The Hindu Business Line : Labour law reforms can benefit workers too

We do not want sacrifices from labour because that is still the bottom end of society. If labour laws are liberalised the right way, the workers will benefit.

DR KAUSHIK BASU, C. MARKS PROFESSOR OF INTERNATIONAL STUDIES, PROFESSOR OF ECONOMICS, AND DIRECTOR, CENTRE FOR ANALYTIC ECONOMICS, CORNELL UNIVERSITY

Prof Kaushik Basu, <243>C. Marks Professor of International Studies and Professor of Economics and Director, Centre for Analytic Economics, Cornell University, has written and researched extensively on economics, the Indian economy, in particular. He has written books and published academic papers on a range of areas which include economic theory, development economics, welfare economics and industrial organisation. He has also contributed to newspapers and is a columnist for BBC Online.

In Chennai recently for the launch of his book, The Oxford Companion of Indian Economy, Prof Basu took time off to speak to Business Line on a range of issues concerning the economy.

Excerpts from the interview:

What prompted you to write The Oxford Companion of Indian Economy?

Two things: One, the global interest in India is at an all-time high. The New York Times, The Wall Street Journal, Financial Times are some of the newspapers that regularly report on India and do so with greater frequency now. Two, 20 years ago, you could actually think of a few specialists who could write a book on the Indian economy. But, now, the economy has become really complex; on the one hand, you have the stock market, the SEBI (Securities and Exchange Board of India) rules and, on the other, farmer suicides, poverty, inequality. Now, you cannot think of a single person who can cover these topics. So the idea of a multi-author reference volume on the Indian economy was conceived.

I had casually raised this issue with the Oxford University Press that if we really want an overarching book on India, think of 200 of the best minds, 200 topics and let's get them together. So it is an unusual book in the sense that it covers the good and the not-so-good sides of the country. Of course, I did not realise that I would end up being the editor of the book!

Though the growth performance has been impressive in the recent past (growth rates of around 9 per cent and the manufacturing sector performing well), there have been some worrying signals too — the rising inflation and current account deficit. So, do you think the economy is overheating? The Economist seems to think so.

It is of concern that inflation is picking up, but unfortunately it is for politicalreasons. The big question is, when an economy overheats, what do you do? Many analysts, including government spokespersons, are treating inflation as a consequence of growth. On the contrary, inflation occurs when the economy tries to grow faster than the capacity and investment base permits. The recent rise in investment should dampen inflation in the coming months.Also, the government should try to curb the growth of money supply. The big mistake will be to try reining-in inflation by dampening growth.

In that context, what do you think could derail the Indian growth story?

I am optimistic of the overall Indian growth story. We will hit road bumps for sure, but derailment is unlikely unless there is a big political turmoil. I expect India to remain, on average, at the 8 per cent range, which for a big country is very good. This is largely because of the reforms that have occurred since 1991. Even if we cannot undertake any further reforms, we should be able to ride on what has happened thus far.

Second, some important changes had taken place in the pre-reform period. India's savings and investment rates — the most important facilitators of long-run growth— did very well in the 1970s. The savings rate went up to over 20 per cent in the 1970s but had stagnated after that till 2001-02. In the last three years, we suddenly had another round of increase in savings rate and it is now around 32 per cent.

Now, this is not an indicator that gets too much media attention, but it is significant that we are now in the East Asian category. Part of this could be because of change in Government behaviour, which from a net dis-saver has become a net saver now. But household and corporate savings have also risen sharply. Fortunately, the savings rate does not fluctuate much.

And an 8 per cent growth rate is pretty much in keeping with this savings rate. If there is political turmoil, which can get sparked off if inequality rises, or poverty goes up in agriculture belts, the growth story can get derailed. It would beunfortunate if a small group keeps getting richer, leaving behind large sections of society. Even putting aside the moral angle, it is in the self-interest of this small rich group to reach out to the poorer sections to ward off political destabilisation. But for the political turmoil, I think for the next 15-20 years, India is in for a good run of growth.

The issue of land acquisition for industrial projects and SEZs has been a controversial one, especially in West Bengal. Do you think it would be better if the industrialists putting up these projects negotiated with the landowners/farmers directly instead of going through the State?

I am in favour of state mediation when necessary. The other alternative is the free market one, where you leave it to the industrialist to negotiate directly with the landowners. This may work in some cases only For industrialisation, we need parcels of contiguous land. So, during land acquisition, if you have one landowner who does not want to sell his land and move out no matter what the price , the entire project can be stalled. This situation has been faced by other countries too. The US faced this problem too.

