The proportion of informal employment in the organised sector has increased, thereby indicating a deterioration in skill levels
The ‘Make in India’ drive in 2013 and the ‘Atma Nirbhar Bharat Abhiyaan’ initiated this year by the Government are critical steps forward in improving the manufacturing growth of India. Success in both would hugely depend on the real leap we make in the ease-of-doing-business. One of the biggest challenges on this front is the growing emphasis on hiring of informal labour.
Trade unions do not represent the informal labour force, which has neither employment nor social security. Such workers are neither covered under national labour legislation and social protection nor entitled to employment benefits such as paid annual or sick leave, health insurance, contribution to the provident fund, bonus and so on. In other words, the quality of employment of the informal labour is relatively poor. In a developing economy, the labour mix (formal and informal) employed in manufacturing plays a significant role.
As per current estimates, 92 per cent of approximately 500 million workers in India are informal. The proportion of informal employment in the organised sector has increased from 41 per cent in 1999-2000 to 58 per cent in 2011-2012, thereby indicating deterioration in skill quality. This means that India has too many working poor, who make enough money to live but not enough to pull out of poverty. Additionally, as per the National Sample Survey Office (NSSO), only 18 per cent of the youth passing out of vocational schools have regular jobs and 60 per cent of them are employed as informal workers. Our archaic labour laws regulate the industrial labour environment. So an informal worker employed for more than 240 days can claim a regular or permanent (formal) employment.
Companies hire informal labour because lower wages make it favourable to manage the intense global competitiveness. There is flexibility to play with staff numbers to get around labour laws and manage demand-market volatility. There is increased flexibility in retrenchment, irrespective of the performance of the employee. The practice also reduces the bargaining power of formal worker unions during negotiations. However, an unusually high proportion of the informal labour force in a manufacturing set-up, in the long-term, is likely to lead to low productivity and product quality due to time-bound exit of the informal labour, inconsistent quality and high cost of quality due to low labour skill levels. There is an unhealthy industrial relationship climate between the “top-floor” and the “shop-floor” that deters efficiencies.
Therefore, it is recommended that every manufacturing plant should operate with the right balance of formal and informal labour. This is ratified by simulation runs to study the long-term implications of informal labour hiring on manufacturing growth using System Dynamics modelling.
Some of the useful inferences from the analysis are: Beyond a critical limit of informal labour mix, the manufacturing output, in the long-run, is likely to decrease. A small periodic conversion from informal labour to formal, based on high performance, significantly improves the performance trajectory of the manufacturing output.
All options with conversions from informal to formal labour have shown a speedy and a significant increase in the output. Options with no conversion from informal to formal labour have shown low plant capacity utilisation. The recommended healthy labour flexibility range of formal-informal labour ratio may vary from 60:40 to 80:20 with a conversion rate of five-seven per cent per year. The policy of periodically moving a small fraction of high performing informal workers into the formal category would improve competitiveness among workers and facilitate a long-term healthy industrial relations environment in the production shop.
Gradually minimising and eventually leading to equal work, equal pay, is recommended. Labour reforms are needed by providing the employers the flexibility in labour recruitment and lay-offs. However, this ought to be transparent, performance-driven and with a financial safety net in the form of insurance for upskilling or retraining. To fulfil the dream of an Atma Nirbhar Bharat, we need labour reforms.
(The writer is Professor, Operations, GLIM, Gurugram)