Misguided emphasis on labour reforms

Changes in land and labour laws are the two most important components of the second generation of economic reforms. Since early 1990, a slew of economic reforms have been initiated in almost all sectors. However, the governments in power from 1990 through 2014 did not introduce radical changes in the prevailing land and labour laws. It’s not that previous governments lacked the will to legislate, but coalition politics prohibited them from bringing in far-reaching changes.

Just after coming to power, the new government initiated steps to legislate on these issues on the plea that the prevailing land and plethora of labour laws, many of them enacted during the British Raj, were dragging down the economic growth rate of the economy.

Despite introducing the Land Bill (officially termed The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Bill) in Parliament twice, the Bill could not be enacted because of obvious reasons. But in a very short span of time, Parliament has been able to pass two labour laws: the Apprentices (Amendment) Bill 2014, and the Labour Laws (Exemption from Furnishing Returns and Maintaining Registers by certain Establishments) Amendment Bill 2014. It also introduced The Factories (Amendment) Bill 2014 in the Lok Sabha and drafted the Labour Code on the Industrial Relations Bill 2015. The former Bill seeks to amend the Factories Act 1948 and the latter is a Bill to consolidate and amend the Trade Unions Act 1926, the Industrial Disputes Act 1947 (IDA 1947) and the Industrial Employment (Standing Orders) Act.

At present, the Factories Act 1948 classifies manufacturing enterprises employing at least 10 workers and where production is carried out using electricity, as a factory. If the enterprise does not use electricity, it has to employ at least 20 workers to be recognised as a factory. The Factories (Amendment) Bill 2014 increases this limit to 20 and 40 workers. The draft of the Labour Code on the Industrial Relations Bill 2015 toughens rules for registration of trade unions and makes easier the retrenchment of the workers. The Bill allows enterprises hiring up to 300 workers to lay off any worker without taking official permission.

Currently, an enterprise employing more than 100 workers requires official permission if it wants to lay off workers, according to Chapter V(B) of the IDA 1947. Since labour is on the Concurrent List, some States, such as Rajasthan, had already amended the Trade Unions Act 1926, the Factories Act 1948, and the IDA 1947 purportedly without holding consultations with workers’ representatives. It is mandatory for the Centre and State governments to hold consultations with workers’ representatives before amending any labour law as India is signatory to ILO Convention No 144.

Given that the majority of India’s workforce is informally employed in the unorganised (or informal) sector since independence, one of the arguments the government makes is that amending these labour laws will boost formal employment of the labour force in the organised (or formal) sector. But the moot question is: Will making amendments in the so-called archaic labour laws increase formal employment in organised sector enterprises?

Before addressing this question, it is imperative to define formal and informal employment, and organised and unorganised sector enterprises. The broad definitions of these concepts have been provided by 15th and 17th International Conference of Labour Statisticians (ICLS), which India uses for official purposes. In simple terms, the definition of organised or formal sector enterprises are the same as enunciated in the Factories Act 1948. If a manufacturing enterprise uses electricity and employs fewer than 10 workers, it is an unorganised enterprise. If it does not use electricity then the threshold is 20 workers. But the nature of jobs differentiates a formal employed worker from an informal employed worker. Informal employment is mainly casual, part-time or temporary. In such jobs, no clear employer-employee relationship exists. Therefore, such jobs are mainly out of the framework of labour laws. Formal jobs are mainly of a permanent nature and are regulated through labour laws by the state. Formal or informal employment can exist in both the organised and unorganised sectors.

Employment in the organised sector has increased from 54.6 million to 101.60 million. But much of the increase in the workforce in the organised sector is accounted for by informally employed workers. The share of the informally employed workers in the organised sector which was close to 38 per cent, has increased to more than 67 per cent. As a matter of fact, the share of the formally employed has steadily declined from 62 per cent to below 33 per cent. In absolute terms too, the share of workforce in formal employment in the organised sector has shown a marginal decline. This means that a sort of flexible specialisation has been occurring in the economy of India in the post-reforms era, when there were strict labour laws.

Will the past trend get reversed if the government makes amendments in the so-called archaic labour laws? The answer is in the negative. If entrepreneurs can adjust the labour requirement in their enterprises according to requirements in an era of stringent labour laws, there is a very high probability that this process will get more accentuated when the labour laws are diluted. Also, there is a high probability that the dilution of labour laws will result in an increase in the precariousness of a large section of the workforce. According to the Annual Survey of Industries, in 2012-13, nearly 70 per cent of the factories in the organised sector employed fewer than 40 workers, and according to the NSSO 68th round (2011-12), more than 77 per cent enterprises employed fewer than 20 workers. Thus, amending the Factories Act 1948 and other labour laws will not be in the interest of workers.

The government’s notion that labour reforms will result in the establishment of big enterprises seems to be quite unpalatable as worldwide, enterprises are getting leaner. In fact, there is barely any country where formal employment has increased after labour reforms were initiated. Now, leading firms (multinational enterprises) of the North are integrating smaller firms in the global value chains of the South at a rapid pace. The Fordist and Taylorist regimes are long gone. The government should focus more on how to improve workers’ well-being, rather than spend its energy on getting labour laws passed in Parliament.

Singh is a professor and Giri a research scholar in the department of humanities and social sciences at IIT-Roorkee