That India’s archaic and restrictive labour laws are discouraging investment in the manufacturing sector is now a well-understood fact. They provide bureaucrats with a reason to harass entrepreneurs and have failed to protect India’s workers. As a consequence, over 90 per cent of Indians work in the unorganised sector. Any comprehensive approach to restarting the economy by the new government will need a complete overhaul of labour laws. Some states like Rajasthan, Madhya Pradesh and Haryana have realised this and have started labour reforms. These are welcome developments, but if the Narendra Modi government is serious about pro-market reforms and restarting manufacturing, it must change the labour laws at the Centre instead of waiting for states to do so in a haphazard and piecemeal basis.
Much of the difficulty is due to the longstanding political and official focus on ensuring job security for workers at the expense of increasing production. The emphasis on protecting the rights of workers may have been needed at one time to prevent exploitation by unscrupulous employers. But, in course of time, the fallout has been a decline in production because of the realisation by the workers that they cannot be easily dismissed. Besides, the trade unions are always there to speak up on their behalf if any disciplinary action is taken for neglect of duty.
While the American-style hire-and-fire system is not advisable in a poor country like India, the negative consequences of an excessive emphasis on rights have become increasingly clear with the rise in militant trade union practices and the disinclination of the corporate sector to invest for fear of being saddled with an unruly and unproductive workforce. There is a need, therefore, for a relook at laws which require companies employing 100 or more people to seek the government’s approval for sacking or even closing the establishment. Yet, a continuation of the present state of affairs will harm the workers themselves in the long run by curtailing employment opportunities.