The reason that migrant labour and almost 80 per cent of the total workforce toil in the informal sector is because the higher-paying formal sector with superior working conditions shies away from hiring labour because of stringent laws. This has real consequences not just for labour and employment but for the macroeconomic health of the country. Unlike most emerging economies, India has not developed a labour-intensive manufacturing
base, which could have powered both domestic growth and exports, just like it did in East Asia, including China.
Let us also be frank about the elephant in the room when it comes to labour laws: Hire and fire. The inability to hire and retrench workers
is a genuine problem for firms, which operate in markets which are cyclical. They need the flexibility if they are to operate efficiently and profitably. By forbidding hire and fire, the current labour laws protect a small labour elite, not more than 10 per cent of the workforce. In any case, in white collar jobs, with the exception of government jobs, it is common for employees to be relieved despite labour laws. In blue collar jobs, employers take the route of contract labour, rather than permanent jobs precisely to get around the law on retrenchment. Is it worth protecting 10 per cent at the expense of the 90 per cent?
The answer is no, but students and practitioners of political economy know the power of vested interests and the problem of collective action. However, reform can be designed to succeed.
First, the government should “grandfather” the existing labour laws for those in current employment. The new amended labour laws which will have provisions for hire and fire will not apply to the 10 per cent who have joined employment before a cut-off date. They will apply to new entrants. Interestingly, the government has given an extra tax concession to new firms, which will only be taxed at the rate of 15 per cent. For the same category of firms, amended labour laws can apply. This would immediately increase the prospect of firms that want to relocate out of China to come to India.
Second, the new labour laws must have an inbuilt element of social security. The worker must be entitled to a cash transfer, say of Rs 5,000 per month, for a maximum period of six months after retrenchment or until he or she gets alternative employment. This can be conditional on the worker entering a reskilling programme. The government must bear the cost of this. It cannot possibly argue that this is unaffordable given the tens of thousands of crores being spent every year to prop up sick and loss-making public sector companies and protecting their tiny labour forces.
Third, begin a massive programme of constructing public housing in urban areas. This can be spread out over the next three to four years and form an important part of the stimulus to get the economy back on a high growth trajectory post Covid. It is worth monetising a part of the government debt for this project, along with raising investment in public health infrastructure.
There are no short cuts to changing the status quo. Suspending entire labour laws as some states have tried is not sustainable. It is time to restore the dignity of the labour, properly.