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Resource centre on India's rural distress
 
 

Flat since 1991 by Manish Sabharwal

The only economic or social variable that has not moved since 1991 in India is our 93% informal employment in the informal sector. So, while we have smartly and substantially moved the needle on everything from foreign exchange reserves, infant mortality, school enrolment, market capitalisation, foreign investment, and pregnancy deaths, 9 out of 10 of our workers do not work in organised employment. Informal employment—what President Alan Garcia of Peru called the slavery of the 21st century—denies 93% of India’s workers the networks, skills, training, workplace safety and productivity that comes with formal employment. This extreme level of informalisation is not only an outlier by global standards but also economically stupid because organised sector employment leads to higher taxes, lower employee turnover and grants access to the credit and capital that can improve firm survival rates.

Public policy over the next 10 years needs to pray to one god—jobs. India’s demographic dividend means that 10 lakh people will join the labour force every month for the next 20 years. But a demographic dividend does not mean people but productive people. So improving the metrics of 3Es (education, employability and employment) must be the only filter that matters in public policy. This requires recognising that our high level of informal employment is not a cultural preference or a pull, but a push that arises from our dysfunctional labour market regime. Unfortunately, 2010 did not help in tackling this problem but made it worse by acting in the wrong direction in four public policy buckets:

1. Labour law coma: India’s labour law regime prefers job preservation over job creation. It makes an employment contract immortal—marriage without divorce—and the lack of employers’ ability to end contracts means that they hire less people than they should or hire them in the informal sector. Our labour laws encourage the substitution of people by machines, breed corruption and sabotage third-party financing of skill development. The Indian Labour Conference of 2010 did not help by further undermining the legitimacy of fixed-term contracts and not recognising trade unions for the labour aristocracy they are. The self-interest of trade unions—7% of India’s labour force—is not national interest.

2. Higher salary confiscation: The high level of mandatory salary deduction (PF, ESI, EDLI, EPS, etc) does not raise cost-to-company but reduces take-home wages. At lower wages, people find it difficult to live on 65% of their salary and prefer informal employment, which does make these deductions—the government views them as value-for-money, but the poor see them as a tax. The year 2010 made this worse by raising the limit for ESI coverage to Rs 10,000, raising the coverage of PF to employers with 10 employees and a stealth default by EPFO on the EPS by reducing benefits.

3. Minimum wage distortion: Wages reflect productivity. If they do not, they lead to distortions and lead to inflation (food anybody?). Unrealistic minimum wages hurt the young and less-skilled the most because they are the most vulnerable and likely to volunteer for informal employment. 2010 ended with proposals by the National Advisory Council to pay minimum wages under MGNREGA and the ministry of labour competing by proposing a national minimum wage. MGNREGA should remain a safety net for the poor and paying minimum wages will make the government the largest employer in the country. A national minimum wage is a dysfunctional idea because India’s geography of work is very diverse and labour markets are local. So, an unrealistic minimum wage fatwa by some labour market Ayatollah sitting in Delhi will only amplify unorganised employment.

4. Re-regulating education: Supply creates its own demand in labour markets. Low quality supply creates low quality jobs. If our education and training system produces employable children, it will spark a virtuous cycle of productivity and employment.

Unfortunately, 2010 saw the activation of the poisonous Right to Education Act that will lower school capacity, increase corruption, raise costs, lower competition and increase confusion. It represents a license raj of the 1980s, while education needs a deregulation of the 1991 kind. A bad school is better than no school. The most expensive school is no school. The good is not the enemy of great. An education and training system that does not produce employable children amplifies to low productivity informal employment because it produces low productivity people.

India’s reform journey is about giving every Indian a decent job. Of the many factors in creating a fertile habitat for job creation—infrastructure, capital, role models, etc—we have made no progress in labour laws since 1991. But no labour law reform means lower organised jobs. We have nothing to lose but our demographic dividend.

The author is chairman, Teamlease Services