Necessary, not sufficient: Labour reforms a good start; will we see more jobs now?

For close to three decades, those wanting economic reform (ie greater market-orientation) have called for changes in India’s multiple, archaic, rigid and procedure-bound labour laws. Yashwant Sinha proposed some changes when he was finance minister in the Vajpayee government about two decades ago. Following widespread criticism, he had to retrace his steps. And ever since the Modi government assumed office with a comfortable majority in the Lok Sabha, the charge has been that it has not changed the country’s labour laws. The standard argument through three decades has been that the failure to bring about changes has come in the way of labour-intensive industries flourishing in India, as they have done in other Asian countries.

 

Now comes the test. The labour laws have finally been changed along the lines that most people (other than trade unions) have wanted. Forty-nine central laws have been crunched into four “codes”: One on wages passed last year, and three enacted last month on working conditions, social security and industrial relations. In their totality, the codes give much greater freedom to businesses when it comes to taking on and shedding employees, while putting trade unions to new tests about their representational claims and making both strikes and lock-outs more difficult. Those employing fewer than 300 workers don’t even have to issue what are called standing orders, which specify conduct norms for workmen.

 

Going further, enormous freedom has been given to governments to exempt industries from the coverage of the codes, and to define the limits within which they will operate. In a sense, Parliament has given governments carte blanche, to do as they will. Watch how Uttar Pradesh recently tried to exempt employers from all but a few labour laws — by ordinance. In its turn, the central government has announced a national ”floor wage” (below which “minimum wages” cannot go) of Rs 178 per day, which works out to Rs 4,628 monthly, assuming 26 working days. Fortunately, most state minimum wages are already well above this absurd level.

 

Before coming to whether the new codes will pass the test by delivering additional employment, it must be recognised that they do simplify matters by reducing the number of operative laws and acknowledging contemporary realities. They de-criminalise many actions (like not maintaining a register) and allow compounding fines to be paid instead. They also expand the scope of the codes to include fixed-term employees, contract labour, gig workers in the informal sector, migrant labour and “platform” workers (such as drivers who have signed up at app-based taxi companies). So there is much to be said in favour of the changes.

 

Still, the real test will be growth of employment, in particular an increase in employment in the organised sector where productivity tends to be better and wages therefore higher. The core objective is large-scale factory employment that turns out wage goods like shoes and clothes, as also the local assembly of a range of electronic goods like mobile phones, to be followed by backward integration into components, for the domestic and export markets.

 

The game is to profit when China is exiting some of these activities, or when companies are exiting China for wage-cost and other reasons. So far, Vietnam, Bangladesh and others have taken up the slack. India too wants to be a player, and is raising tariffs and imposing other import curbs in the drive to promote manufacturing activity.

 

If it works, everyone can celebrate. If not, it will be because labour law changes are a necessary but not sufficient condition for achieving the intended objectives. Co-terminous changes are required to reduce the cost of factory land, transport, and electricity for industrial consumers (through ending cross-subsidies — a touchy issue), while stopping the arbitrary interpretation of tax and other laws and maintaining an appropriate exchange value for the rupee. Failure to do all this will have the opposite of the intended effect. Instead of increasing higher-productivity work and raising wage levels, workers’ earnings in existing jobs will get pushed down. The risk should not be minimised when the economy has shifted to a slower track and investment in new capacity has dried up. So, fingers crossed.


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