First published: Thursday, 18 May 2006

While the Indian economy is booming, there is evidence that workers are not partaking in the boom adequately. Employment is not growing as fast as working age population, nor are wages rising as rapidly as per capita income. 

There are many reasons for this - some to do with forces of globalisation that are beyond the Indian government's policy reach.

But much of it has to do with the 'culture' that pervades our labour markets, which in turn is a consequence of the complicated and ill-conceived laws that govern the labour market.

The travails of Calcutta's famous Great Eastern Hotel illustrates nicely much of what is wrong.

The hotel, founded in 1840 by a British confectioner, David Wilson (and originally named Auckland Hotel), prospered for a long time; but began to flounder in the early 1970s. 

Worried about the many workers of the hotel, the Congress government took over its management in 1975; and, driven by similar concerns, the Communist-led Left Front government nationalised it in 1980.

Protected from the vicissitudes of the market, the hotel's quality continued to decline and staff size grew. 

Too many laws

According to some back-of-the-envelope calculations I did some time ago, it came to have such a high staff-to-rooms ratio that it was not clear why the hotel needed customers. 

If it moved its staff members into the hotel, it would be a self-sufficient housing complex, if slightly over-crowded. 

Fortunately, the government has since taken restructuring measures and there are hopes of the hotel's revival. But what happened for over 30 years is a mirror to much that ails Indian labour.

In India there are 45 laws at the national level and close to four times that at the level of state governments that monitor the functioning of labour markets.

Some of these date almost as far back as the founding of the Great Eastern Hotel. They were meant to control conflict and keep the labour market efficient. 

Unfortunately, the experience has been to the contrary. According to recent World Bank estimates, in 2004, there were 482 cases of major work stoppages, resulting in 15 million human days of work loss. 

Between 1995 and 2001 around 9% of factory workers were involved in these stoppages. The figure for China is close to zero. 

On the other hand, the wages of Chinese workers are rising much faster than that of India's. These facts are not unrelated.

Short-sighted policy

Most of India's labour laws were crafted with scant respect for 'market response.' If X seemed bad, the presumption was that you had to simply enact a law banning X. 

But the fact that each law leads entrepreneurs and labourers to respond strategically, often in complicated ways, was paid no heed.

In a poor country no one with any sensitivity wants workers to lose their jobs. So what does one do?

The instinct is to make it difficult for firms to layoff workers. 

That is exactly what India's Industrial Disputes Act, 1947, did, especially through some later amendments, for firms in the formal sector and employing more than 100 workers.

But in today's globalised world, with volatile and shifting demand, firms have responded to this by keeping their labour forces as small as possible. 

It is little wonder that in a country as large as India less than 10 million workers are employed in the formal private sector.

Some commentators have argued that India's labour laws could not have had much of a consequence since most of them apply to only the formal sector. 

What they fail to realise is that one reason the formal sector has remained miniscule is because of these laws (and also the culture that the laws have spawned).

Need for flexibility

What is needed now is not a law that allows employers to fire workers at will but one that allows for different kinds of contracts. 

Some workers may sign a contract for a high wage but one that requires them to quit at short notice; others may seek the opposite. This would allow firms to employ different kinds of labour depending on the volatility of the market they operated in.

Flexibility in hiring and firing is not the only problem. India's complex web of legislation leads to a system of dispute resolution that is incredibly slow. 

Data from the Ministry of Labour reveal that in the year 2000 there were 533,038 disputes pending in India's labour courts; and of these 28,864 had been pending for over 10 years. 

If India is to be a vibrant global economy, this has to change. 

Much of the debate on labour laws has been misconstrued. We do not need changes in labour laws and policy to elicit sacrifice from organised labour, as some economists have suggested. 

Indian workers, whether they be in the organised sector or the unorganised sector, are too poor for that. 

We need changes in order to create greater private-sector demand for labour, which will boost wages and employment. 

In brief, we need to move to a system that (1) makes room for more flexible contracts in the labour market, (2) has a minimal welfare net for workers who are out of work, and (3) resolves labour market disputes more quickly.

 Dr. Kaushik Basu, Professor of Economics and Carl Marks Professor of International Studies at Cornell University

This article first appeared on the BBC News Column published in Thursday, 18 May 2006.