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Make Hire And Fire Easier

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Human resources are currently India's greatest asset, and form the foundation of our rapid growth process. The compulsions of India's young demographic profile and of inclusive growth signify a re-examination of the country's architecture of labour legislation in order to encourage rapid growth of employment. India's labour laws must be geared towards unleashing the potential of its huge latent talent and providing each worker dignity of work, sufficient and rising income, and social security.

According to the National Sample Survey Organisation (NSSO), total employment in both the organised and the unorganised sectors is 397 million, of which just 28 million is in the organised sector. Labour laws in India cover only the workers in the organised sector, of which about 20 million are in the public sector. For the remaining 369 million workers, there were no social security or welfare legislations until the Unorganised Workers Social Security Act of 2008.

Around 45 labour laws are applicable to the organised sector at the national level and 200 at the state level. The major concern of industrial enterprises regarding labour laws relates to inflexibility in retrenchment of workers and closure of enterprises with 100 workers or more under the Industrial Disputes Act 1947. Further, many of the stipulations in laws overlap. For example, the requirement of canteen, rest rooms and first aid facilities is mentioned not only in the Factories Act, 1948, but also in the Contract Labour Act, 1970 and the Inter-State Migrant Workmen Act, 1979. The definition of ‘wages' too differs under different laws. Also, frequent inspections by different inspectors pose difficulties for factories.

Labour LogoThere are several consequences of such restrictive labour regulations in India. Primarily, they could be a key reason that organised sector employment has stagnated or declined over the years. During 1983-94, the rate of growth of employment in the public sector was 1.53 per cent per annum, and in the private sector 0.44. In 1994-2005, public sector employment declined at the rate of -0.7 per cent per annum, while the private sector saw a growth of 0.58 per cent.

Second, the model of economic growth in India may have altered due to labour legislation. While most economies shifted from agricultural dominance to mass manufacturing and then to service sector, India has attained a sectoral GDP break-up in which the services sector is predominant.

Third, India has missed out on the mass manufacturing boom experienced by other developing countries such as Korea and China.

Fourth, India's manufacturing sector has veered towards high-capital, high-technology, high-skill production models. Thus, a vast majority of workers with low skills has few employment opportunities in the organised sector.

Fifth, FDI is discouraged by the stringent labour laws in certain sectors. According to the Investment Commission report of 2006, potential investors cited "inflexible labour laws" as deterrents to investment in textiles, auto components and electronic hardware.

So, simplification of labour laws is vital, as is streamlining of inspections and compliance. In fact, the Second National Labour Commission had gone into issues in detail and suggested that incremental changes could be carried out in stages. Another key area that requires attention is skill development. Though the government has set up a National Skill Development Mission and has announced its intention of establishing 50,000 institutions across the country to skill 500 million workers by 2022, this would need to be implemented with commitment. To sum up, a restructuring of labour regulations to encompass each member of our huge talent force is the need of the hour.

Chandrajit Banerjee is Director-General of CII

(This story was published in Businessworld Issue Dated 24-08-2009)

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