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3 Reasons why labour market is hindering India’s growth

Moneylife Digital Team
18 August 2014

According to Morgan Stanley, current labour laws in India incentivize firms either to remain small, employing fewer workers, or to use capital- intensive approaches. No wonder, the share of India’s manufacturing sector in GDP of is one of the lowest among EMs

India’s track record in terms of creating productive jobs has been slow so far. One of the key issues stifling productive job growth is labour market regulations in the country. In addition, multiplicity of laws, rigidities in the system and trade unions play a major role in holding back India's labour market environment, says Morgan Stanley in a research report.

"Labour regulations in India are seen to be complex, rigid, time-consuming, and one of the main impediments to job growth in the organized sector. However, it is important to note that most labour regulations are seen to stifle job growth in the manufacturing sector. The services sector (mainly IT/ITES, retail comes under a different) has largely escaped stringent government, administrative requirements. Moreover, labour laws also create segmentation in the labour force – ultimately, the labour provisions meant to safeguard worker interests are applicable only to the much smaller organized labour force, which is about 16% of total. Thus, majority of the workers in India are not covered by regulations that are needed to protect their interests," the report says.

Labour law is a concurrent subject under the Indian constitution, which implies that both the central government and state governments have the right to formulate laws on the subject. This has resulted in multiplicity of laws, at times with overlapping jurisdictions. Currently there are 44 central laws and about 160 state laws on the subject (ILO, 2013). Many of the laws are archaic, dating to pre-independence – creating an urgent need for an overhaul of the laws to attune them to present realities.

Indeed, there are multiple laws governing a single area. For instance, there are 19 laws governing conditions of work and industrial relations, 14 laws on social security and labour welfare, etc. Here we have only mentioned the central laws applicable to these areas.

According to Morgan Stanley, a fallout of the cumbersome labour law structure is that the organised sector has remained small, accounting for only 16% of the total employment and the bulk of labour force is employed in the unorganised sectors.

In addition, Morgan Stanley says, the regulations are also viewed as increasing rigidities in the labour market, owing to restrictive conditions on hiring and laying off workers, closure of plants, and dealing with trade unions.

"Though India does not have the provisions for collective bargaining, the emergence of various trade unions leads to bargaining at an individual firm level. Moreover, the most pressing issue faced by industry is that trade unions tend to get associated with/backed by different political parties, leading to politicization of trade unions and making it difficult for employers and employees to resolve the issues," the report added.

Comparing labour regulations in India with other countries, Morgan Stanley says, most other nations do not have a stringent requirement of prior approvals and consultations (hire and fire practice), apart from Pakistan and Sri Lanka. The report says there is dire need to reform labour laws, especially related with trade unions.

Under Indian law, there is scope for multiple trade unions in a single factory – e.g., a company with 700 workers can have 70 trade unions. In most other countries, the requirements for minimum membership for trade unions to be recognized are higher than those in India, reducing the scope for multiplicity of unions.

Morgan Stanley says, it believes India needs to amend provisions, which allow outsiders to be office bearers. Currently one-third of the office bearers or five (whichever is less) can be outsiders. India also needs to introduce a strike ballot such that a strike can be called only if it is supported by a qualifying majority. Moreover, under the Industrial Disputes Act there is no provision to give advance notice for a strike unless industries are mentioned under public utilities, contrary to the general practice in many countries. Thus, there is a need to amend this to introduce a mandatory advance notice for all firms, it added.

Indian policy makers are slowly paying attention to the fact that tight labour market regulations are having a negative impact, especially on manufacturing sector job growth. There has been a lot of discussion of this, yet governments have stopped short of making any full-fledged changes to the laws to reduce the rigidities in the system, Morgan Stanley says.

From the early days of its formation, the new government has been making announcements of its intention to boost manufacturing sector jobs. Indeed, Prime Minister Narendra Modi again made a firm commitment on the need to work towards boosting manufacturing exports in his speech on Independence Day.

Morgan Stanley said, apart from amending the laws, the state governments will need to initiate effort to bring about a change in attitude among local field officers and inspectors who are in charge of enforcement of labour laws.

