LABOUR LAWS AMENDMENTS: Part 12

Explained: What labour law changes by states mean 

Last week, a number of state governments made key changes in the application of labour laws. What are the labour laws in the country, and how can such changes impact firms, their workers, and the economy? 

Written by Udit Misra , Nushaiba Iqbal | New Delhi | Updated: May 16, 2020 

On the face of it, these changes are being brought about to incentivise economic activity in the respective states. 

As the economy struggles with the lockdown and thousands of firms and workers stare at an uncertain future, some state governments last week decided to make significant changes in the application of labour laws. The most significant changes were announced by three BJP-ruled states — UP, MP and Gujarat — but several other states, ruled by the Congress (Rajasthan and Punjab) as well as BJD-ruled Odisha, too made some changes, although smaller in scope. UP, the most populous state, has made the boldest changes as it summarily suspended the application of almost all labour laws in the state for the next three years. 

On the face of it, these changes are being brought about to incentivise economic activity in the respective states. Keeping aside the questions of law — labour falls in the Concurrent List and there are many laws enacted by the Centre that a state cannot just brush aside — the key question is: Are these the long-pending reforms of the labour market that economists used to talk about, or is the suspension of labour laws an ill-timed and retrograde step that critics have made it out to be? 

ExplainSpeaking: Are Indian labour laws as inflexible (or pro-worker) as is often claimed?

What are Indian labour laws? 

Estimates vary but there are over 200 state laws and close to 50 central laws. And yet there is no set definition of “labour laws” in the country. Broadly speaking, they can be divided into four categories. Chart 1 provides the categorisation, with examples. 

The main objectives of the Factories Act, for instance, are to ensure safety measures on factory premises, and promote health and welfare of workers. The Shops and Commercial Establishments Act, on the other hand, aims to regulate hours of work, payment, overtime, weekly day off with pay, other holidays with pay, annual leave, employment of children and young persons, and employment of women. 

The Minimum Wages Act covers more workers than any other labour legislation. The most contentious labour law, however, is the Industrial Disputes Act, 1947 as it relates to terms of service such as layoff, retrenchment, and closure of industrial enterprises and strikes and lockouts. 

Why are labour laws often criticised? 

Indian labour laws are often characterised as “inflexible”. In other words, it has been argued that thanks to the onerous legal requirements, firms (those employing more than 100 workers) dither from hiring new workers because firing them requires government approvals. As Chart 4 shows, even the organised sector is increasingly employing workers without formal contracts. This, in turn, the argument goes, has constrained the growth of firms on the one hand and provided a raw deal to workers on the other. 

Others have also pointed out that there are too many laws, often unnecessarily complicated, and not effectively implemented. This has laid the foundation for corruption and rent-seeking. 

Essentially, if India had fewer and easier-to-follow labour laws, firms would be able to expand and contract depending on the market conditions, and the resulting formalisation — at present 90% of India’s workers are part of the informal economy — would help workers as they would get better salaries and social security benefits. 

Is that what is proposed by states like UP? 

As a matter of fact, no. UP, for instance, has summarily suspended almost all labour laws including the Minimum Wages Act. 

Radhicka Kapoor of ICRIER characterised this as “creating an enabling environment for exploitation”. That’s because far from being a reform, which essentially means an improvement from the status quo, the removal of all labour laws will not only strip the labour of its basic rights but also drive down wages. For instance, what stops a firm from firing all existing employees and hiring them again at lower wages, she pointed out. 

In that sense, from the perspective of the workers, the government has completely turned its stand from asking firms not to fire workers and pay full salaries at the start of the lockdown, to stripping workers of their bargaining power now. 

Moreover, far from pushing for a greater formalisation of the workforce, this move will in one go turn the existing formal workers into informal workers as they would not get any social security. 

Why will wages fall?

For one, as Chart 3 shows, even before the Covid-19 crisis, thanks to the deceleration in the economy, wage growth had been moderating. Moreover, there was always a wide gap between formal and informal wage rates. For example, a woman working as a casual labourer in rural India earns just 20% of what a man earns in an urban formal setting. 

If all labour laws are removed, most employment will effectively turn informal and bring down the wage rate sharply. And there is no way for any worker to even seek grievance redressal, said Amarjeet Kaur, General Secretary of AITUC. 

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Would these changes not boost employment and spur economic growth? 

Theoretically, it is possible to generate more employment in a market with fewer labour regulations. However, as the experience of states that have relaxed labour laws in the past suggests, dismantling worker protection laws have failed to attract investments and increase employment, while not causing any increase in worker exploitation or deterioration of working conditions. 

Ravi Srivastava, Director, Centre for Employment Studies at the Institute of Human Development, said employment will not increase, because of several reasons. 

First, there is already too much unused capacity. Firms are shaving off salaries up to 40% and making job cuts. The overall demand has fallen. Which firm will hire more employees right now, he asked. 

Kaur said 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. They should have allowed two shifts of 8-hours each instead, she said, so that more people can get a job. 

Both Srivastava and Kapoor said this move and the resulting fall in wages will further depress the overall demand in the economy, thus hurting the recovery process. “The timing is all wrong,” said Kapoor. “We are moving in the exact opposite direction,” said Srivastava. 

