The EconomistJune 27th 2020 Finance & economics 63H
as anycountry ever lost as many jobs as India shed in April?
After the government imposed a strict lockdown on March
24th, employment fell by 114m in the following month, according
to the Centre for Monitoring Indian Economy, a research firm. The
number, it said, was “mind-boggling”. It has also been mind-con-
centrating. Although employment has begun to recover, the need
to create jobs has prompted several Indian states to suspend many
of the country’s compendious labour regulations. These strictures
include over 40 central laws and about 100 state ones dictating how
employers should pay workers, contribute to their pensions, guard
them from injury, settle their grievances and lay them off.
The Factories Act of 1948, for example, aims to safeguard work-
ers’ health, safety and comfort in any plant with ten or more em-
ployees. It is quaintly fastidious. In some states, the rules prescribe
the frequency of whitewashing latrines (every four months) and
the size of bucket required to fight fires (nine litres). Other rules
elaborate on the specifications of spittoons (galvanised iron, with
conical funnels, on stands that are three-feet high).
This kind of overbearing regulation is one reason why “India
grows at night, while the government sleeps”, according to an ad-
age popularised by Gurcharan Das, an author. Reform has been in-
cremental and piecemeal. In nine states, for example, manufactur-
ing firms with fewer than 300 employees can now lay workers off
without the government’s permission (the previous threshold was
100). A new labour code passed last year consolidated four laws on
wages. Three similar codes were making their way through parlia-
ment before covid-19 struck.
The urgency of the pandemic has turned this slow march of re-
form into a “chaotic” scramble, says Aditya Bhattacharjea of the
Delhi School of Economics. Nine states are trying to raise limits on
working hours (to as many as 72 hours a week in some cases). Three
big states are seeking presidential approval for more sweeping
measures. Gujarat hopes to exempt new firms from most labour
laws for 1,200 days; Uttar Pradesh wants to exempt all manufactur-
ers for three years. In Madhya Pradesh new firms will be spared
many provisions of the Industrial Disputes Act, including its ban
on union-busting, for 1,000 days. And most small firms (with up to
50 workers) will be able to hire an independent auditor to certifytheircompliancewith the Factories Act, without having to endure
a government inspection.
These three states make up about a quarter of India’s labour
force. Amitabh Kant, the head of nitiAayog, a government think-
tank, hailed the proposals as “one of the boldest and bravest initia-
tives since the reforms of 1991”. He credited the pandemic with
“eliminating red tapism, inspector raj and all that was antiquated
in our labour laws”. The reforms were also one reason s&p, a rating
agency, did not downgrade India’s rating to junk this month.
Will the reforms work, though? Sceptics raise an obvious objec-
tion. If India’s workers are so well protected by the country’s cum-
bersome laws, why did over 100m lose their jobs in a single month?
This misses the point: it is because India’s labour laws are so oner-
ous that firms try to escape them by remaining small and shadowy.
(Firms are also hiring more people through temporary-employ-
ment agencies, many of which disappeared during the lockdown,
leaving their workers in the lurch.) In 2015, Urmila Chatterjee of the
World Bank and Ravi Kanbur of Cornell University found that al-
most 10% of manufacturing employees worked for firms that
should have registered themselves under the Factories Act but had
not. And about 65% worked for tiny firms that fall outside the act’s
scope. Jobs are protected on paper but precarious in practice; the
paperwork may contribute to the precariousness.
More recent work by Amrit Amirapu of the University of Kent
and Michael Gechter of Pennsylvania State University shows that
there are surprisingly few firms with ten or more employees, given
the number with nine or fewer. They infer that becoming big
enough to fall under the purview of the Factories Act adds almost
35% to a firm’s costs per worker. But this national average masks
wide variation. In some states, such as Bihar, the cost is as much as
69%. Elsewhere it is negligible. This is not because states differ
greatly in their laws, but because they vary in their lawlessness. In
corrupt states, dishonest inspectors demand bribes, forcing firms
to stay inconspicuous. “Every business unit in Karnataka faces this
agony,” complained one entrepreneur on ipaidabribe.com in 2016.An inspector calls
The answer, argue Mr Amirapu and Vidhya Soundararajan of the
Indian Institute of Management Bangalore, is not to erase labour
protections but to prevent their abuse. Even stalwart reformers like
Arvind Panagariya of Columbia University believe the recent sus-
pensions are too sweeping—they “violate the spirit of a modern-
day democratic state”—and too short-lived. “No entrepreneur
worth her salt will invest [in a sizeable enterprise] if she faces the
prospect of the current labour-law regime returning,” he wrote in
the Times of India, a newspaper.
Mr Bhattacharjea thinks the new labour codes in parliament
might strike a better balance between flexibility and security. He
also welcomes procedural reforms, such as computer-generated
schedules that remove an inspector’s discretion about which fac-
tories to visit and when to file their reports. That makes it harder
for them to prey on a factory or delay approval until a bribe is paid.
Such a system has already been implemented by the central gov-
ernment and several states. (Coincidentally, the number of labour-
related complaints on ipaidabribe.com has tapered off.)
The number of state labour inspectors grew by 18% between
2017 and 2019. If employment in the rest of the economy is to rise as
quickly, these inspectors will have to enforce leaner, simpler rules
with more computer-aided honesty than in the past. The govern-
ment cannot afford to sleep when the economy is comatose. 7Free exchange The three-year nap
Some of India’s states are temporarily relaxing labour laws. Will the reforms work?