One of the long-pending reforms to unleash the Indian economy for labour-intensive manufacturing is rationalising the plethora of labour laws applicable to the organised sector, which are perceived as biased against employers, affecting investment in the sector. In fact, some of the punitive clauses of labour laws, such as compulsory and prior government approval in the case of layoffs for firms employing 10 or more persons (Industrial Disputes Act, 1947), consent of the employees to change the nature of the job (Contract Labour-Regulation and Abolition-Act, 1970), allowing outsiders to become office bearers of trade unions (Trade Union Act, 1926), etc, hamper labour-intensive manufacturing, adopting new techniques of production and cordial industrial relations. Realising the need to rationalise labour laws, the NDA government immediately after assuming office embarked on long-pending labour reforms by proposing to amalgamate 44 existing labour Acts into four codes — on industrial relations, wages, social security and industrial safety and welfare. However, the Centre has developed cold feet even as some of the states such as Rajasthan, Madhya Pradesh, Andhra Pradesh and a few others have already implemented most of them. This delay of proposed labour reforms is disappointing and contrary to the central theme of the government to boost manufacturing for job creation through its ‘Make in India’ initiative.
The NDA government initiated steps in October 2014 to rationalise labour rules by announcing two major schemes—unified labour and industrial portal, and labour inspection scheme—to bring transparency in inspection and use of rules. However, much desired reforms at the central government level through the proposed four codes is much awaited. It’s well established that China’s flexible and business friendly labour laws have ensured continued investment in Chinese manufacturing, whereas plethora of restrictive labour laws in India, around 245 in total, make it difficult for employers to downsize during business downturn and introduce a new technology. As a result, FDI inflows in India is insignificant in capital-intensive industries unlike in case of China during the first couple of decades of reforms. The existing laws protect only 10% of the total labour force and come in the way of creating opportunities for the rest.
Some of the major proposals of industrial relations (IR) code include allowing firms employing up to 300 people—against 100 now—to retrench/lay off workers and/or close down without government approval, requirement of 10% of workers to form a union, fixed-term employment, etc, which will encourage firms to hire workers for seasonal and other jobs. Under the IR code, outsiders will be barred from being office bearers of trade unions and strikes can be resorted to only after 14 days’ notice. The wage code will subsume four existing central labour legislations—the Minimum Wages Act, 1948, the Payment of Wages Act, 1936, the Payment of Bonus Act, 1965, and the Equal Remuneration Act, 1976. The tripartite consultations (trade unions, employers and the government) are over and the draft is in the final stages to be sent to a group of ministers headed by the finance minister for consideration. The government had already introduced the code on wages in the Lok Sabha that proposes a universal minimum wage for the entire working population, including unorganised sector workers.
The labour reforms agenda of the NDA government, in fact, has been holistic. As many steps are regarded as industry friendly, the proposed codes also seek to enhance the workers’ privileges. The code on wages, for instance, proposes making minimum wage a statutory right and extending it to all employees—currently, the relevant Act applies to 51 “scheduled employments” only. The wage code will reduce the disparity in minimum wages across states as the Centre will notify a “national minimum wage” (below which no state can fix its minimum wages) and this will be revised every two years (five years if the dearness allowance becomes part of the minimum wages). The government is in its last year of the tenure, therefore, the delay is to avoid the most sensitive labour reforms. There are also reports of diluting key proposals like allowing firms to hire and fire employing up to 300 people without government nod and barring outsiders from becoming office-bearers of trade unions. While IR code is being weakened, the fixed-term employment that is already in force in the textiles and garment sector may be extended to all sectors. The stiff opposition from trade unions has slowed the reforms’ pace. Moody’s has stressed that labour market, along with land reforms and recovery in investment cycle, could put upward pressure on its India rating, essential to attract investment.
A strong legislative intervention in labour market is difficult without developing a consensus on national policy framework. In the time and age of highly automated manufacturing ecosystem, there is a need for simplified and rationalised labour laws that are in line with contemporary economic realities. Labour market liberalisation is likely to augment employment flexibility, skill development and job creation on a wider scale. India is very well placed to reap demographic dividends, provided it can shift large number of labour force from agriculture to labour-intensive manufacturing. China has been hugely successful in attracting FDI into export-oriented labour-intensive manufacturing, in part because of flexible labour laws such as the contract labour system implemented in 1995. Though the encouragement to states for labour reforms has resulted in seven to eight states going for appropriate policy changes relating to labour laws, it is high time the central government carried out the proposed four codes for rationalisation of restrictive labour laws.
Professor, Institute of Economic Growth