Could the government have done something else? 

Srivastava said that instead of creating exploitative conditions for the workers, the government should have — as most governments have done across the world (Chart 5) — partnered with the industry and allocated 3% or 5% of the GDP towards sharing the wage burden and ensuring the health of the labourers “because if Covid hits them, the whole country would be sunk”. 

Workers, and those who speak for them, must be heard on labour laws 

India must remain a democracy. Workers, and those who speak on their behalf, must be heard while framing or changing regulations. Their voices must not be silenced by ordinances. 

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Written by Arun Maira | Updated: May 22, 2020 9:50:10 am 

All Indians with compassion for their fellow citizens must ask: Who will benefit if employers are given even more freedom to hire and fire? (File photo) 

The 20th century’s great management thought leader, Peter Drucker, used to consult CEOs of the largest companies in the world and presidents of nations. Whenever he met any leader, he would always first ask them for their opinions, and not facts. Because smart people know how to find facts that fit their opinions. Drucker comes to mind these days with the government’s moves to reform India’s labour laws. The government and its advisers seem to be moved by ideology, not facts. 

The facts on the ground have been revealed by the moving scenes of millions of migrant workers who were abandoned by their employers after Prime Minister Narendra Modi declared a nationwide lockdown. Data about India’s labour regime had been presented by many researchers before, but these figures were ignored. Images of jobless workers and their homeless families scrambling to reach their homes, far away from where they were employed, have starkly revealed now the fragility of their contracts with their employers. The workers were used and discarded. 

All Indians with compassion for their fellow citizens must ask: Who will benefit if employers are given even more freedom to hire and fire? The problem is not in the laws. It is in the mindset of those who advocate such reforms. In 2013, the Planning Commission asked Bain & Company to conduct an objective study of enterprises in India. The management consultancy firm was asked to test the hypothesis that the long-term performance of the companies, who treat their employees as long-term assets is better than the ones who consider workers as a burden and as costs to be adjusted, whenever sales drop. The companies were compared with their peers in the same industries. The hypothesis was validated. The companies that invested in their workers, and held on to them as assets, did much better, even though they went through the same dips in the business environment as their peers did. 

Around the same time, Maruti, one of India’s most enlightened employers, was shaken by violent unrest. The issue was the treatment of contract workers in a Maruti factory. They were not paid the same wages as permanent workers doing the same work and did not have the same rights to represent their needs to the management because, legally, the contract workers were not the company’s employees. 

The Bain study had revealed that the practice of engaging workers through contractors to work alongside permanent skilled workers had permeated all the best employers in the country. In fact, in many companies they accounted for over 50 per cent of the workforce. The unions complained that this was an unfair labour practice. It reduced the cost of workers no doubt. However, the Bain study had revealed that the companies’ profits would be only marginally reduced if all workers were paid similar wages. Employee costs constitute less than 20 per cent of the companies’ costs and, within employee costs, the share of compensation of CEOs and senior executives was often half of the total. (CEO compensation had risen to over 300 times the salary of a worker in many companies; in the early 1990s, it had been less than 20 times.) 

While workers within the factories of large employers were not being fairly treated by enlightened employers, conditions of workers outside were worse. Large companies employ very few people. Most of the employment their business generates is outside their factory walls, in tiers of suppliers, down to hundreds of tiny and informal enterprises. Labour laws provide even less protection to these millions of workers outside, whether in payment of their wages, their safety, or their rights of association. 

Against this backdrop, unions and employers began a series of dialogues in 2013. They agreed that both sides were interested in the growth of Indian enterprises. They would listen to each other so that they could agree on norms and regulations that would give employers requisite freedom to improve the competitiveness of their enterprises while ensuring fairness for workers. 

A truth the dialogue revealed was that the unions were not speaking on behalf of the 4 per cent of India’s fortunate workers in permanent employment in large companies. These unions were asking enlightened employers to consider the conditions of the 96 per cent others — the contract workers within their companies, as well as the masses of workers employed outside. Outsourcing of employment to contractors and outsourcing of production to small firms are strategies for reducing costs. Since India’s social security systems are very weak, masses of workers suffer whenever there is a downturn. The unions appealed to these big businesses to consider all Indian citizens, not only their own employees and shareholders, when they proposed changes in India’s labour law regime. 

The Overton window (named after public policy expert, Joseph Overton) is the range of policies politically acceptable to the mainstream population at a given time. The slackening of India’s GDP growth, as well as economists’ data that employment was declining, did not wake up the government to the vulnerability of India’s workers. Nor did the appeals of the unions. After many years of demands by a section of economists and business lobbies for making it even easier for large employers to fire their workers, the Overton window seems to have opened a bit to consider the plight of 96 per cent of India’s workers. It is tragic that pictures of millions of workers abandoned by the system were necessary to wake up many more Indians to speak up against the foolhardy scheme of suspending India’s ineffective labour laws. 

India must remain a democracy. Workers, and those who speak on their behalf, must be heard while framing or changing regulations. Their voices must not be silenced by ordinances. 

Maira is a former Planning Commission member and author of Transforming Systems: Why the World Needs a New Ethical Toolkit