Outdated labour laws don't help India's rural poor

IN LAUNCHING an ambitious programme to feed 800 million poor citizens, India has embarked upon a morally admirable but economically problematic social welfare scheme.

To sustain such a humane policy, the country must generate wealth by putting its massive working population to productive work. To achieve that goal, however, India needs a national employment promotion scheme. Not one requiring subsidies for the urban poor and unemployed, but rather one that clears the thicket of outdated labour laws.

In the name of protecting workers, these rules have ensured that labourers do not get a chance to exercise their right to work.

Under the Rural Works Programme, members of poor families have the right to work 100 days a year for a minimum wage. Despite massive corruption in its administration, to say nothing of the substandard roads and canals built by such workers, the programme has helped the rural poor and, perhaps, stemmed city-ward migration. At its core, however, it is a classic transfer payment aimed at redistributing wealth.

To build a prosperous society, however, the country needs to generate wealth by creating jobs, not making work schemes.

The transfer policy may be morally right in a deeply unequal society, but India has failed to exploit its much-vaunted "demographic dividend".

Millions of dollars spent on rural work schemes have provided subsistence but they have not helped the rural poor to develop skills. Also, the failure of the state to build necessary infrastructure and phase out antique laws has discouraged growth in manufacturing, which could absorb the 13 million job-seekers that enter the market each year.

Developing countries have traditionally leveraged their working populations in light industry and manufacturing to accumulate capital. Over time, developing skills and adding value have lifted the poor and unskilled into the ranks of the middle class.

China offers a textbook example of that policy, whereas India presents a worrying counter-example. Once the world's leading textile exporter, India has ceded its place to its South Asian neighbours and China. Overall manufacturing has also stalled, with its contribution to the gross domestic product declining from 17 per cent in 1995 to 14 per cent last year.

Aside from poor infrastructure and policy inconsistency, labour laws designed (ironically) to help the workers have instead held back investment in manufacturing. A plethora of laws dating back decades have effectively prevented the "effective provision for securing the right to work", as provided for by Article 41 of the Indian Constitution.

Successive amendments to the Industrial Disputes Act (1947) have made it increasingly harder for firms with 100 or more workers to dismiss workers. Among the laws dating back to another era is one that requires factories to maintain paper files - effectively barring the advent of electronic record-keeping.

Such laws deter investors. It is hard to maintain a steady workforce when export demand is notoriously volatile.

Export issues aside, anachronistic labour laws have reduced productivity. In a 2004 study of the impact on Indian states that modified the Industrial Disputes Act in a pro-worker direction, Mr T. Besley and Mr R. Burgess found the result was the opposite of what the legislation intended. Output in the formal sector where regulations applied dropped, while that in unregistered or informal manufacturing increased.

A recent Asian Development Bank study on the impact of labour market rules in five Asian economies - Bangladesh, Indonesia, Pakistan, the Philippines and Vietnam - reached a similar conclusion. It found labour market regulations inhibit the flexibility of firms engaged in export more than firms serving only the domestic market.

Free food and subsistence wages for the rural poor may help politicians to get votes. But lifting the economy will require a coordinated government and private sector initiative to promote conditions for job creation.

stopinion@sph.com.sg

The author is editor-in-chief of YaleGlobal Online, published by the MacMillan Centre, Yale University.

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