A comprehensive review and restructuring of labour laws is required to make them more attuned to the present economic realities. "We believe that the central and state governments have recognized the need to initiate labour law reforms in order to boost manufacturing sector jobs. So far the governments have taken a piecemeal approach – but there now appears to be serious effort by the central government and some of the state governments to revive the manufacturing sector," the report says.

Morgan Stanley says it is cautiously optimistic about amendment to labour laws by the Central Government, since getting approval in the Upper House (Rajya Sabha) for some sensitive changes could be a challenge with a lack of majority for the ruling coalition. It says, "We are more optimistic about state governments going ahead with meaningful labour law reforms. The recent amendments to labour laws by Rajasthan are a case in point."

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India-China: Important issues to settle in September

AK Ramdas
18 August 2014

Apart from the frequent border incursions in Arunachal Pradesh, China has showed its distinct dislike for even India to explore oil blocks that Vietnam had offered. Can both countries bury the hatchet and settle all impending issues when their chiefs meet in September?

One of the earliest diplomats to visit New Delhi and call on the Prime Minister Modi was Wang Li, the Foreign Minister of China. This was in apparent early bird move to ensure a meeting of President Xi Jinping with Prime Minister Narendra Modi in September, which is now confirmed. But the dates have yet not been officially announced. The Chinese President is aware that Indian PM Modi is set to meet President Barack Obama on 30th September in the White House.

His emissary, in the person of Sushma Swaraj, is on the move and has covered several countries, including Myanmar. She is now in Singapore. Modi's plans include a short visit to Japan to meet Shinzo Abe, his counterpart, and a great friend and admirer of India. (Abe has a few issues of his own to deal in relation to China). Modi will also receive the Australian PM Tony Abbott in September. A very tight schedule and a lot of important issues are to be covered with all these important diplomats.

Of immediate importance is the planning for President Xi Jinping's visit. Indian imports from China have been increasing at a tremendous pace to reach $52 billion in 2012-13 as against India which could manage a poor $13.5 billion. In the meantime, the target for trade by 2015 could reach $100 billion of imports. Imports from China are likely to be far more than the exports India can muster.

In order to make President Xi Jinping's visit a success all round, efforts have already been made by the Chinese government. An advance team from China visited India to study the prospects for cooperation in Railways. It appears this team has had its first round of preliminary consultations with the Ministry and all others concerned. According to China's Consul General in Mumbai, Liu Youfa, they may even sign an MOU (Memorandum of Understanding) on their cooperation in this area.

In the recent months, China has made other moves showing its ambition to be the lead banker for infrastructural development in Asia by garnering support from BRICS in setting up NDB (National Development Bank) with an authorised capital of $100 billion. All the five members will equally share $10 billion to meet the paid up capital. The founding members, Brazil, Russia, India, China and South Africa are also keen to go ahead with this. China has been explaining that NDB will be able to reduce the clout enjoyed by the World Bank and Asian Development Bank. Beijing's ultimate interest is to reinforce its economic clout in this area.

In so far as Modi's visit to Japan is concerned, both India and Japan have a common factor of checking the aggressive designs of China. Since 1894, Japan has been controlling Senkaku Island, which the Chinese call as "Diaoyu". China has attempted to dominate the East China Sea and has territorial claims also on Vietnam, Philippines, Malaysia, Brunei, Indonesia and Taiwan.

It must be noted that these claims with all its maritime neighbours are in violation of the UN Convention on Laws of the Seas (Unclos). Because of this bullying attitude all, these nations look towards the US for support. In the case of India, apart from the frequent border incursions in Arunachal Pradesh, China has showed its distinct dislike for even India to explore oil blocks that Vietnam had offered. India should go ahead with this exploration, and also not be afraid of taking part in joint military exercises with Japan, US or any other nation.

Apart from the two-way trade relationship that China enjoys with Australia (reaching $133 billion in 2013), the latter also has inward migration from Chinese people. Although Australia's relations are good, they have some concerns too. After seeing what is happening in the neighbourhood, the Australian cabinet minister Malcolm Turnbull, a key lieutenant of PM Tony Abbott is reported to have called the Chinese policy of dealing with its neighbours as "counterproductive" and "singularly unhelpful" to regional security.

