The Unfinished Business of Labour Reform

Property rights form the fundamental bedrock of capitalism. In a capitalistic society an individual’s right to own property and dispense with it as he deems fit, must be protected. Only then is the individual encouraged to invest money and effort to add to his property. (Here the term property applies to all assets, not just real estate)

If India is to keep the momentum going on its recent economic growth, it must strengthen the pillars that hold up the edifice of capitalism in the country. Property rights are the most important ones. There are many laws like the rent control act that impact an individual’s right to property. In some cases, the inability of the state to protect its citizens’ property may be construed as something that erodes property rights. I see labour inflexibility in India in the same light. Many will not agree with me on this. I believe that shareholders of a company ‘own’ the company. Not allowing the company to conduct its business as it deems fit, including hiring and firing employees, is in effect constraining the shareholders’ rights to property.

Any discussion on labour issues in India puts the ‘shoe on the wrong foot’. Our moribund labour laws are the way they are because the opposition to reform ask the question ‘Why should labour suffer for the mistakes management made?’ I believe that is the wrong question to ask. The right one is ‘Why should shareholders’ rights over the use of their property be curtailed to protect employees?’

I am not arguing that there should be no curtailment at all of shareholders and their agents, management, in the manner they run the company. Laws must be created and implemented to preserve the greater good from the untramelled pursuit of profit. However, unqualified protection of labour is not the greater good.

I am also not suggesting that we have a zero cost, completely flexible labour environment where businesses can hire and fire as they please. That will be absolutely wrong. It will give employers far too much power which will lead to exploitation of workers by management and by individual managers. But today the pendulum has swung too far in favour of workers. Not all workers, just workers in the organized sector who tend to be better off. This protects the interests of a few million workers in the public and organized sectors but harms job growth because it discourages capital investment.

The answer lies in lowering the cost of restructuring labour from stratospheric (buy them out with a VRS) to moderate. Let a company be able to retrench any number of employees without any permission from the state by paying one year’s wages. For employees over 50 it should be higher since they are less likely to get another job quickly. The company should be able to demonstrate that the employees being retrenched are not being selected in any discriminatory way (older employees or of a certain caste etc.)

Why one year? No science there. I just picked a number. It could be higher – say two years. An employee with two years of retrenchment pay can find a new job and supplement his income with the interest on the retrenchment pay. I can guarantee you that even at 2 years, there will be businesses who will take the hit to their balance sheet. They are so fed up with underperforming employees.

When I was at Lipton (now HLL) in Mumbai in the early 90s, we did a voluntary retirement scheme where the company paid 100% of a salesman’s salary for those over 55, if they retired early. Imagine that the company is asking employees to sit at home and get their checks, and they still expect to come out ahead! There were some savings on benefits and travel, but the real benefit was to be able to change the work culture and become performance driven. But the cost of a VRS is too high. And fundamentally, I find something wrong with it. It implies that employees’ rights on the company are higher than shareholders’. You have to pay them, regardless of circumstances. Anything left goes to the shareholders. That is just wrong headed.

On this Labour Day, I hope someone in New Delhi is thinking of the unfinished business of labour reform.