It is wrong to say that employment must come mainly from the unorganised sector

Pity K C Pant. Two reports on employment by the Planning Commission, over which he presides, are pulling in opposite directions. Mr Pant is valiantly trying to straddle both of them, but with little success.

One of the reports — by the Task Force on Employment headed by Montek Singh Ahluwalia when he was a member of the Planning Commission — recommended changes in labour laws. The other, more recent, Special Group on Employment — headed by S P Gupta — is fairly orthodox.

The two reports differ not just on the unemployment numbers, estimated at 8.97 million by one and an amazingly different 26.58 by the other. Rather, more significantly, they also differ on what should be done about it.

One says new jobs have to come from the unorganised sector; no, says the other, they have to come from the organised sector. The diametrically opposite perceptions have resulted in crucial differences in the policies the two reports prescribe.

The task force headed by Mr Ahluwalia had recommended an acceleration of GDP growth to achieve higher employment growth. This could come about through substantially higher investments and an increase in the efficiency of capital use. It argued that the Indian labour laws have impeded the flexibility to adjust the labour force, affecting investment and the growth of employment.

The most radical change recommended by the task force was the abolition of the requirement of prior government permission for retrenchment, lay-off or closure, through a change in the Industrial Disputes Act. It also recommended the introduction of a system of short-term employment contracts under which workers hired on contract can be fired. These workers could be paid higher wages to compensate them for the uncertainty of the contract. Further, it recommended amendments to the Contract Labour Act to allow all peripheral activities to be freely outsourced from specialised firms.

But the special group headed by Gupta pushed aside action on these recommendations. It did so by arguing that 10 million jobs can be provided even without such changes because they would come from the unorganised sector.

On what basis did the special group argue that the unorganised sector would provide maximum jobs over the next five years?

One is the fact that the organised sector employs about 28 million, or a mere 7 per cent of the total employment of 397 million. Not just that, over two-thirds of it or 19 million, is in the public sector.

A reduction in government employment (via a ban on recruitment, rather than sackings) has led to a sharp deceleration in public sector employment. The growth in public sector employment has consequently fallen from 1.52 per cent per annum during 1983-1994 to -0.03 per cent annum during 1994-2000. And private sector employment, though growing fast, is not enough to offset it.

But then how is the workforce surviving? A quick scan of employment data shows that it is the unorganised sector that has allowed employment generation to keep up with the growth in the labour force.

When the labour force grew at 2.29 per cent in the period 1987-94, employment grew at 2.43 per cent. In the following years from 1993-2000, the employment growth of 0.98 per cent was close to the labour force growth of 1.03 per cent.

In other words, if the economy as a whole had followed the trend in organised sector employment, unemployment would have been far higher than it is now.

Look at the two sub-markets separately. We can say that unemployment in 1999 of 0.2 per cent among the “not literate” category and 1.2 per cent in the “literate up to primary” represents unemployment in the unorganised sector. Simultaneously, the 7.1 per cent unemployment among the “educated” represents unemployment in the organised sector.

Clearly, the unemployment level in the unorganised sector, where there is no help from the government, is more in tune with the acceptable level of frictional unemployment. That is, the market there adjusts better than in the organised sector, which is why we get more jobs from it. Whence, the special group concludes, it is the unorganised sector that should be encouraged to grow.

Sounds logical, but is it really the panacea for India’s employment problem? No, not unless India is aiming for low labour productivity, low real wages and low incomes. Because, unless employment growth comes with higher GDP growth and higher productivity, it will continue to result in low wages and low standards of living.

Simple economics suggests that if labour productivity is to increase, production must take advantage of economies of scale. This can only happen if there is massive investment in the industrial sector or what in India is called the organised sector.

But clearly this simple economic sense has been lost in the face of the fear that there will be more firing than hiring if labour laws are changed. Or, at least the workers may lose their jobs. As a result, argues Gupta’s special group, we should not even aim for employment growth in this sector.

But what does this mean? Let us assume that changes in the labour laws would result in firing a huge one-fourth of the labour employed in the organised sector. This would be about 7 million workers. In other words, instead of targeting a higher growth in quality employment, productivity and incomes for the 400-million-strong labour force of the country, we are trying to secure the jobs of the 7 million.

Funnily enough, targeting growth in the unorganised sector where workers do not have either the rights or the incomes enjoyed by the organised sector is considered “pro-labour”.

This is in sharp contrast to the “anti-labour” policies recommended by the task force of Mr Ahluwalia. Or, could it be that it was precisely because of this reason that the Planning Commission has felt obliged to undo the “damage” by coming out with status-quoist recommendations?

Whatever the motive, one thing is certain. The recommendations of the Gupta group will put labour reforms on the back-burner.