Land And Labour Reforms Are Good To Have, But They Won’t Bring Big Upsurge In Growth

It is now routine for all economic advice-givers, from the World Bank to the International Monetary Fund (IMF) to sundry economists of various stripes, to ask India to initiate factor market reforms, largely land and labour. While nobody should doubt the need for greater flexibility in these factor markets, we do need to question whether even sweeping land and labour reforms will really lead to a huge upsurge in growth or job-creation.

There are two reasons why. One, classical economic theory is out-of-date. We have all studied in school economics that land, labour, capital and organisation are the key factors of production. But we were not told quite so clearly that every factor of production can have substitutes. If the price of one goes too high, another factor steps in.

In the knowledge economy, technology, automation and IP (intellectual property) are the key factors of production driving growth; land and labour have become less and less important. Technology and automation ensure that more can be produced with less land and less labour.

Studies in the US clearly demonstrate this, both in manufacturing and services. Since 1991, US recessions have gotten longer and longer to restore employment to pre-recession levels, but gross domestic product (GDP) has swung back much faster. A Ball State University study showed that barely 13 per cent of job losses in the US were due to trade or globalisation; the rest were mostly due to technology and automation. This trend is true even in India, as most manufacturing companies buy more robots, and even services companies in the IT sector are beginning to automate low-level coding and other jobs.

Coming to India, ask yourself some simple questions to check if labour law reforms will really move the needle in a big way on jobs growth when the following circumstances prevail.

One, barring government and public sector services, unions are incapable of bringing any major sector to a halt. Even in banking, the public sector banking unions cannot dictate terms as private sector banks have grown market shares and have no unions. Private banks, IT companies and telecom firms — all big employers over the last two decades — are now substantially automated and invulnerable to labour power.

The big job creating sectors, real estate and construction, do not have any problem hiring and firing workers at will. Ditto for private schools and hospitals. So, will labour law change impact jobs in any of these job-creating sectors? Most sectors already have the flexibility they need.

Two, even where workers are deployed on a significant scale, significant numbers are provided by contract labour. Again, this implies that labour flexibility already exists where it matters. The rate of hiring contract workers is now higher than rate of hiring regular labour.

Three, it is widely accepted that India has a large informal sector. In the 2018 Economic Survey, the size of the informal workforce was estimated at 93 per cent; NITI Aayog’s “Strategy for New India at 75”, released last year, estimated the same at 85 per cent. Even assuming both these guesstimates (they are guesstimates for sure) have grossly overestimated the number of informal workers, over two-thirds of the workforce will still remain in the informal sector, where labour law protections do not quite operate. So how exactly, and by how much, will labour law reforms improve the market for hiring labour in the remaining part of the economy?

At best, we can conclude that labour market reforms are good to have, but we cannot be sure how much good they will do when the tendency to replace labour with capital and technology will be accelerated by the falling price of technology and gadgets.

In the Union budgets for 2017 and 2018, the late Arun Jaitley allowed fixed-term labour contracts in most sectors, but has this made any difference to hiring practices? There is no evidence of any boom in hiring due to these changes, which could also be due to tardiness on the part of states to notify these changes. Put another way, reforms at the central level may not always deliver unless they are followed up with similar enthusiasm at the state and municipal levels.

Now, let’s talk land reforms. There is no case for arguing that we don’t need a vibrant land market, where prices are determined by demand and supply. In this scenario, the United Progressive Alliance-era Land Acquisition Act, which mandated payment of two times “market” prices for urban land and four times for rural land acquired for public purposes, has clearly distorted the market. But even if these laws were to be modified to make them more market-oriented and the record of land titles cleaned up, will it make a huge difference to growth in the short run? Ask yourself these questions:

One, if state governments can bring urban land prices down by the mere use of a pen — a change in floor space index by a factor of two can bring down the land price per unit of property by nearly half — the impact of a national level land market reform will make no material difference. The bulk of the stimulus for building and growth can be provided by transparent policies and governance reforms at the state and urban local body levels.

Two, when it comes to building infrastructure like roads and highways, a small change in road alignments — away from costly land areas to cheaper regions — can dramatically lower land acquisition prices. Roads and Highways Minister Nitin Gadkari claimed last year that by realigning the Mumbai-Delhi Expressway route to pass through backward regions in five states his land acquisition cost was being brought down from Rs 7 crore to Rs 80 lakh per hectare. The use of better technology also reduces the time and cost of building expressways and highways.

The moral of the story is this: the market always finds a way. If one factor of production becomes too costly, it will be substituted by another, cheaper, factor of production. Labour will be substituted by capital or technology, and land by cheaper land, never mind whether there are reforms or no reforms.

If onion prices remain at over Rs 200 a kg for two years, people will switch to radishes or other pungent substitutes. The same applies to land and labour.

This is not an argument against land and labour reforms, but just a cautionary note that even dramatic factor market reforms — of which there is little in sight — will not herald some new era in growth or employment. The time when labour or land reforms could have given us dramatic improvements was a long time ago. We missed the bus when the rest of Asia did those reforms. Our businessmen moved on to using other factors of production to get growth up. It is unlikely that they will now suddenly start hiring more.

A corollary: if you don’t do the right thing at the right time, you may not benefit as much as you would have earlier.