There is a perception that the share of manufacturing sector in India's GDP, at around 16 per cent, is low by international standards, and therefore needs to be stepped up. One of the factors perceived to be holding back manufacturing sector growth is the operation of numerous labour laws in the country. However, this assumption is open to scrutiny.
There are three major arguments against labour laws in the context of manufacturing sector growth: the multiplicity of legislation; difficulties in hiring and firing workers; and the cost of compliance on account of inspector raj.
There are as many as 44 Central Acts alone, besides many State labour legislations on labour. This web of norms, with no harmonisation of eligibility criteria across legislations, is believed to discourage setting up of new businesses.
But, according to the
If labour laws are indeed a hindrance to business in India, how has the services sector grown at a much higher rate than the manufacturing sector?
REVEALING JOB DATA
The second argument against labour laws is their alleged inflexibility on induction and removal of workforce. The biggest culprit is perceived to be Chapter VB of the Industrial Disputes (ID) Act which stipulates that establishments employing more than 100 workers should seek prior permission of the Government before they can retrench workers and close the establishment. It is alleged that on account of this piece of legislation larger corporates are prevented from expanding to their full potential, both in terms of output and employment.
This contention is not supported by the Annual Survey of Industries (ASI) data which indicates that the share of factories employing more than 100 workers has grown in terms of fixed capital formation as well as employment, among units covered under the Factories Act. The compound annual growth rate of employment during the period 2005-09 was close to 7 per cent in establishments employing more than 100 workers, compared with around 4 per cent in establishments employing less than 100 workers.
With such trends in growth rates, there is no way that restrictive labour laws, particularly operation of Chapter VB of the ID Act, could have stood in the way of manufacturing sector growth, particularly in factories covered under ASI.
INSPECTOR RAJ
The third perceived problem associated with labour laws is the high compliance cost, including the associated costs of “inspector raj”. A Committee set up in 2002 to look into reforming investment approval and implementation procedure had suggested simplification of not just labour laws but financial laws, corporate laws, environmental laws and infrastructure related Acts.
Whereas there are basically four main inspectors associated with labour laws (labour inspector, factories inspector, ESI inspector and EPF inspector) there are a host of inspectors under other laws which include electricity inspector, fire inspector, food inspector, central excise inspector, income tax inspector, customs inspector, controller of weights and measures inspector, and hazardous waste inspector, to name only a few.
Labour laws are not a major hindrance to business for three basic reasons. First, a large number of establishments cannot be regularly inspected because of the low ratio of total number of inspectors to total establishments to be inspected. For an estimated 2.5 lakh establishments in the Central Sphere there are merely 150 Labour Enforcement Officers and around 50 Assistant Labour Commissioners directly entrusted with the responsibility of carrying out inspections.
Secondly, the penalties prescribed under various labour laws have eroded over time due to infrequent amendments. For instance, the maximum fine under the Minimum Wages Act, 1948 is Rs 500; under the Contract Labour Act, 1970, it is Rs 1,000; and under the Employees Compensation Act, 1923, it is Rs 5,000.
Clearly, this level of fines is no deterrent to committing irregularities and violations. Further, action taken through convictions and prosecutions take an inordinately long time.
EXPLOITATION OF LABOUR
In fact, it is more likely that the recent growth of the manufacturing sector has been contributed in no small measure by engaging cheap labour that is not adequately protected by labour laws. It is to prevent this exploitation that some of the important labour laws including the Minimum Wages Act and the Contract Labour Act are in the process of being amended. Evidence of possible exploitation of workforce is indicated by the fact that according to ASI, the money wages per worker increased by less than 6 per cent between 2004-05 and 2008-09 while the rate of inflation was higher.
According to the same data, despite the fact that there was an increase in employment, there was a decline in the share of total wage bill in total value addition in the manufacturing sector. In other words, the earnings of workers did not rise at the same rate as the other factors of production.
There may be a strong case for strengthening labour laws, simplifying them to reduce the cost of compliance and improving their administration, rather than allowing greater flexibilities and exemptions under them.
(The author is Labour and Employment Advisor, Ministry of Labour and Employment, New Delhi.)