Finally, a push for labour reforms

The much awaited labour reforms necessary for mass manufacturing in India were initiated by Prime Minister Modi on October 15. Any efforts to rationalise labour rules, around 250 of them at the Central and State levels, is a welcome step for industry.

The two key areas of reform are ‘unified labour and industrial portal’ and ‘labour inspection scheme’. Introduction of the labour identification number (LIN) and putting inspection on a unified portal will help bring transparency in the use of labour rules.

The Prime Minister’s efforts to raise the minimum wage ceiling from ₹6,500 to ₹15,000 and to ensure EPF and the pension scheme for vulnerable groups are also laudable.

Overall it’s the first big step that’s been taken at the Central level to reform one of the most complicated issues in the post-reforms era. However, much more needs to be done to put together a system that is not biased against either employers or employees.

Further, the system should create an environment for productive employment with reasonable safety nets.

It’s been well established that China’s flexible and business friendly labour laws have ensured continued investments in Chinese manufacturing, unlike in India where restrictive labour laws have been a cause of concern for investors. Though the Indian labour force has been much more disciplined and cooperative in the post-reforms period leading to a decrease in the number of strikes, lockouts, mandays lost and so on, the large number of labour rules and the process of enforcement by inspectors scares investors, at least on paper.

India’s labour laws are restrictive in nature and hurt investments in the manufacturing sector. The Industrial Disputes Act (1947) has rigid provisions such as compulsory and prior government approval in the case of layoffs, retrenchment and closure of industrial establishments employing more than 100 workers. This clause applies even when there is a good reason to shut shop, or worker productivity is seriously low.

The Contract Labour (Regulation and Abolition) Act (1970) states that if the job content or nature of work of employees needs to be changed, 21 days’ notice must be given. The changes also require the consent of the employees, and this can be tricky.

While the right of workers to associate is important, the Trade Union Act (1926) provides for the creation of trade unions where even outsiders can be office-bearers. This hurts investor faith and restricts economic growth.

Rigid labour laws discourage firms from trying to introduce new technology, requiring some workers to be retrenched. This deters FDI because of the fear that it would not be possible to dismiss unproductive workers or to downsize during a downturn. Hence getting FDI into export-oriented labour-intensive sectors in India has not been fully achieved.

In contrast, China has succeeded in attracting FDI to export-oriented labour-intensive manufacturing, in part because of flexible labour laws such as the contract labour system implemented in 1995. Whereas in India, employers have taken to hiring workers on contract outside the institutional and legislative ambit, resulting in informalisation of the labour market. This hampers worker well-being.

To undo the malady in India’s labour market, some changes have recently been initiated in the three acts that largely govern India’s labour market: the Factories Act (1948), the Labour Laws Act (1988) and the Apprenticeship Act (1961). Amendments to some restrictive provisions of all these acts have been cleared by the Cabinet and are set to be tabled in Parliament. Key changes proposed include dropping the punitive clause that calls for the imprisonment of company directors who fail to implement the Apprenticeship Act of 1961.

The Government is also going to do away with a proposed amendment to the Act that would mandate employers to absorb at least half of its apprentices in regular jobs.

In order to provide flexibility to managers and employers, the amendment to the Factories Act includes doubling the provision of overtime from 50 hours a quarter to 100 hours in some cases and from 75 hours to 125 hours in others involving work of public interest. This is seen by some as being anti-labour as it imposes greater working hours without ensuring their security and welfare.

However, the penalty for violating the Act has been increased so as to deter exploitation. Increasing the working hours might also have to do with low worker productivity in India.

However, even as productivity issues should be addressed in part by bringing in quality FDI, it is important that maximum-hour protection is strictly enforced so as to prevent worker exploitation.

The norms for the employment of women in certain industry segments have been relaxed. The number of days that an employee needs to work to be eligible for benefits like leave with pay has been reduced to 90 from 240.

The amendments to Labour Laws Act, 1988 meanwhile, will allow companies to hire more people without having to fulfil weighty labour law requirements as it is proposed that companies with 10-40 employees will be exempt from having to furnish and file returns on various aspects. This will help avoid procedural delays, a feature of doing business in India.

With the finance minister encouraging States to bring in appropriate labour reforms, Rajasthan has gone the Chinese way. Henceforth, it will be easier for firms there to adopt hire and fire policies. The Rajasthan government’s labour reforms are manifold. For one, industrial establishments employing up to 300 workers are now allowed to retrench employees without seeking the prior permission of the Government.

In addition, the threshold of the number of employees required for the purpose of applicability of the Factories Act has been increased from 10 to 20 (in electricity-powered factories) and from 20 to 40 (in factories without power). This is expected to reduce bureaucratic delays.

Finally, membership of 30 per cent of the total workforce needs to be recorded for a union to obtain recognition, up from 15 per cent, a move that will halt productivity losses out of politically motivated petty strikes.

The reality is that manufacturing has to grow to absorb millions of semi-skilled young Indians, a difficult task without rationalising labour reforms. Overall, it seems Modi is on the right track.

The writer is an associate professor at the Institute of Economic Growth, Delhi University