7 PM Editorial |Are labour law reforms the panacea to the investment problem?| 14th May 2020

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Are labour law reforms the panacea to the investment problem?

 What has happened? Several states including UP, Gujarat, Rajasthan has diluted labour laws.

India has more than 40 central labour laws and about 200 state enacted labour laws. Such a huge number of laws make it difficult for a business to setup and run smoothly. In order to attract business (private investment), several states have recently brought changes/dilution in labour laws, through ordinances. The states argue that these reforms in labour laws will generate employment, attract private investment and will provide flexibility to business and industry. However, labour law experts believes that such changes in labour laws will lead to dilution of worker rights and pave the way for exploitation of workers. Reforms in labour laws alone is not sufficient to bring in investment.

This brings to us the question of labour law reforms brought by several states in India and whether this could bring investment in the states. In this article we will discuss the following:

  • What are the steps taken by states?
  • What are the Arguments given by states to dilute labour laws?
  • What are the issues pertaining to dilution of labour laws?
  • Why labour law reforms alone will not bring investment?
  • Conclusion
What are the steps taken by states?

In total 9 states have brought changes in the labour laws which include, Uttar Pradesh, Madhya Pradesh, Gujarat, Rajasthan, Goa, Himachal Pradesh, Assam, Punjab and Odisha. Changes by some of the states are given below:

  • The Uttar Pradeshgovernment has cleared an ordinance, ‘Uttar Pradesh Temporary Exemption from Certain Labour Laws Ordinance, 2020’,  exempting businesses and industries from labour laws, for the next three years to increase industrial activities in the state.
  • The Gujarat government announced exemption from a certain labour laws for 1,200 days to the firms that want to set up new units in the state in order to boost economic activities.
  • Madhya Pradesh government has announced several reforms in labour laws. As per the new laws, registrations and licences under different labour laws will be issued in a day versus the earlier 30 days, renewal of factory licence will be for 10 years instead of one year now.
What are the Arguments given by states to dilute labour laws?
  • Complexity in India’s labour law regime: Under the Constitution of India, Labour is a subject in the Concurrent List where both the Central & State Governments enacts laws. As a result, there are more than 40 central labour laws and about 200 state enacted laws. There are numerous overlapping, rigid and isolated acts, which are applicable to firms at any point of time. Lifting of these labour laws, will relieve the industry from cumbersome regulatory compliances. It will also provide relief to industries from red tapism and rent seeking of labour inspector.
  • Huge informal sector: More than 90% of the workforce in India is working as informal labor, and thus are not protected by these labour laws.Further, with the rise in competition in the economy, flexibilization of work has occurred, resulting in gig economy.
  • Providing Employment – Reverse migration of labour from industrialized states back to their homelands due to lockdown is expected to create a glut of labour in the parent state. The states argue that relaxing labour laws is expected to encourage local industry to hire more and thus provide a large number of new jobs to these migrant labour.
  • To attract MNC’s shifting from China- Relaxing labour laws is intended to provide a positive signal to companies who want to relocate from China. It improves cost of compliance and provides an opportunity to attract MNCs and investment in the manufacturing sector.
  • Suspension is temporary: The state says that suspension of some of the labour laws are temporary in nature. For example in UP, suspension is for three years.
  • Applicability of laws: The applicability of various labour laws differs. For example, the Factories Act, 1948 is applicable to a factory with 10 or more workers, the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (EPF Act) is applicable to establishments with 20 or more employees, the Minimum Wages Act, 1948 is applicable to all establishments and so on. Such different provisions are a cause of confusion for the businesses and thus creates problem.
  • Trade Unions: Frequent strikes by trade unions hamper the productivity and efficiency of the industries. These frequent strikes bring down the confidence of investors to invest in India.
  • Rigid laws: The Indian labour laws such as Industrial Disputes Act, 1947 are too rigid in nature. Some of the provisions of the act states that employers can not hire and fire at will. It leads to further disincentive to private investment.
  • Entry and exit Barriers for firms:According to the Economic Survey 2015-16, most of the private companies/industries enter into the market easily. Despite the low productivity, industries are given limited exit options that hamper the economic growth. 
What are the issues pertaining to dilution of labour laws?
  • Might increases worker agitation and activism:Many of the labour reforms in India are a result of prolonged struggle of the labour class against the suppression and exploitation prevailed since the British era. Thus the dilution of these hard-earned changes may spark resentment leading to increased worker agitation and activism.
  • Minimum wages: The changes made by Uttar Pradesh government include the suspension of Minimum Wages Act, 1948. This will take away the statutory guarantee of minimum wages to the workers.
  • Statutory Protections:The statutory protection such as social security, right to form unions etc provided bargaining powers to the workers. The dilution of the laws will take away the bargaining power of workers and this would lead to exploitation of working class.
  • Further increase in informal sector: The dilution of these labour laws will further increase the gig economy with workers having no access to social security and other benefits.
  • Complete removal of labour reform is unwarranted –The major issues in the labour laws pertains to provisions for lay-offs, retrenchment and closure and the administrative implementation of labour laws. Hence wholesale removal of so many labour laws is unnecessary.
  • Labour Laws and Employment –There is limited evidence that relaxing labour laws alone will increase employment. Labour law reforms must be accompanied by structural reforms for the generation of unemployment.
  • Economic Recovery:– India’s current economic slowdown is especially due to slump in private demand. With the relaxation in labour laws, wages may be lowered and thus private demand may further decline, especially in rural areas. This further makes economic recovery difficult.

After discussing the issues of the labour laws in India and the issues pertaining to the dilution of these labour laws, let us discuss as to why these reforms alone will not bring investment in India.

Why labour law reforms alone will not bring investment?

According to WEF’s Global Competitiveness Index, India ranks 58th out of 140 countries and it ranks 33rd on the flexibility of labour markets. While China ranks 28th in overall ranking and 62nd on labour markets. It clearly shows that lack of competitive labour markets is not the main factor driving India’s poor competitiveness. Also, there is little evidence that relaxing labour laws alone will attract overseas investment.

Thus, there is need for India to opt for other structural reforms along with labour laws reforms. Some of the reforms suggested below are:

  • Infrastructure: Infrastructure is the backbone of the economy. But in India, various infrastructural projects like roads, power projects etc faces various constraints such as, land acquisition, delays in environment and forest clearances, funding issues etc. the government should try to minimize these constraints and thereby promote infrastructural development.
  • Ease of Doing Business: Though India’s ranking in Ease of Doing Business ranking (73rdin 2020) has improved, but India still lags in areas such as enforcing contracts (163rd) and registering property (154th). So the government should focus on these parameters and to further promote Ease of Doing Business in India.
  • Employment:To the drive the economy on a sustainable path, the government should focus on strengthening:
  • Apprentice and vocational training system
  • Quality of our school education

The government should focus on streaming high-school youth into the vocational path to improving the quality and relevance of vocational education, and also creating an apprentice supply chain from these institutes into the workforce.

  • Banking Reforms: Present banking system in India is facing several problems like twin balance-sheet syndrome, governance issues. So the government should implement P.J Nayak committee recommendations like streamlining of board level appointment process, development of effective risk management systems, and creation of a pool of independent directors. The government should also take measures to bring down the NPAs.
  • