfortunate

As the run-up to the 2019 general elections begins, the question of whether jobs are being created on a sufficiently large scale has begun to dominate conversations in both policy-making and political circles. Some recent attempts to quantify the growth of formal employment have suggested — by looking, for example, at the data from the Employees’ Provident Fund Organisation — that there has been considerable growth of jobs in the formal sector. However, these figures have justly been questioned as not tallying with other estimates, particularly the large-scale National Sample Survey. In addition, it is unclear if they indicate job creation or one aspect of formalisation of employment. More broadly, even if formal jobs are apparently growing, it is in the context of stagnant labour force participation — which is also a product of poor employment prospects. What is certain is that reliable independent estimates of the employment scenario are overdue.

 
Unless the government is lulled into a false sense of security by these recent estimates, it should be dealing with the unemployment and under-employment problem on a war footing. It is perhaps in this context that the proposal to allow short-term employment contracts should be seen. The effect of this change is yet to be properly evaluated — will it create two sets of “formal” employees, or will it negate the harmful effects of existing labour laws? Certainly, most of these are attempts to go around the real and known constraint on labour-intensive employment in India: The restrictive and overbearing central labour laws, which are among the most oppressive in the world. As written currently, large enterprises with hundreds of employees cannot lay off workers without the express permission of the government. Worryingly, a plan to relax this requirement for companies between 100 and 300 workers, recently circulated at the Union Cabinet level, was withdrawn in less than a week. This betrays a lack of commitment to labour law reform.

 
By way of explanation, government officials indicated that they were uncertain of the usefulness of such a relaxation on investment in high-employment sectors, as some state governments had relaxed the requirement similarly and no effect on investment had been seen. This is not a reasonable objection. For one, it is too soon in most cases for a direct effect on investment to be visible. Other cyclical constraints on private sector investment, such as bank credit problems and overcapacity, might be affecting decisions currently — but such problems are cyclical, and will eventually dissipate. In fact, increasing animal spirits of investors should be priority, and central labour law reform would go quite far towards doing so. It has also been consistently argued since Rajasthan first attempted state-level modifications of labour law three years ago, a patchwork of different labour regulations across different states would not appeal to investors. What is needed is a pro-employment policy nationwide, and that requires action at the central level. It is past time for the government to take this problem seriously, and to act on reform. A first step should be to re-issue the industrial employment deregulation proposal, which has just been withdrawn.