But two-three years ago, Wal-Mart started using the `Eminent Domain' concept to get the local governments to acquire land by virtually giving a mark-up over the market price. Now, `Eminent Domain' was originally meant for public enterprises. Then, the private sector started urging the US Government to use this clause for acquiring land for private projects. The US Supreme Court gave a clarification that `Eminent Domain' can be used for this purpose, but the Government would have to justify that the land was being acquired for public interest. In principle, this is correct but we are opening the doors for litigation.

I think India can learn from the US experience. The West Bengal Government is doing the right thing in negotiating with a big industrial group for setting up a project and then with the farmers for acquiring land. It should pay a mark-up above the market price. Then, if virtually all land owners agree to the price fixed by the government and a small number hold it up, it should be fine for the government to, nevertheless, acquire the land. This process has to take place in a democratic and transparent manner. A lot of people in West Bengal are supportive of their Government's measures to industrialise the State. Also, since West Bengal has seen de-industrialisation over the last three decades, the Government has realised its mistake and is trying to learn from China and make amends for it.

We have had reforms for close to 16 years in this country and we now seem to have reached an impasse. What do you think is the way forward and what needs to be done?

Well, by reform, if you mean greater liberalisation, then, there is no reason to believe that this has to be an endless process. Our governments in the past had become too strangling in nature by getting involved in too many sectors and thwarting the scope for individual enterprise. The reforms, begun in 1991, were meant to correct this. So, once the job is done, we will still need good policies and some policy innovation. But there is no need for further reform. There are still a number of important things that need to be done. Labour laws, for instance, and I think the Government should move on that front.

Now, some market-fundamentalist economists will say that labour laws need change because organised labour will need to make some sacrifice for the country's overall growth. That is a mis-reading of the situation. In fact, we do not want sacrifices from labour because labourers — rural and urban — still constitute the bottom end of society. If labour laws are liberalised the right way, workers will benefit.

In India, the labour involved in the manufacturing sector is tiny and one of the reasons is that if a company hires labour to supply some product to the international market and if this market slumps, then the company cannot shut shopand it is stuck with this body of labour. These workers cannot be laid off as the Industrial Disputes Act will be invoked. Whereas if you allow labour reforms — and I am not saying remove all the laws — that would enable firms and workers to get into different kinds of contracts, the total demand for labour will go up.

Suppose a firm operating in a volatile market hires labour at a wage rate above the market rate with a clause that the workers can get laid-off if the market conditions change for the worse, why should this not be allowed? This is because new firms will come in and hire more labour.

Now if the demand for labour goes up, two things will happen — one, it will lead to more employment generation and, two, wages will go up. Now, in India, we have had good growth and it is only in the last few months that employment has gone up. If we take the last 15 years, employment has just not kept pace with growth; so, the benefits of growth have not been shared. It is for these reasons that labour laws need to be reformed. But, even the Left is not making this argument clear enough. It wants to hold on to the Industrial Disputes Act because it looks like a pro-labour legislation. In fact, it was the last piece of legislation enacted by the British in 1947. So, it is time to reform it.

You had proposed a couple of years ago in one of the papers on globalisation and inequality about the need for a new global organisation to coordinate anti-poverty programmes across nations, which you said was a nascent idea then. Have you developed on it?

That paper has just come out in the journal World Development. I have not developed on that idea any further, but let me elaborate on that a bit. In India, poverty is going down, slowly perhaps. But inequality is going up. There is little doubt about these facts the fall in poverty, economists both from the Left and the Right are in agreement with this. The rise in inequality is something of concern. But what should we do? The typical tendency is to give a knee jerk advice - if inequality is going up, tax at the top, subsidise at the bottom and inequality would come down. This would be fine if India were the only country in the world with capital to go nowhere and skilled labour were stationary.

With globalisation, the top-end of the labour market is much more footloose, but the poor people cannot go anywhere. And capital too is footloose; it can come in and go out easily. So in a globalised world there are severe limits to what we can do to keep inequality down, without provoking a flight of capital or skilled labour. This is a concomitant of globalisation. Countries such as Japan, the US, the Scandinavian countries, China are seeing a rise in inequality. Each country is trying to grapple with it but without much success.

