‘Imperfect yet small gains from labour codes shall drive MSMEs forward’

Updated: Oct 13, 2020 12:00 PM

Ease of Doing Business for MSMEs: There are many reasons why many of India's 63 million enterprises are dwarfs (small that stay small) rather than babies (small that grow). And one of them is surely our regulatory cholesterol created by India’s compliance universe.

code of social security, labour code 2020, employment, unemploymentRs 3.7 lakh crore package for MSMEs under the Rs 20 lakh crore economic stimulus was announced by PM Modi earlier this year.
  • By Rituparna Chakraborty

Ease of Doing Business for MSMEs: In India, poor people cannot afford to be poor and hence they are self-employed. Indicative of self-exploitation, India’s problem is wages and not jobs. If jobs were the problem, labour reform may not be the answer, but to provide Indians with the wages they aspire for or want we need to talk about labour reform. This issue can’t be solved without the formalisation of our enterprises and improving productivity. We have 63 million enterprises, we have 12 million enterprises that work from home, we have 13 million GST registrations, 1.2 million enterprises contributing employer-based pension or insurance programs, .5 million enterprises with revenues, 15,000 employers posting jobs on Naukri.com, and around 22,000 employers with a paid-up capital over Rs 100 million.

There are many reasons why many of India’s 63 million enterprises are dwarfs (small that stay small) rather than babies (small that grow). And one of them is surely our regulatory cholesterol created by India’s compliance universe consisting of 69,233 compliances, 6,618 filings, and 1,536 acts. Out of which labour consists of 463 (which today stands reduced to 438) Acts, 32,542 Compliances and 3048 Filings.

Balancing between formal job creation and protecting worker’s rights must have been challenging for our public policymakers as it’s the heart of all debates around labour reform. We recently witnessed all four labour codes become the law subsuming 29 of the Central labour codes. While we are seeing ongoing debates on its impact on employers, employees, informal workforce and the economy – let’s try and focus on how this impacts small businesses – whether we end up with more dwarfs then babies. Segregation of Small businesses (MSMEs) as of June 1, 2020, under micro enterprises, small enterprises and medium enterprises is done through a combination of investments and turnover.

While India is using investment and annual turnover as the criteria to classify MSMEs, globally, the number of employees is the most widely used criteria for classifying MSMEs. It is an important exclusion as employee thresholds play an important role in understanding the impact of the labour codes. Hence it is important to call out that the various provisions of the labour code shall impact each of the above three category of small businesses differently. However, for easy comprehension let me attempt some noticeable benefits and challenges for small businesses on account of the freshly minted labour codes.

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Some of the key benefits shall include:

  • Codes prescribe size-based thresholds – Most of the labour laws apply to establishments over a certain size (typically 10 or above). These size-based thresholds is a considerable positive that shall help small business to reduce their burden of compliances enabling them to stay competitive and thrive.
  • Lower cost of compliance – Simplification, rationalisation and greater digitalisation shall help MSMEs save considerable operational costs by reducing their cost of compliance. Previously the cost which went in compliances did not translate into any benefit for employees. The new reform will help address that.
  • Lesser complexity – Previously several laws with differing definitions often used terms like “appropriate government”, “worker”, “employee”, “wages”, “establishment” – resulting in varying interpretations. This would lead to complexity in compliance and often result in acts of omission. The attempt to reduce these variances across the labour codes definitely benefits smaller businesses who may not have the luxury of investing in large internal legal experts.
  • Promotes entrepreneurship by providing room to fail – Now one requires government permission for layoffs and retrenchment only if the number exceeds 300 and contrary to the popular view that this shall encourage hire and fire, it actually creates room for MSME to aim higher and grow from being dwarfs to adults without the burden of failing.
  • Allows flexibility by legitimising various types of employee supplementation – With creating bold legislations, on one hand, acknowledging all forms of livelihood – permanent employees, fixed-term employees, contractual employees and gig workers and on the other creating tight guard rails to upload the interests of all stakeholders it has provided MSMEs with wings to fly.

There are however some sore points for MSMEs in the labour codes which includes:

  • Cost of compliance for safety norms has increased – Clearly, the stringent safety norms that all establishments have to follow as per the code shall impact the MSME employers more than the larger companies. While its need from the workers perspective is obvious however it would lead to cost explosion for MSMEs.
  • High penal provisions – Across all four codes the penal provisions have become quite steep whether it is in terms of penalties as well as in terms of jail terms. This would definitely be a setback for those MSMEs.

Recently our Finance Minister Nirmala Sitharaman said, “Atmanirbhar Bharat doesn’t mean India becomes inward-looking or isolate itself – that will not happen. It is just a focus on being self-reliant and grow local brands and businesses.” It is true MSMEs need access to capital, favourable tax policies, government regulations, promotional policies – however labour laws would remain an important driver for the success of MSMEs. Hence we shall celebrate the small gains the labour codes have for our local brands and small businesses with its imperfections.

Rituparna Chakraborty is the Co-Founder & Executive Vice President of TeamLease Services. Views expressed are the author’s own.

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