Recalling Arvind Panagariya's Unsuccessful Labours

If deregulation of hiring and firing is desirable, then greater regulation of working conditions is also necessary.

Arvind Panagariya

Arvind Panagariya. Credit: PTI

Multiple media stories are quickly weaving a narrative, through implication, that Aravind Panagariya’s departure from NITI Aayog is a big loss to the Indian economy. The angle being pushed is that a ‘modern’ thinking, celebrated Columbia University professor quit in the face of India’s persisting lack of professionalism, unstructured power centres and politicisation of institutions.

While the reasons behind his departure can only be conjectured and not thoroughly verified, the claim that his exit is a massive intellectual loss to Indian economic thinking may be exaggerated. Panagariya’s insistence on deregulation of Indian labour laws for example, is marked more by alarmism than nuance, and this has led him to advocate changes to the labour regime that are one-sided and unlikely to benefit the economy.

In a speech before the change of regime in India in 2014, Panagariya said the following at the Centre for Development and Enterprise, a South African think tank working on socio-economic policy.

The labour situation is incredibly complicated: when you go from six workers to seven in a firm, the Trade Unions Act kicks in. When you go from nine to ten, the Factories Act kicks in. And when you go from 19 to 20, something else kicks in, as happens again when you go from 49 to 50 and 99 to 100. The biggest killer is the Industrial Disputes Act, which says that if you are a manufacturing firm with 100 workers or more, you cannot dismiss any of them under any circumstances unless you get prior approval from government. This is rarely given and it applies even if you go bankrupt, in which case you still have to pay your workers. This has important consequences, because investors are not going to enter into an industry if they can’t exit. So India has a very pernicious set of labour laws and that really, to me, is the reason why Indian firms have remained so small on average.

This excerpt clearly highlights Panagariya’s belief that labour laws are the biggest impediment to the growth of the Indian economy. The truth however is that it is difficult to isolate the impact of labour laws related to hiring and firing on job growth. A range of other reasons may be locking up industry resources and making even labour-intensive sectors uncompetitive. For example, a factory that has to pay an unreasonable price for land, part with regular bribes to government officials, navigate a volatile tax environment, and is subject to frequent power outages has little capital left over to expand its scale of production by employing more workers. This means that it is quite possible to boost productivity and growth by addressing the other set of problems – which may be more critical binding constraints – instead of making the lives of blue collar workers even more uncertain in the age of globalisation of capital and automation.

Interestingly, the methodology of ranking laws as anti-growth or anti-productivity by Panagariya has been part of a wider neoliberal orchestra. In 2004, two academics from the London School of Economics, Timothy Besley and Robin Burgess, attempted ranking Indian states as pro-employer or pro-worker based a comparison of state labour laws with the Industrial Disputes (ID) Act.

For example, Besley and Burgess identified a law in Andhra Pradesh as pro-employer because it vests with the state government the power to prohibit factory strikes in certain cases. The reality is that no state government functions as an entirely neutral entity because of the contingent nature of politics. Thus, at the time of elections it may pass an order in favour of workers whose votes it needs and between election cycles it may favour employers in exchange for rent payments. Classifying states as labour friendly or management friendly, on the basis of labour laws alone, ignores the manner in which actual implementation takes place.

Panagariya, like other advocates of ‘labour reform’ are right in arguing that the pressures of running businesses in India will ease if hiring and firing norms are relaxed. While those opposed to any easing of restrictions on hiring and firing argue that this will lead to the rampant dismissal of workers, it is a fact that employers generally like to retain their workers – their purpose is not to fire workers at will and increase operating costs in hiring and training new employees. Therefore, providing employers with greater discretion in firing unproductive workers or downsizing against continuous losses will probably be used wisely because employers generally try to retain their workforce.

However, Panagariya’s pet proposition lacks the necessary counter-measure that would ensure that ease of hiring and firing is not exploited in other ways by managements. Employers have a tendency to exploit workers by lowering wages and pushing up work hours; in such a scenario, the ability to easily fire workers could be used coercively to retain them in poor conditions. Workers will probably not protest for fear of being dismissed. Achieving high employment levels would then remain a metric on paper, camouflaging the subjective experience of the worker with a metaphorical gun to his head. Panagariya’s approach offers insufficient protection to safeguard the nature of work.

The American economy is experiencing an analogous crisis that spilled over to its politics as white working class voters did not back Hillary Clinton as strongly as past Democrat candidates, because of her one way reform proposals for labour laws that were wholly pro-employer. Liberalising hiring-firing makes sense only when there is greater regulation of working conditions.

It is also important to note that contrary to perception, fair pay and decent working conditions do not necessarily make workers less competitive as buyers do not always seek the cheapest labour. Gunseli Berik and Yana Rodgers, have pointed out how the US has signed trade agreements guaranteeing Cambodia permanent markets for its garments if Cambodia allow improved wages and working conditions for its garments workers, monitored regularly by the International Labour Organisation. This is not an isolated incident but part of a growing trend of consumer sensitisation. Just as consumers increasingly disfavour using products that harm the health of animals used for testing, there is growing unwillingness to buy goods produced under exploitative conditions.

The Rajasthan government’s labour amendments, Panagariya’s model case study for India, have made precisely the same error – by making labour reform a one-way street that favours employers but does not protect workers. While the state government did the right thing by easing both hiring-firing norms, it failed to increase the regulation of working conditions. In addition, its step to liberalise laws on contractual employment will further help management save costs through poor working conditions and remuneration. Generally a contractual employee does not receive certain crucial work benefits that are due to full-time employees. In Rajasthan, management has been given incentives to keep workers contractual. Panagariya praised Vasundhara Raje, the chief minister of the state, for her “bold” moves, forgetting to consider the interest of workers.

Thus, if deregulation of hiring and firing is desirable, then greater regulation of working conditions is also necessary. The Union government has to draft better laws for workers to negotiate maximum working hours, paid leave, sanitation requirements, personal and family insurance, among others. The combined impact of deregulating firing and regulating wages and work conditions can create a relatively nimble and willing workforce – a situation that benefits both employers and workers. The approach to the whole question of labour reform must be that of multiple, precise cataract surgeries, not a cleaver that severs away ‘regulation’ once and for all.

Sampad Patnaik is an MPhil candidate at the Department of Politics and International Relations, University of Cambridge.

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