To me, the crux of the issue is something to do with inter-country relationships. In Japan, a highly industrialised country, the bottom end of the labour force is seeing competition from countries such as China and India. In India, the salaries for the top-end of the labour market are going through the roof. So, something ought to be done about it, but individually countries cannot do much. What is needed is a coordinated approach between nations; so that one country does not try to take advantage of another's effort to cap inequality. But such coordination is currently difficult. For international trade policy coordination, we have the WTO, for labour, the ILO to coordinate policies but we do not have an organisation to coordinate anti-poverty policies.

Do you think the reform process has become enmeshed in political wrangles and how do you see that impacting foreign investment coming into India? What is the view from the outside?

Well, foreign investors may say that this is the trouble with a democratic country because there are several undemocratic countries they can go to, where the Government finds it easier to stand by its word. China very often does that. But, in the US, when a company wants to put up a big project, there are citizen protests, local Governments protests, litigation and big companies expect these problems and know how to deal with them. India is similar in these ways. There is going to be public involvement; that is what you expect in a democracy and that is really what makes such an interesting place. But it is unfortunate when you have political parties getting involved solely for their electoral interests. So people's participation, litigation, these things are inevitable. Whether in allowing FDI in retail or land acquisition, we need more transparency. We need to see the actual numbers in the public space, and more involvement of professional and non-political people. Let me go back to the West Bengal scenario. We have very good economists who are completely apolitical but unfortunately have no say. In fact, all over India, there is a serious professional class which is interested in development and we need to get them more involved.

Now, we have a reform-minded Chief Minister in West Bengal who is welcoming investments (both domestic and foreign) into the State. At the same time, there is this perception that he may be alienating a section of his electorate/power base that has helped the CPI (M) sustain power close to three decades. So, in the coming years, how do you see the party handling or managing these tugs and pulls from various directions?

I have no inside information but one thing noticeable I have noticed is that in the top brass there are contradictory statements coming out. The statements which come from Mr Buddhadeb Bhattacharjee or Mr Nirupam Sen seem to diverge from that of the Polit Bureau. I don't know if this signals a true conflict or is a party strategy - I am not enough of a political animal to figure this out.

What is however important is the opinion of the cadre base and here the Chief Minister will have to work hard because what he is saying today seem to be in contradiction to what the cadres were taught earlier. I think the new lessons are right and the past ones were wrong but the CPI (M) will have to persuade people about it.

Fortunately, the party has been in power for so long in West Bengal that ideology is virtually gone. This is quite common, we have seen this happen in China. The communist party there is no longer ideological; it is just a well-organised party. West Bengal is probably going in the same direction. The CPI (M) is arguably the best organised party. Now, if the top brass — and I don't know whether the top brass is united or split on this — decides to go in for industrialisation in a big way and invite investments, the party should be able to take the cadres along with it, like China has done with its trade unions and party workers. But what I do not know is whether the top brass is in agreement with the Chief Minister's policies. If the top brass is split, there can be turmoil.

SEZs seem to get around these archaic labour laws, which is probably one reason why they are so popular. Your views on this?

You have to aware that this might get into problems with the ILO. And other groups interested in labour rights. China has been using this route as has Malaysia. The aim is to use SEZs to circumvent labour laws. I have been objecting to this, since that is not what SEZs are meant for. They have other functions like making room for imports, which the country may not want for local use but only for export processing and for keeping bureaucratic controls to the minimum. That is the spirit in which India should view its SEZs. The change in labour law should be for the entire nation. In the corporate sector, VRS and golden hand shakes have become common. There has been a demand for the unionisation of call-centre employees. Are you in favour of that?

In the software sector, curiously, it is West Bengal which has tried to curb union activity by using a rarely-used part of the Industrial Disputes Act, whereby some sectors are described as public utility services. Once this is done, strikes are not banned per se but cat-call strikes are not allowed and there are a couple of other restrictions. West Bengal has used this because it is trying to catch up on the software sector where it has been lagging.

Turning to golden handshakes, it is true, as you say, some corporates are using this effectively and managing fine. The big firms know how to downsize without getting into litigation. But, what about the small firms? They do not have the deep pockets for this. I think if the law changes, we will see a mushrooming of small firms and labour will gain tremendously. Unions object to changes in the law because of a misunderstanding of the consequences of such a change. So, the Government ought to open up a debate on this, persuade the unions that these reforms are being carried out in the interests of labour.

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