As far as India is concerned, China's claim on Arunachal Pradesh has no legal or historical basis. It may also be remembered that illegally occupied Aksai Chin was passed over to China by Pakistan, which has been, so far, its closest friend! China's policy of "strategic containment" of India by enchancing Pakistan's military might, particularly in the nuclear field has been alarming, to say the least. Also, they are in various stages of completion of Gwader all-weather port in Baluchistan. They talk of friendship but are covering India from all sides.

The Chinese have employed other techniques to keep claiming Arunachal Pradesh as their own. From time to time, they issue wrong maps of their own choice and creation; they issue stapled visa for Indians from Arunachal Pradesh visiting China and most importantly, they do a lot of export of goods that can be easily made in India. Here, it is the importers in India who should be blamed for obtaining such cheap goods from China.

When President Xi Jinping comes to India for serious discussions, it is imperative that Prime Minister Modi, while welcoming him as an honoured guest of India, must ensure that the following issues are discussed threadbare and basic understanding reached, so that final agreement can be signed within the agreed time frame. These are:

a) our present LOC is the final actual border between the two countries and that China should return back those territories given by Pakistan from PoK. The PLA will not any more tresspass into our territories, nor there any intrusions in the air.

b) China will whole-heartedly support the induction of India as the permanent 6th member of the UN Security Council

c) India would welcome a restructuring of the UN Security Council itself. The policy of UK and France enjoying the permanent member status should be null and void, and should be replaced by a permanent representative nominated by European Union

d) this change, if approved by the UN General Assembly, would leave USA, China, Russia, India and European Union as permanent members. If, however, UNSC is to be made a 7-member council, Brazil, South Africa and Indonesia should be considered and two of them selected

e) To increase our bilateral trade and other relations, it is essential that China undertakes to not give any more military assistance to Pakistan. India will be willing to sign a no-war treaty with Pakistan, if China truly guarantees that it will not arm Pakistan any more. Also, China should not support so-called jihadi groups in J & K region. If anything, China should advise Pakistan to dismantle such terror camps.

f) China will not be the springboard for shipping fake Indian rupee currency notes

g) China and India agree to mutually help each other in exploring for oil and other sources of energy, such as solar

It would be a great day if PM Modi and President Xi Jinping can jointly achieve these objectives before them so that both Indian and Chinese people can live in peace.

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)

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Economy & Nation

July inflation down to a 5-month low at 5.19%

Moneylife Digital Team
14 August 2014

WPI inflation in vegetables declined 1.27%, however, potato prices shot up 46.41% and fruits 31.71% during July

Inflation dipped to a five month low of 5.19% in July mainly due to decline in the prices of some food articles, vegetables and protein-rich items. It was at 5.43% last month and 5.84% in July 2013.

Inflation in the overall food articles basket, which account for 14% of the total wholesale price index (WPI), stood at 8.43%. It was at 8.14% in June.

Inflation in vegetables declined 1.27%, and for onion it was (-)8.13% on an annual basis in July, as per the WPI data released on Thursday.

However, potato prices shot up 46.41% and fruits 31.71% during the month. Rate of price rise in milk was at 10.46%.

Inflation in the egg, meat and fish category stood at 2.71% in July as against 10.27% in the previous month.

While the rate of price rise in pulses was 3.31%, it was at 4.46% for cereals. In rice it was 6.85% and wheat 1.02% in July.

Inflation in the manufactured products was at 3.67%, and non-food articles, which include fibre, oil seeds and minerals, at 3.32%.

Inflation in the fuel and power category, meanwhile, was down at 7.40% from the previous month.

The WPI inflation data was revised upwards for May to 6.18%, from 6.01% as per provisional estimates.

The Reserve Bank of India (RBI) in its monetary policy review last week had cautioned that continued uncertainty over monsoon could stoke food inflation, but expressed the hope that government policies will improve supplies in the coming months. Retail inflation data for July, released earlier this week, showed a marginal inch up to 7.96%.