We must establish good processes of dialogue amongst stakeholders if we want effective labor reforms soon
Economists are debating whether or not enough jobs were created in India in the last ten years. However, they all agree that the pattern of growth in the next decade must provide jobs to large numbers of young job-seekers—the source of India’s so-called demographic dividend. These youngsters, with more education and vocational skills as the country’s drive to educate and skill them succeeds, will also have greater expectations for better jobs. Simultaneously, productivity improvements in agriculture will put pressure on other sectors of the economy to create jobs. Services, especially construction, have been the principal engine for job-creation so far. Now the job growth engine must fire on all cylinders. And all economists agree that India’s manufacturing sector must grow much faster. It must create about 100 million additional jobs by 2025.
There are many reasons why India’s manufacturing sector has not grown as fast as it should have. These include the poor state of India’s power and transport infrastructure, the messy business regulatory environment, inadequate flow of credit (and its high cost) for India’s SME sector, and availability of land. Amongst these reasons are the country’s labor laws. Though labor laws are not on the top of the list of constraints on growth according to most surveys of enterprise owners and managers, they must be reformed. Because there are too many laws; many are archaic; and they are badly administered. For over twenty years employers as well as unions have demanded reforms of labor laws. But we have not been able to reform them so far because we have not applied ourselves to fixing the process of making the reforms.
There are three reasons why we must concentrate on the process if we want effective labor reforms that translate into competitiveness of Indian manufacturing enterprises. First, since there are various reasons for changing the laws with different demands from stakeholders, there must be consultation to determine what the changes in the laws should be.
Second, for the debate on labor laws to move beyond an academic exercise, reforms must be implemented. They cannot be implemented without support from all key stakeholders. And to gain their support, all stakeholders must be involved in the deliberations to get their buy-in even while the content of the reforms is being determined. We can take a lesson from France where a process of labor reforms is underway. Explaining the process by which the reforms are being made, French Minister Michel Sapin said that the process adopted “showed that it is possible in France to put in place deep reforms through dialogue, negotiation and compromise amongst France's traditionally hostile social partners”. A French CEO, speaking at an employers’ meeting in India last month, amplified this adding that France realizes it must go the German way of institutionalized dialogue amongst unions and employers for sustainable competitiveness of French enterprises.
The third reason for institutionalizing a better process of dialogue is the accumulation of trust amongst the stakeholders. Listening regularly to each other to understand others’ views with the intention of finding solutions together, rather than arguing to demolish the others’ arguments, can change orientations from ‘us versus them’ to ‘what is good for all of us’. When stakeholders agree, Government can do its part and change the laws accordingly. As Minister Sapin said, “The social partners have fulfilled their side of the contract. The (French) Government will now fulfill its side of the contract."
Changing labor laws is only a limited objective. The larger objective is to accelerate improvement of competitiveness of Indian enterprises. They have to catch up with others who have gone ahead of them in Korea, China and elsewhere. Then they must stay ahead of all potential competitors who will emerge in other countries. Therefore manufacturing enterprises in India must have the ability to continuously learn and change faster than enterprises elsewhere. Sustainable competitiveness of manufacturing enterprises lies in their only appreciating assets, which are their people. People can learn and improve their capabilities if the right environment is created. Whereas the value of other assets of the enterprise including its machinery will inevitably depreciate. The nurturing of human assets, through continuous skill building along with secure employment arrangements, explains the sustained competiveness of German and Japanese industries, even though their wages are higher and currencies stronger than their competitors.
We must reform our labor laws. But laws alone will not create trust within enterprises. Processes for dialogue within enterprises amongst managers and workers are essential too. Wage costs must be controlled to improve competitiveness. In most industries demanding more flexible labor laws, employee costs range between 5 and 8% of revenues. If, in fairness, employees were paid same wages for same work—presently a contentious issue, profits after tax will reduce by less than 1%. Henry Ford is reported to have complained: ‘Why is it that when I want only a pair of hands I get a whole human being?’ Human beings are not merely costs to be adjusted: they are assets to be nurtured. They are the heart of learning organizations.