EXIT POLICY
With the new economic policy which would pave way for economic restructuring, Exit Policy has
become a widely debated subject in India. Exit policy refers to the policy regarding the retrenchment of
the surplus manpower resulting from restructuring of industrial units or the workers becoming
unemployed by the closure of sick units. The exit policy in its wider context covers the policy for the
compensation for the employees who leave the organisation and the measures for their rehabilitation
also.
NEED FOR EXIT POLICY
Surplus manpower is a major problem of many industrial units in India. In other words, the industrial
sector too is characterised by disguised unemployment. (There is disguised unemployment if some
labour employed in an enterprise can be withdrawn without adversely affecting the production. This
concept was originally used to describe the situation which exists in the agricultural sector of the
developing countries.) This problem is very rampant in the public sector. The private sector also
seriously suffers from this problem.
In the seller’s market which existed in India under the protected economic system, the high costs of
surplus manpower employed by the companies could be passed on to the consumers by way of high
prices. However, survival in a competitive system demands cost efficiency improvement and cost
reduction in every possible way. It may become necessary not only to get rid of the surplus manpower
under the existing technology but also to cut the labour force size further due to modernisation. In some
cases, it may also become necessary to give up some of the lines of business to maintain or improve the
health of the enterprise. Thus, some of the measures which industrial undertakings take to improve the
competitiveness and to ensure survival would render a part of the existing manpower unemployed. If
the enterprises do not take such measures in time, it may even ultimately lead to the closure of the
units throwing all the workers unemployed.
There are also a large number of unviable sick units, both in the public and private sectors. There is no
economic and social justification for their continuation. Those who argue that the State should run the
sick units fail to recognise the fact that the society will have to bear the cost of the huge losses these
units make and that amount could be invested elsewhere for generation of productive employment or
for enhancing the social welfare.
If the required restructuring to improve competitiveness and the closure of unviable sick units are not
allowed, the whole economy would become sick in due course. There are, therefore, no options.
The new economic policy may create unemployment at the enterprise level in a large number of cases.
It does not, however, mean that NEP would increase the total unemployment in the economy. Contrary
to that, it would help increase the total employment. In fact, a deviation from the old policy was a must
even to maintain the existing level of employment in the long run.
Technology is becoming more and more labour-saving. Technological developments are making several
industries which in the past were labour-intensive more and more capital-intensive. Countries which do
not adapt themselves to the changing environment would ultimately see their employment shrinking.
Technological developments which increase productive efficiency are affecting employment in many
organisations all over the world. Downsizing the manpower is inevitable due to other reasons also. The
multinational giant IBM which has assiduously followed a cardinal philosophy of non-retrenchment for a
very long time has been compelled to give up this policy.
Modernisation or restructuring may lead to job cuts at the enterprise level. But will this mean a fall in
total employment or only a change in the pattern of employment generation? The evidence from other
countries suggests the latter. Had this not been so, the level of unemployment would have been highest
in Japan where the rate of technological change is the swiftest. Instead, it is the lowest, with Germany
only a step behind.
One of the major failures of Indian system has been the inability to recognise the implications of
technological developments. The unpragmatic employment protection policies have created many long-
term problems. “Experience the world over suggests that modernisation can work only if labour is
trimmed sharply. Modern looms need only one-fifth the labour that obsolete ones do. If a company
cannot shed labour, modernisation will saddle it with both high capital costs and high labour costs, a
recipe for bankruptcy. Indeed, the inability of the Indian firms to tailor their workforce to the level of
capital employed has been an important reason why firms have not modernised. This rigidity in the
labour market has also meant that the Indian labour, contrary to popular belief, is not at all cheap. The
Japanese have pointed this out often, saying that while it may be cheap in the first round of investment,
thereafter it becomes expensive because swift capital-labour adjustment are just not possible.”
It is high time that India corrected the growth defeating policy of protecting the existing jobs at high
social costs. Employment generation by the industrial sector depends, inter alia, on the dynamism of the
industrial sector.
EXTENT OF OVERMANNING
A large member of the people employed in the industrial and other sectors of India is surplus. However,
there is no reasonably accurate estimate of the extent of the surplus of the manpower employed.
The overmanning has two dimensions, viz., the surplus even with the existing technology employed by
the enterprises and the surplus that will emerge if the existing technology is replaced by modern
technology.
In many cases, the Indian industry uses more labour than those in other countries even when the
technology used is the same. For example, the Aditya Birla Group uses the same textile machinery in
India that it does in its other plants in South-East Asia. But it takes just two workers to process 100 kg. of
yarn in Indonesia and three in Philippines and Thailand; in India, Birla’s Grasim Industries needs seven
people for the same job. This made the labour cost of processing 100 kg. of yarn in India 14 times more
than it in Indonesia.
