Flexibly Rigid Labour Laws

Labour laws in India have always been at the heart of controversy for being unusually rigid. The crux of the controversy can be understood by the speech of former Niti Aayog vice-chairperson and a distinguished economist Aravind Panagariya in a speech in 2014- “The labour situation is incredibly complicated: when you go from six workers to seven in a firm, the Trade Unions Act kicks in. When you go from nine to ten, the Factories Act kicks in. And when you go from 19 to 20, something else kicks in, as happens again when you go from 49 to 50 and 99 to 100. The biggest killer is the Industrial Disputes Act, which says that if you are a manufacturing firm with 100 workers or more, you cannot dismiss any of them under any circumstances unless you get prior approval from the government. This is rarely given and it applies even if you go bankrupt, in which case you still have to pay your workers. This has important consequences, because investors are not going to enter into an industry if they can’t exit. So India has a very pernicious set of labour laws and that really, to me, is the reason why Indian firms have remained so small on average.” Many leading economists are on the same page with him.

The issues with the labour laws have resurfaced at the top of the tables of all the stakeholders along with the larger question of economic revival after the COVID-19 lockdown is lifted. Labour laws mostly fall under the concurrent list except for a few laws regarding union employees and labour in mines and oil fields that are legislated by the centre. Many states including Gujarat, Madhya Pradesh, Uttar Pradesh  have passed ordinances to do away with  many sections of these laws.

Bone of contention
Research regarding the relation between productivity, growth, poverty vis-a-vis labour laws have been undertaken at length. Besley and Burgess had studied the manufacturing growth in India for the period  1958-1992 and had found that the states that had brought amendments to the much villainized Industrial Disputes Act (IDA,1947) in the pro-worker direction resulted in lower output, investment, employment and productivity in the formal manufacturing sector while output in the informal manufacturing sector increased. A pro-worker amendment was also associated with higher urban poverty. Another study that worked on criticisms of Besley and Burgess, by Ahsan and Pages also concluded the same negative effects of increased employment protection. In a study by Amin, more flexible labor laws encouraged firms to operate in the more efficient formal retail sector, thus reducing the levels of informality and also had significant positive effects on job creation. Other studies regarding the increase in contractual workers, who are not covered under the IDA, in states with stricter labour laws suggested evidence of the firms trying to circumvent labour laws using contractual workers. More recently the Economic Survey of India, 2019 cited a case study of Rajasthan where the state undertook various amendments in IDA 1947 and Factories Act,1948 among others and found that the number of large firms increased significantly compared to other states in India and the compound annual growth rate (CAGR) of Rajasthan also increased significantly . Thus, there seems to be a case to revisit the labour laws, especially the contentious ones.

Too much to handle
If we take the case of Madhya Pradesh, the government allowed the employers to increase the working hours per day from 8 to 12 hours and as a consolation the chief minister added that the increased working hours are applicable only if employees are willing to work and they must be paid for overtime. There is a huge influx of migrant workers returning to their hometowns combined with this is the fact that economy was already facing high levels of unemployment; when the supply of labour is much higher than the demand, the bargaining powers of the employees are low and thus the wages, it is more like a ‘take it or leave it option’. So the coat of candy in his words that ‘only if they are willing’ is a false comfort.

New units have been exempted from various sections of the Factories Act, 1948 except a handful till July and this might extend upto 1000 days i.e, almost 2 years and 7 months. The whole chapter regarding the provisions for health which includes the sections for- cleanliness, disposal of wasteful effluents, ventilation and temperature, dust and fume, overcrowding, lighting, drinking water and latrines has been relaxed. The sections in the chapter of welfare that have been done away with are about first aid appliances, facilities for sitting, canteens and creches. Daily and weekly hours of work, compensatory holidays and intervals of rest are now not a responsibility of the employer. The new units have been exempted from the section of ‘The right of workers’ to know about the workplace, moreover  the employer of a new unit will not be liable for any penalties in case of violations of the provisions.

The new firms are also exempted from all sections of the IDA except section 25 which prohibits financial aid to illegal strikes and lock-out. This means that the workers would not have rights to approach the labour courts and several issues will be settled without going to the courts. Factory registrations if not completed within a day will make the official in charge pay a fine to the firm and the licence renewal will be done after 10 years instead of one year. There are amendments to other labour laws, all of them weighing in the direction of the employers. The chief minister said that the world is relocating its firms and they wanted to invite all of these.

Extraordinary times call for extraordinary measures but at the cost of the health and security of the workers? Doing away with the labour laws is no less than taking a U-turn from formal to informal employment.

Turning a crisis into an opportunity
The liberalization and reforms during 1991 had its roots in the 1980s and the crisis of 1991 just sped up the process. There were many who predicted that this would lead to a disaster since India’s firms had become too inefficient to compete with the global market due to the high levels of protectionism that they enjoyed but that wasn’t the case, India bounced back to its revival path. What has been observed in recent times is that although the labour laws remained the same, their enforcement was diluted or the government ignored their evasion by employers. The labour law reforms have been a long demand of the industry and this is the opportune time to include all- employers, trade and labour unions, state governments and the union government to rationalise and eliminate the lack of consistency across the states. Labour Law reforms are the need of the hour, not eliminating them. The unions will rise to compromise in difficult times as they did during the 2007-08 crisis but the governments need to get them on board as a disgruntled and dissatisfied workforce is the last thing that the economy needs to deal with at this time of crisis.

Alisha George
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Alisha is presently a student at Delhi School of Economics. She has worked with Economic Research Foundation and Institute of Economic Growth.