By Archit Jain
It is no secret that prime minister Narendra Modi’s government is unabashedly pro-capitalist in several ways.
Drawing upon the Gujarat model of development, PM Modi’s administration has consistently prioritised the creation of business corridors (“National Industrial and Manufacturing Zones”) over labour welfare.
In this context, finance minister Arun Jaitley’s commitment—as outlined in the Union Budget 2017—to foster “a conducive labour environment wherein labour rights are protected and harmonious labour relations lead to higher productivity” is refreshing. He stated that the government is keen to undertake legislative reforms to amalgamate existing labour laws into four codes on (i) wages; (ii) industrial relations; (iii) social security and welfare; and (iv) safety and working conditions.
Unfortunately, however, there is little clarity on what these reforms would look like. Particularly, on whether they will include the controversial Industrial Relations Code Bill.
To legislate for betterment
Jaitley headed an inter-ministerial group in September 2016 to reconsider implementation of two legislations. As proposed by the Labour Ministry, this included the Wage Code Bill, and the Small Factory Bill. The former provides for a single nationwide minimum wage and streamlines the definition of wages. The latter seeks to bring all small factories under common regulation and exempts them from 14 central laws. These bills feed well into the ‘Make in India’ narrative.
The same meeting also deliberated over the Industrial Relations Code Bill. This will allow companies with a staff of up to 300 to retrench workers without government permission. Trade unions perceived this to be a threat to their job security, retaliating in a major nationwide strike.
[su_pullquote align=”right”]India’s labour laws have been criticised for being too rigid, thereby constraining the growth of its formal manufacturing sector.[/su_pullquote]
India’s labour laws have been criticised for being too rigid, thereby constraining the growth of its formal manufacturing sector. With respect to labour reforms, a 2008 World Bank report noted that “Given the country’s momentum of growth, this window of opportunity must not be lost for improving the job prospects for the 80 million new entrants who are expected to join the workforce over the next decade”. The argument is that if the laws are made more ‘flexible’—which is a euphemism for easy hiring and firing of workers—large firms will gain the confidence that they can shed workers in adverse conditions. They will therefore be more willing to enter labour-intensive sectors. This will, in turn, create jobs and boost output growth.
Redrafting the circumstances
The Industrial Disputes Act, the final authority on all labour-related issues in India, was amended and made more pro-worker. In 1982, for instance, it was made mandatory for firms employing more than 100 workers, instead of the earlier 300, to obtain the government’s permission for retrenchments, layoffs or closures. It adversely affected discipline on the factory floor (by reducing the fear of job loss). These findings were later countered by economists who showed that employment actually rose in factories with 100 to 1,000 workers in the period 1979-87 in India. They are also vulnerable to criticism on the grounds that they ignore the political and legal developments of the period under consideration. Most notably, the 1975 Emergency could’ve been the cause of the supposedly shrinking employment.
[su_pullquote]Several influential economists contend that rigid labour laws deter firms from entering labour-intensive, lowskilled sectors because they don’t feel confident that they can lay surplus workers off.[/su_pullquote]
Several influential economists have concluded that India’s protective labour laws have hurt growth and efficiency. They contend that rigid labour laws deter firms from entering labour-intensive, lowskilled sectors because they don’t feel confident that they can lay surplus workers off. While there is considerable merit in their arguments, they often overlook the fact that the per unit cost of labour is substantially lower in India than in most emerging markets. Moreover, many other developing economies have already become the first movers in the said low-skilled sectors. Automation in the developed world implies that the window of opportunity in these sectors is fast closing. This casts doubt on the notion that reforming labour laws will trigger a significant expansion in India’s low-skilled manufacturing.
Attempting to offset the cons
Au contraire, a maverick 2016 study by the International Monetary Fund shows that in a depressed economy, weakening dismissal conditions tends to reduce, not raise, employment. The Fund argues that if such changes to labour laws are to be carried out, offsetting fiscal expansion must increase the demand for labour. India, already struggling with fiscal consolidation, is in no position to meet this condition.
One step further, some of the academic literature on this subject suggests that giving workers greater protection enhances their productivity by giving them an incentive to invest in firm-specific skills. This suggests that the link between greater flexibility and higher economic growth is not as straightforward as is commonly believed. Consider this: dismissal laws in France are more stringent than in India, but that did not prevent France from prospering over the last century. China has in fact made its labour laws more rigid so that they are comparable with their counterparts in India.Finance minister Arun Jaitley stands outside his office holding the briefcase containing the Union budget for 2017 | Photo Courtesy: Hindustan Times
It is indeed puzzling why labour laws, and particularly the IDA, are being touted as the biggest hindrance to the development of India’s manufacturing sector—close to 60% of India’s manufacturing labour does not even fall within the ambit of the IDA.
Moreover, there is hardly any evidence that shows that the negative effect of the so-called rigid labour laws is particularly large compared to the effects of other impediments in the economy. Hence, while it is true that job creation in the private sector is constrained by low investment, this investment is constrained because of a multitude of factors, such as high levels of debt, high interest rates and a decline in the growth rate of corporate loans by public sector banks. Likewise, there is evidence that the bias against workers in Indian industries may have been triggered more by the tax incentives on capital than by restrictive labour laws. In this context, a singular emphasis on labour market flexibility as a key to job creation is misplaced.
Identifying the predicament
[su_pullquote align=”right”]The real problem in India, instead, is the multiplicity of labour laws, which often define the same terms in conflicting ways.[/su_pullquote]
The real problem in India, instead, is the multiplicity of labour laws, which often define the same terms in conflicting ways. The Wage Code Bill and the Small Factory Bill proposed by the Labour Ministry must accordingly be hailed for reversing these trends but equating labour market reforms with a policy of easy hire and fire does immense disservice to the cause of workers, and therefore precludes more egalitarian outcomes in society.
Assuaging the concerns of labour assumes even greater importance against a backdrop of insufficient jobs in the economy. The employment growth rate decelerated from 2.8% in 2000-05 to 0.5% in 2011-12. The sectoral composition of employment is also changing for the worse: in the organised sector, the share of informal employment rose from 48% in 2004-05 to 54.6% in 2011-12.
Finally, it is worth noting that the social costs of the proposed legislations are far-reaching. For example, one of the amendments seeks to practically make child labour legal in ‘family enterprises’ if the kids are employed ‘after school hours’. The number of occupations restricted for child labour has been reduced from 83 to 3.
All this gives enough reason to the liberal left for being cautious in its enthusiasm for Jaitley’s promise of worker-friendly labour reforms. Continuous kowtowing by a government to industrial lobbying leaves workers restive and aggravates their distress. Such a scenario not only violates economic and political prudence, but is also a slap in the face of inclusive growth, an ideal that our democracy holds in such high regard.
Featured Image Credits: Live Mint
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