Shift of labour to non-farm jobs: Why it's high time to reform India's job-creation laws

20 Feb 2024
Shift of labour to non-farm jobs: Why it’s high time to reform India’s job-creation laws

Opinion: Manish Sabharwal and Kartik Narayan.

India aims to reduce agriculture’s ‘self-exploitation’ through non-farm jobs. This requires addressing problems with job laws, promoting direct benefit transfer, improving infrastructure and human capital, and reforming social security and labor codes.

In 1918, B R Ambedkar wrote, ‘If we succeed in sponging off our labour in non- agricultural channels of production… they will cease to live by predation, and will not only earn their keep but give us a surplus.’ More than a century later, the timing couldn’t be better to realise Ambedkar’s dream of India reducing agriculture’s ‘self-exploitation’ through the virtuous cycle of non-farm jobs.

Non-farm jobs fuel consumption and more jobs. However, accelerating farm-to-non-farm transition requires fixing the injustice, inefficiency and incoherence of laws that govern jobs.

Mass prosperity doesn’t arise from government spending. No country would be poor, monetary policy made countries rich – they are, at best, a painkiller or steroid. India’s goal is shifting from poverty to prosperity because of the direct benefit transfer revolution of the last decade. This has improved welfare state efficiency and put a floor under extreme poverty.

Our improved infrastructure – road- building has almost doubled to 30 km a day in the last decade – and human capital (the latest ASER report suggests we have more kids with more years of schooling than ever) provide fertile soil for productivity. The unfinished agenda of transforming our enterprise stack – 6.3 crore enterprises only translate to 25,000 companies with a paid-up capital of more than ₹10 crore – needs three reforms:

Decriminalisation: The most poisonous manifestation of our excessive regulatory cholesterol is the 26,134 jail provisions embedded in employer compliance. These rarely-used provisions have very few CEOs in jail. But they breed corruption, informality and low wages. About 17,819 of these jail provisions arise from job-creation legislation.

Outcomes need teamwork. About 80% of all employer jail provisions arise from state legislation. Unreasonable jail provisions encourage transmission losses between what is written, interpreted, practised and enforced. The recent Jan Vishwas (Amendment of Provisions) Bill 2023 is excellent. But Version 2.0 must raise ambitions (Version 1.0 only discards 2% laws), change philosophy (eliminate every jail provision that does not meet agreed criteria), and incentivise replication by states.

Rationalisation: Employers are asphyxiated by 6,000-plus filings (19% arise from job laws) and 69,000-plus compliances (26% derive from job laws). These laws are a thorn in the flesh for big employers who can afford large teams for compliance. But they are a dagger in the heart for small employers, who often surrender to the reality that you can’t comply with 100% of job laws without violating 10% of them.

Speed matters more than perfection. So, consolidating 42 central labour laws into four labour codes – mostly an aggregation exercise – was sound. But that new regime has not gone live.

The world has changed since the labour code legislation. China factory refugees are looking at India with ambition, even though only 11% Indians work in manufacturing. We should use the delay in notifying the four labour codes to consolidate them into one code that is more straightforward and shorter (shared definitions, etc).

Social security revamp: India’s self- interested trade union movement – which believes job preservation is a form of job creation, and chooses the old over the young – has infected work-linked social security programmes with high costs, low competition and excessive deductions. Consequently, only 0.1 crore of our 6.3 crore enterprises and 7.5 crore of our 55 crore workers make monthly social security contributions. Five design reforms by EPFO are overdue:

Efficiency: Benchmarking costs to gilt mutual funds.

Choice: Making employee contribution voluntary.

Competition: Giving employees the option to pay their contribution to NPS.

Design: Paying into Aadhaar number for portability.

Sustainability: Transfer pension scheme to public programmes and maintain employer-deducted programmes as defined contribution.

Reforming job-creation laws is challenging worldwide as some employers exploit employees. But without employers, there are no employees. And, most employers, especially successful ones, don’t view employees as an expense to be minimised, but as human capital to be nurtured.

Creating mass prosperity needs changing some of the laws that blunt non-farm employment, encourage machines over people and torture job-creators. The farmers’ agitation deserves listening. But if we want to be good ancestors, we can’t meet their demands. Helping them requires the higher financial viability of agriculture, which can only come through modernisation and a massive shift of labour to non-farm jobs.

The labour code delay demonstrates that change is a difficult and controversial job. But as James Baldwin suggested, not everything we face can be changed. But nothing can be changed unless it is faced.

Views are personal.

Published in: The Economic Times, 20 Feb 2024