Reform in Practice: Amartya Lahiri (UBC) on Hiring, Firing and Why India’s Firms Stay Small

What is one area of regulation in India that should be deregulated?

Labor, the labor markets are incredibly, you know, important for India because that's one of India's biggest resource people. So we just have to make, get people to work in things that they're good at, get people, you know, firms to find ways of employing people who are, you know, useful for them. So that labor market has to be in a much smoother functioning, you know, state than it is right now.

So we have a preponderance. Our problem is that most firms don't want to hire people and grow, so they stay small. And the reason for staying small often is the fact that they cannot let go of people, you know.

So there are lots of constraints on letting people. And what India needs is, so therefore the landscape is kind of full of smaller firms employing, you know, 20 or fewer or 100 or fewer. And so traditionally, this used to be a major issue because, you know, so because people would not want to grow beyond those thresholds because your desire to hire someone is crucially linked to your ability to fire that person if the match doesn't work out.

You know, the labor market is really a matching game between employers and employees. And so, you know, like any match, it may not work and sometimes it works. So you have to have separation rules in place that you have to allow a match to fail.

And that's where the exit, you know, whether you can separate from a match that isn't working becomes very important. If I fear that I won't be able to separate, I really don't want to, you know, enter into that match either. And that's partly has been a big reason why Indian firms remain small.

And small comes with productivity costs that, you know, you can't, you don't get any of the benefits of scale. So for India to profit, to productively employ about, you know, 10 million additional people that are joining the labor market with more education, with more training, it is very important that firms are willing to hire them and willing to operate at a much bigger scale than they are. And that's where the Indian problem is that, you know, we don't allow, you know, separation is not easy.

And so the new, you know, labor codes that have been notified has made one change, which is, has allowed, you know, firms which are at, you know, they need to take permission if only they are employing more than 300 people. So that's an improvement from it, from the hundred that used to be, but it's still, you know, a drop in the bucket. What we need is much bigger firms.

So that's the sector that we have to really push, I mean, the kind of reforms we need to push.

What would a more effective alternative look like?

So I think, you know, all of these things have to work from, work backwards, you have to say what your goal is. And so I think the goal for India has to be a much larger set of factories and firms that are employing 2,000 people or more.

And if that sector really, you know, to grow to that size, all, you know, capital owners, firm owners will say, I will only grow to that size if I can hire and fire these, you know, otherwise I just don't want to get in there. So the, you know, the 300 really doesn't cut it. I mean, you know, if you have to get there, you have to move it at least that, you know, you have to raise this bar up to 1,000, if not to 2,000 that, you know, up to that point you can, you know, you can hire and fire.

I think that's, you know, the 300 that has been introduced, I think is too little. It has to be much, much bigger. It has to, you know, they have to ramp it up to, as I said, either 1,000, preferably 1,000 or preferably 2,000.

And I think that's possibly going to loosen up the hiring process because we have a huge number of people who are joining the labor market. And at this point, we cannot accommodate them all in low value added gig worker jobs. It has to be large scale manufacturing, which can absorb these people, but that is contingent on these labor markets working.

So until you introduce a much freer hiring and firing policy, we're not going to get there. So we just have to, you know, work hard on that.