1 Use of obsolete technology causes very high labour costs. The use of obsolete technology makes cost
of production very high in India in several cases. For instance, while it took a South Korean worker 11
hours to make a tonne of steel, his counterpart in TISCO would take two days. With vintage factories,
some of which were more than 75 years old, ACC produced 475 tonnes of cement per worker while
Gujarat Ambuja produced 2000 tonnes per head.
By estimating the number of workers in sick public and private sector units, Sudipto Mundle arrived at a
figure of 2.4 million surplus manpower in the industrial sector in India. Assuming the same level of
redundancy in government employment (18 per cent), Mundle has assumed for estimating the surplus
in public sector companies, Business Today estimated that 1.8 million of the total of over 10 million
government staff, including administrative staff and workers in departmental undertakings (like
railways, telecom, etc.) was excess.
According to Pramod Verma, even without technological change, it should have been possible to reduce
labour by five to seven per cent which meant between 13 and 18 lakh people and if technology was
upgraded, the organised sector would lose another 25 lakh jobs. A study by the Textile Ministry had
estimated that there was 80,000 surplus workers in the National Textile Corporation (44 per cent of total
employment). There was a surplus of about 50,000 workers in Coal India and this figure could be much
higher once the technology for underground mining was upgraded. Besides, the Singareni Collieries
which had been referred to the BIFR, had about one lakh workers. A study by Mrityunjaya Athreya,
conducted in 1987, revealed that the Steel Authority of India (SAIL) had a surplus of 80,000 workers. At
least 50 per cent of the workers of the State road transport undertakings were estimated to be surplus.
The same may be true of state electricity boards. The figures given above give some indication of the
extent of the alarming overmanning of the Indian economy.
VRS AND GOLDEN HANDSHAKE
It is necessary to dispense with the excess manpower for improving the health of an organisation. If this
is not done, the excess labour could cause industrial sickness.
A popular method to trim the manpower is the voluntary retirement scheme (VRS). Under the VRS,
employees who have attained forty years of age or ten years of service would seek voluntary retirement.
The minimum benefits under this scheme would be forty-five days’ emoluments for each completed
year of service before normal date of retirement or the monthly emoluments at the time of retirement
multiplied by the remaining months of service before the normal date of service, whichever is less. The
benefits would be in addition to the amount that has accrued to the Provident Fund as per the rules or
to the Gratuity fund whichever is applicable.
Some companies offer very attractive package of benefits to the employees who would opt for VRS.
Such schemes are often referred to as golden handshake scheme. While the golden handshake scheme
offered by some companies in the past worked very well, the offers made by some other companies
failed to elicit the required response from the employees. An important reason for this was said to be
the higher expectations workers began to entertain as the concept of golden handshake became
popular. The VRS offered by some banks like the SBI and Canara Bank in 2001 have got very high
response.
A number of companies have already reduced their workforce by VRS. These VRSs have taken different
forms. In fact, the process of getting rid of the excess labour started in several companies much before
the economic reforms ushered in India.
The ACC had brought down its workforce from 25,000 to 16,000 in 10 years. Between 1987 and early
1993, SAIL got rid of 17,000 workers through its VRS and by 2000 another 57,000 were estimated to
retire.
The VRS takes different forms. While in SRF Ltd. the VRS cost was a low ` 25,000 to one lakh per head, in
Hindustan Geigy it was about ` 4.4 lakh per head on an average. The absolute limit set by the
government is ` 5 lakh.
The NTC had offered looms at subsidised rates to the workers under the VRS package. They are also
offered sheds for housing the looms and marketing facilities to sell their production. Between November
1992 and March 1993, 25,000 NTC workers had accepted VRS. Road transport firms can offer buses to
the employees under the VRS.
Between April 1997 and March 1999, the central public undertakings reduced their manpower by over
one lakh.
NATIONAL RENEWAL FUND
A very important step taken by the Central Government to benefit the workers affected by industrial
restructuring, modernisation or closure of the unit was the establishment of the National Renewal Fund
which was operationalised in 1992. The objectives of the NRF are the following.
1. To provide assistance to firms to cover the cost of retraining and redeployment of employees arising
as a result of modernisation and technological upgradation of existing capacities and from industrial
restructuring.
2. To provide funds for compensation to employees affected by restructuring or closure of industrial
units, both in the public and private sectors.
3. To provide funds for employment generation schemes in the organised and unorganised sectors in
order to provide social safety net for labour.
The NRF is administered by the Department of Industrial Development. The first set of cases taken up by
the Department were those relating to the National Textile Corporation. The NRF was proposed to have
a corpus of ` 2,000 crore which would be contributed by three sources; ` 200 crore as budgetary support
(the 1991-92 Budget earmarked this amount); ` 1,000 crore from the disinvestment of public sector
undertaking’s shares and ` 800 crore from the World Bank. The NRF was proposed to have two parts.
