Rigid labour laws are counter productive

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Our manufacturing industries have the advantage of a large work force at competitive wages. But the productivity in our factories is so low that we are unable to leverage our competitive work force properly. Productivity comes from technology and scale is a critical factor for using technology effectively. Economies of scale will remain a distant dream for our manufacturing industries, especially the more labour intensive sectors, so long as our current labour laws remain in force.

What is wrong with our labour laws can be inferred from the fact that some of them date back to the 1920s and some others have a vintage of more than half a century. The Industrial Dispute Act 1947 had been made severely more stringent during the Emergency. But the strongest opponents of the Emergency have been fighting for the continuation of these provisions ever since. The way factories work has undergone a sea change all over the world during the last few years, with corporate responsibility and compliance norms enforced by buyers becoming effective tools for ensuring labour welfare. But our labour laws remain where they were decades ago.

That rigid labour laws hamper the growth of manufacturing industries is conceded by all experts other than trade union leaders whose careers depends on them. But do these labour laws really protect the interests of workers? Our exit policy, or rather the lack of it, is a case in point. Currently, an industrial unit employing more than 100 workers cannot reduce its work force or be closed without prior permission from the government, even if it has been consistently making losses. And the prior permission is very difficult to come by. So, what happens to a loss-making unit? Within a few years, while the investor keeps running around for permission to downsize or close the unit, the accumulated liabilities erode its net worth. The workers get no salary since the unit does not function and no compensation because the unit continues to exist on record.

If there is no viable exit policy for an industry, a prudent investor will not enter it. Our labour laws seek to protect about 6% of our work force which is in the organised and therefore unionised private sector, ignoring the interests of about 92% workers forced into the informal sector in the absence of sufficient growth in the organised industry and over 40 million workers awaiting employment opportunities.

Rigidity in our labour laws goes much beyond the unviable exit policy. To cite some other examples, there is a stipulation that a worker cannot be deployed for more than 48 hours a week, even if the unit is prepared to pay higher wages and the employee is therefore eager to work for longer hours. Outsourcing and vendorisation are the current global trends that help in handling peripheral activities through contractors and allow the resources and energies of the unit to be spent on its core activities. But our Contract Labour (Regulation & Abolition) Act 1970 does not permit this. Fixed time employment for seasonal jobs is practically impossible and such jobs are in effect being driven out of the country. The Factories Act stipulates that women workers cannot be employed between 7 pm and 6 am. Thousands of women have been working in night shifts in service and hospitality industries, which are not covered by the Factories Act.

Meanwhile, capital from manufacturing industries of developed countries has been flowing, along with their technologies, into countries where such operations are cost effective. FDI in India is one of the lowest among emerging economies and negligible in labour intensive industries.