India Sounds `Death Knell' for Jobs With Perks: Andy Mukherjee

Commentary by Andy Mukherjee

Aug. 12 (Bloomberg) -- Among the many surviving relics of India's socialist past, the most prominent are the Soviet-style five-year plans that the government still insists on producing.

The 11th plan was recently unveiled, when almost 1 1/2 years -- or 30 percent -- of the period it seeks to cover have already lapsed. So much for timeliness.

Even the usefulness of the planners' advice to the policy makers is suspect because the latter probably don't even bother to listen carefully to what the former has to say.

Take the issue of job creation.

Planners are highlighting the need to create decent jobs -- those that come with social security and other benefits. Policy makers are doing exactly the opposite.

In its report, the Planning Commission devoted a good deal of attention to what it calls ``informalization'' of employment.

Statistics collected by a government-appointed advisory panel show that from 2000 to 2005, the Indian economy added 61 million jobs. Tiny enterprises, employing 10 or fewer workers, accounted for 52 million of these new opportunities. Even the remaining 9 million people hired by larger companies were offered ``informal'' employment with no benefits or social security.

These findings perhaps exaggerate the extent of informalization. Based on consumption trends -- such as a 15-fold growth in mobile-phone subscribers in the past five years -- it's hard to believe that the fast-growing Indian economy is only producing poor-quality jobs.

Too `Casual'?

Out of India's 500 biggest, publicly traded companies, up- to-date employment statistics are available for 93: The median rate for one-year employment growth is almost 9 percent for these enterprises, three times the annual pace at which the workforce in the country is expanding.

Even then, it would be wrong to dismiss increasing informalization as merely a statistical artifact.

Another government survey, which covered the same 2000-2005 period, showed that bigger enterprises hired both ``regular'' and ``casual'' employees in large numbers, though the growth of job creation was much higher for the latter category.

This is a worrying trend, which at least the Planning Commission is taking seriously. One of the ``major challenges,'' it says, is to expand formal employment at bigger firms.

Policy makers have come up with a solution to deal with the challenge: Make social-security contributions mandatory for more of the smaller firms. The result may be exactly the opposite of the one intended.

Provident Fund

Until now, firms with fewer than 20 workers were exempt from social-security plans funded by contributions from employers and employees.

The government decided last month to lower the threshold to companies with 10 workers or more.

Its decision is a ``death knell'' for attempts to increase formal employment, says Manish Sabharwal, chairman of Mumbai- based Teamlease Services Pvt., one of India's largest providers of temporary workers.

Participants in the so-called Employee Provident Fund program must set aside 24 percent of their salaries, while surveys show a quarter of employees in firms that have between 10 and 19 workers are able to save only 9 percent of their pay, Sabharwal wrote last week in the Financial Express newspaper.

``Forced savings of this magnitude at lower salary levels are impossible and force informalization,'' he added.

Curiously, the authorities bungled the expansion of social security just as they sought to lower the cost of building nest eggs to levels that are impressive even by global standards.

Fund managers chosen last month through competitive bidding have undertaken to charge no more than 0.01 percent of assets for managing a part of the $60 billion kitty.

Labor Laws

Forcing tiny enterprises to create formal employment isn't a pro-labor move.

A more honest and effective approach would be to ease the country's labor laws. This will create an incentive for companies to increase the scale of their operations to a point where they can absorb the social-security costs out of the benefits that they derive from being legally aboveboard.

The laws currently in force have the opposite effect: They serve to keep labor-intensive companies small and weak. The worst offender is the so-called Chapter V-B of the Industrial Disputes Act of 1947. It stipulates that companies employing more than 100 workers must obtain government approval before firing people or closing down. Needless to say, this permission is seldom granted.

As a result, employers in India are reluctant to hire workers they won't be able to dismiss if there's a sudden slump in demand for their products.

This draconian law is a ``psychological block for entrepreneurs against establishing new enterprises with a large workforce,'' says the Planning Commission, calling for ``practical solutions'' to the problems created by labor laws.

For a relic of socialism, the Planning Commission is offering sage advice. Both the quantity and quality of employment need to rise in India. That's the only way to keep inequality under control and raise living standards quickly for all.

(Andy Mukherjee is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Andy Mukherjee in Singapore at amukherjee@bloomberg.net