The first part is the Employment Generation Fund, which would provide resources to approved
employment schemes in the organised sectors. The second part is the National Renewal Grant Fund to
meet the compensation and training expenditures of retrenched workers.
The World Bank has offered (in February 2001), to fund Government of India’s downsizing plan,
estimated to cost a minimum of ` 5,000 crore, provided the Government is willing to settle for a young
bureaucracy.
CONCLUSION
Although a full-fledged, detailed exit policy has not yet been formulated, the establishment of the
National Renewal Fund is very important step. This is indeed a clear indication of the appreciation of the
need for modernisation, restructuring and even closure of units in inevitable cases and that if these
measures render workers unemployed the right policy is not to resist such measures but to retrain and
redeploy the workers to the extent possible. Schemes like NRF should not be made completely
dependent on the national exchequer. A scheme for regular contribution to such a fund by the
companies and workers should be designed and implemented. As mentioned earlier, many companies
and organisations all over the world, one time or the other, have faced the problem of surplus
manpower. It was reported that the Chinese Government had decided to bring about sweeping changes
in the Central Government structure causing a 20 per cent cut in the number of government employees.
India cannot afford to be blind towards hard realities. Organisations should be allowed and facilitated to
swiftly respond to environmental realities to enable them to become efficient and competitive.
The workers have a lot of apprehension about the very term exit policy. One of the important objectives
of an exit policy is to protect the interests of the workers. However, instead of educating the workers
about it, the trade unions and politicians seem to be causing unnecessary fears in the minds of the
workers. It is pointed out that “the exit policy on which the union bosses are currently declaiming
pertains to their own impending exit and not that of the common worker.
It is almost a certainty that the average retrenched blue-collared person will get a fair deal by way of
compensation, retraining and redeployment.”
In fact, “the biggest loser of not having an exit policy is the labour because the legitimate interests of
labour are protected only when there is a legal closure of a sick mill. In a situation of a sick unit not
functioning and not legally closed, workers may remain years together without employment, wages and
not getting their legitimate dues. One may therefore, argue that “if properly implemented, it is the most
pro-labour policy imaginable.”
There is however, a growing realisation among the workers of a need to increase productivity to survive
the domestic and foreign competition; if firms do not shed the excess manpower all the workers would
sink with the firm. While in some companies the unions cooperate with the VRS, in several companies
they have strongly opposed. In a number of cases, the workers defied the call of the unions to boycott
the VRS.
The response of the workers to the VRS may depend upon the attractiveness of the scheme, their
assessment of the future of the enterprise etc. In 1989, when the Hindustan Lever (HLL) lifted its year
long lock-out at its Sewree plant in Bombay, more than 550 workers availed of the VRS. But in 1992
when the HLL offered another Scheme to retire 500 workers, only nine of them accepted it.
SUMMARY
Exit policy refers to the policy regarding the retrenchment of the surplus manpower resulting from
restructuring of industrial units or the workers becoming unemployed by the closure of sick units. The
exit policy in its wider context covers the policy for the compensation for the employees who leave the
organisation and the measures for their rehabilitation also. The economic liberalisation has made exit
policy highly important because of restructuring of enterprises and closure of units. Surplus manpower
is a common problem of the private as well as the public sectors in India. In a globally competitive
environment, no organisation can survive with large surplus human resource. It is, therefore, necessary
to have an appropriate exit policy to make the transition smooth. There is a feeling that exit policy is
something anti-labour. The fact, however, is that the biggest loser of not having an exit policy is the
labour. It is argued that “if properly implemented, it is the most pro-labour policy imaginable.” A
popular method to trim the manpower is the voluntary retirement scheme (VRS). Some companies offer
very attractive package of benefits to the employees who would opt for VRS. Such schemes are often
referred to as golden handshake scheme. One possible drawback of the VRS is that the efficient
employees would leave the company while the inefficient may stay back; the efficient ones would be
hopeful of alternatives outside while the inefficient may not be very optimistic.
A very important step taken by the Central Government to benefit the workers affected by industrial
restructuring, modernisation or closure of a unit was the establishment of the National Renewal Fund
(NRF) with a view to: (1) providing assistance to firms to cover the cost of retraining and redeployment
of employees arising as a result of modernisation and technological upgradation of existing capacities
and from industrial restructuring; (2) providing funds for compensation to employees affected by
restructuring or closure of industrial units, both in the public and private sectors; (3) providing funds for
employment generation schemes in the organised and unorganised sectors in order to provide social
safety net for labour. The workers have a lot of apprehension about the very term exit policy. One of the
important objectives of an exit policy is to protect the interests of the workers. However, instead of
educating the workers about it, the trade unions and politicians seem to be causing unnecessary fears in
the minds of the workers.
