What labour law changes mean

Introduction

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.

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.

What are Indian labour laws?

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.

Objectives of different acts

The main objectives of the Factories Act, for instance, are to ensure safety measures on factory premises and promote the health and welfare of workers.

The Shops and Commercial Establishments Act, on the other hand, aims to regulate hours of work, payment, overtime, a weekly days 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.

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.

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.

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.

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?

Could the government have done something else?

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.

Moreover, beyond labour regulations, firms face a lot of other hurdles like the shortage of skilled labour and the weak enforcement of contracts etc.

Way ahead

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.