As the economy struggles with the impact of the Corona epidemic and thousands of firms and workers stare at an uncertain future, some state governments like Uttar Pradesh, Gujarat and Madhya Pradesh have undertaken labour reforms to attract investment. Uttar Pradesh has made the boldest changes as it has suspended the application of almost all the labour laws in the state for the next three years. Their policy initiative has received both criticism and praise. Before diving into details, let’s talk about the Indian labour laws.
What are Indian labour laws criticized?
There are over 100 state laws and close to 40 central laws but they only regulate less than 15% of India’s workforce which is employed in the formal sector. Indian labour laws are often characterised as “inflexible”. For example, there are even laws that make government approval necessary for firms (having more than 100 employees) for hiring & firing employees. Incremental and piecemeal regulations, excessive rigidity and administrative burden have suppressed businesses, compelling them to ‘stay small’ due to their compliance burden and restrictive nature. As a loophole, the organised sector has increasingly started employing workers without formal contracts. From the perspective of the employees, regulations have been criticised for inadequate social security nets and low wages.
What are the recent labour reforms?
In order to give the businesses a push, industries operating in Uttar Pradesh, Gujarat, Goa and Madhya Pradesh will have the power to hire and fire workers; working shifts will be increased from 8 hrs to 12 hrs and there will be a sizeable reduction of compliance regulations. Whether the labour reforms are beneficial or not is a subject of boiling debate. We’ll explore both sides of the debate.
Effect on businesses and workers
Most of these labour reforms were introduced in the years right after the Independence and have not been upgraded since. It is argued that these laws have proved to be a roadblock for investment in India and can best be described as archaic. Scrapping such archaic labour legislations can provide India with the much- needed investment push. The labour reforms are expected to give industries the operational freedom they require and they will no longer be subjected to the usual compliance rigmarole.
It shall also create new industrial investment opportunities, resulting in more jobs for the workers at a time when the unemployment rate has hit a record high of 27%.
However, the ‘Against’ side argues that the labour reforms have “created an enabling environment for exploitation”. They believe that these labour reforms are far from being a reform, which essentially means an improvement from the status quo since the removal of all labour laws will strip the labour of their basic rights. Moreover, instead of encouraging greater proportion of the workforce to be part of the formal sector, this move will in one go turn the existing formal workers into informal workers as they would not get any social security and would even bring down the wage rate sharply. And there would be no way for any worker to even seek grievance redressal.
It is firmly believed that while there is weak enforcement of current laws, they are also the only option that is available to workers to claim what they are rightfully owed under the law, and to seek redressal in case they are unable to claim their rights. The suspension of labour laws would mean that workers will lose this structure of support and will be at the complete mercy of employers. This is likely to leave them vulnerable to exploitation, reduce their productivity and overall welfare.
Further, when companies are looking to invest in a new destination, labour laws are just one of the several factors they use to judge investment potential. And thus, it would be fallacious to assume that suspending labour laws alone will increase investment.
The other crucial aspect is whether a three-year concession can legitimately attract long term capital. If an investor decides to set up industry in Uttar Pradesh, it is likely that the timeline from the decision to commissioning will be anywhere from 12 -18 months. In case the intention after three years is to revert to the old set of laws, that will act as a discouragement to a long-term investor.
Both sides have pretty good points, isn’t it?
How the economy gains
People in favour of labour reforms say that the economy will be the biggest beneficiary of these reforms. If an industry is set up or expanded, it will lead to job creation across different sectors, which will result in higher purchasing power of the people. Hence, an increase in government revenue shall be witnessed. Metros are the major engines of economic growth in India, but these reforms have the capability to create new growth pockets in villages and small towns, too.
As an outcome of COVID, it is expected that several businesses will move out of China. It is believed that if India wants to gain a competitive advantage over other nations, to transform itself as a manufacturing hub and become self-reliant, it is necessary that such steps are undertaken.
However, the opposing side questions whether these changes can really boost employment and spur economic growth or not.
Theoretically, it is indeed possible to generate more employment in a market with fewer labour regulations. However, practically it looks difficult. This is because first, there is already too much-unused capacity. Firms are slashing off salaries up to 40% and making job cuts. The overall demand has fallen. It’s unlikely that firms will hire more employees right now.
It is also asserted that if the intention was to ensure more people have jobs, then states should not have increased the shift duration from 8 hours to 12 hours. Instead, they should have allowed two shifts of 8-hours each so that more people can get a job. It is predicted that this move and the resulting fall in wages will further depress the overall demand in the economy, thus hurting the recovery process.
An Alternative Approach to Reform
Given the current uncertainty, approaching labour reform with a lens of caution is essential. This would mean channelizing efforts to reduce the administrative burden in the short run and, at the same time, beginning a dialogue around more substantive policy reforms in the medium to long term, in a collaborative manner with the workers’ stakeholder groups.
In the short run, this would mean addressing process constraints in registration, maintenance of registers, and inspections of businesses. In the reforms introduced by Madhya Pradesh, registration and licensing for industries, shops and bidi manufacturers amongst others, will now be delivered in one day against 30 days. Other initiatives taken by MP aim to ease the licensing and registration processes and broaden the thresholds of when regulations become applicable to firms.
Policy reforms require a more carefully considered and consultative approach. Bringing India closer to international standards is one obvious gain achieved by flexible policies around the hiring and retrenchment of workers. On the other hand, in areas such as worker compensation and health & safety standards, regulations and their enforcement will need to be further strengthened rather than relaxed.
The need of the hour is to aim for a regulatory structure that ensures that a balance is maintained between labour market flexibility and protection of labour. The International Monetary Fund in August 2018 had termed the Indian economy as an elephant starting to run. Well-developed labour reforms would have the potential to allow the elephant to break the shackles and move forward leaps and bounds.
Written By: Ridhi Gera
(Ridhi is a first-year Bcom Honors student at Shri Ram College of Commerce)