The Hindu Business Line : Reform labour laws, now

India's labour laws have to work towards `drawing in' human resources — entrepreneurial talent and employees — into the market so that natural resources and savings will follow. This will boost the nation's marketable and measurable output and make India shine brighter, say G. Ramachandran and G. Balasubramanian.

POLITICAL leaders and economic policy-makers no longer believe that natural resources hold the key to incomes, growth, development and prosperity. For long they did. They believed that India would grow into a dominant economic and political power because of its vast natural resources.

Now they believe, correctly, that India would grow into a significant economic and political power in the world because of its human resources. But without labour reforms, sustainable development and prosperity would elude India.

The reform of the economy began 12 years ago, but significant labour reforms have yet to be initiated. Policy-makers and lawmakers have to enunciate new policies that would allow India's human resources to play the leadership role in growing the economy. It is time for change. India needs an `economic approach' to labour laws because human effort is the principal determinant of economic well being.

It is time for change, and the New Year offers lawmakers and policy-makers an opportunity to signal their commitment to revitalising India's human resources. A socio-political approach to employment was adopted in an era when minerals, arable land and financial capital were regarded as the principal determinants of economic well-being.

Labour laws enacted in that era did not view human resources as the principal determinants of economic well being. Moreover, the role of technology and its impact on production were ignored when the laws were enacted. Hence, labour laws and regulations reflect the view that organised labour should somehow take advantage of employment, output and growth engendered by natural resources and financial capital.

Therefore, labour laws and regulations regard employees as occupants of a cart drawn by natural resources and financial capital. They have assumed that those inside the cart should remain in the cart for as long as possible, until it was time for new occupants to be hauled.

Permanency of occupation of the cart has been one of the objectives of the laws and regulations. The world and the world's view of all resources have changed considerably since the time India's labour laws were enacted. Human resources are now recognised as the horses that draw the economy forward. Human resources are now regarded as the horses that `draw in' natural resources, financial capital and technology.

It has been a remarkable journey for human resources from being occupants of the economic cart to horses, engines and prime movers of the economy. Carts of the past have become horses of the present. But India's labour laws that treat human resources as occupants of economic carts have remained where they began.

Labour laws and regulations remain archaic because they do not view human resources as human resources. It is time for change. India's new labour laws and regulations should regard human resources as the horses of the economy.

`India Shining'

The `India Shining' messages show that the people of India have become important to the process of growth and development both as causes and as beneficiaries. The `India Shining' messages do not show mines, oil-rigs and huge dams. They show human beings involved in effort. They show human genius and labour at work.

This shift in the emphasis from natural resources to human resources is epochal.

Endowments of natural resources do not cause incomes. Natural resources may at best give a false sense of economic security and national pride.

Empirical research by Professors Jeffrey Sachs and Andrew Warner of the Harvard University into the economic performance of 97 countries from 1971 to 1989 shows that growth was higher among less-endowed countries than among those with abundant natural resources.

Their research evidence reinforces the centrality of human resources to value addition. Countries that assume that their physical resources sustain prosperity are economic dwarfs. Countries that regard their human resources as their eternal wealth are economic giants.

Empirical research by SpearHead Asset Research Company into the economic performance of 90 countries from 1989 to 2002 shows that per capita gross domestic product (GDP) has grown faster in less-endowed countries than in countries with abundant natural resources.

An abundance of natural resources seems more a curse than a cure for poverty. The inverse relationship between per capita GDP growth and endowments of natural resources invited this comment from The Economist: "Next time you hear of a poor country that has suddenly struck oil or discovered diamonds, do not sit back and give thanks that its future is assured. Tremble, rather, for its poor people — for they will be the last to benefit."

Quite unsurprisingly, India's per capita income has grown sluggishly. The vastness and the diversity of natural resources, the access to savings through modern banking and financial services, and the availability of world-class human resources have been unable to push per capita income above $500.

Human effort matters

The measurement of national income and per capita income is meaningful when human effort is `marketable' and when the depletion of natural resources is reckoned with. Consider a nation with gold worth $1 billion. If gold is transformed through human effort and sold as jewellery for $1.2 billion, national income is $200 million.

National income is not $1.2 billion. The export of jewellery `markets' the nation's human resources for $200 million.

Therefore, better human effort can push the income beyond $200 million. What is more, any rise or fall in the price of the gold would leave national income unaltered at $200 million if jewellery is marked up over the price of gold by the value of `marketable' human resources.

Human effort is the sole determinant of national income and per capita income. What this means is that a nation without any gold could import gold worth $1 billion, transform it into jewellery and then export jewellery for $1.2 billion. Its income, after paying for the imports, would also be $200 million.

It cannot be denied that the income of $200 million is produced by human effort. Human resources are the real 'marketable' resources that produce national incomes.

To shine brighter

If India wishes to shine better, it has to boost the marketability of its human resources. India's labour laws have to work towards `drawing in' human resources — entrepreneurial talent and employees — into the market so that natural resources and savings will follow.

When natural resources and savings follow human resources into the market, the nation's marketable and measurable output rises. If labour laws work towards `keeping out' human resources from the market, natural resources and savings too will stay outside the market. The nation's non-marketable and unaccountable output may rise, if at all. Recent

evidence provided by Mr Harish Damodaran and Mr Ambarish Mukherjee in "Organised sector jobs shrink five consecutive years (1998-2002)" (Business Line, December 19) supports the view that labour laws may have `kept out' human resources from the market.

Some part of the incremental consumption contributing to GDP growth may have been caused by human resources that worked from outside the market. Jobless growth — a phenomenon described by Mr S. Venkitaramanan (Business Line, July 22, 2002) and Professor P.V. Indiresan (Business Line, June 18, 2001) — may well be the result of human resources being kept out of the organised market.

To be sure, labour laws and regulations do not have the objective of keeping human resources away from the organised market. Their objective is to keep human resources inside the organised market, forever. But when laws and regulations become dysfunctional, unintended consequences occur.

Unintended consequences are inevitable when laws do not keep pace with changes in the economy. Unintended consequences impose avoidable costs too.

When human resources are kept out of the organised market, an inefficient combination of human effort, technology and capital could occur, if at all.

An inefficient combination destroys some part of the value of human effort, technology and capital. It suppresses aggregate, marketable output of the economy. It leads to tax evasion too. India's low per capita income and low tax-to-GDP ratio could be the results of archaic and dysfunctional labour laws.

(G. Ramachandran is a financial analyst. G. Balasubramanian is a professor of finance and information technology at the Institute for Financial Management and Research, Chennai. Feedback may be sent to indiagrow@sify.com or bala@ifmr.com)

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