The economic survey criticised the slow pace of reforms in labour laws, arguing that firms “negotiate” regulatory hurdles imposed to protect employees who get poor quality jobs as a consequence and suggested easier retrenchment norms and lower statutory deductions from salaries to create ‘good’ jobs.
“India’s most pressing labour market challenge going forward will be to generate a large number of good jobs. These jobs tend to be formal sector jobs. Two obstacles to formal sector job creation are regulation-induced taxes on formal workers and spatial mismatch between workers and jobs,” the survey said, defining ‘good jobs’ as safe, productive and well-paying jobs.
“The slow pace of labour reform has encouraged firms to resort to other strategies to negotiate “regulatory cholesterol.” One popular strategy is to hire contract workers,” the survey said highlighting how “managing” inspectors to the contract labour firm has become a normal exercise for factories.
Noting that contract labour hiring grew faster in states with relatively more rigid labour laws, the survey said medium-sized formal sector manufacturing firms reported labour regulations as a significant barrier to growth, “specifically the dismissal norms under the Industrial Disputes Act.”
The Industrial Disputes Act 1947 requires firms with more than 100 workers to seek government’s approval before retrenching workers. The law has encouraged factories to employ contract workers to stay out of the rule books even though entrepreneurs feel ‘contract labour is not the ideal solution’ for them.
Only 35 per cent of the 10.5 million new manufacturing jobs created between 1989 and 2010 were in the formal sector. Also, in the total number of establishments that rose by 4.2 million from 1989 to 2010, the formal sector growth stood at only 1.2 per cent. Though the informal sector kept unemployment levels low, these jobs were “much worse than the formal sector ones,” according to the survey.
Citing a recent survey conducted at the finance ministry's request, the survey said 70 per cent workers’ prefer receiving cash instead of the money going into their EPF account. The workers said they preferred spending the money “sooner, suggesting either that workers are liquidity constrained or impatient.”
At present, 24 per cent of a formal sector worker’s salary is deducted – with 12 per cent counted as employer’s share and 12 per cent as employee’s contribution towards EPF. This is compulsory for employees earning Rs. 15,000 a month. The survey suggested that 12 per cent share of employee’s contribution be made optional to “allow the poor to optimise as per their own personal requirements.”
“Policymakers should consider whether lower earners should be offered the same choice – of whether to contribute part of their salaries to the EPF – which the rich have,” it said.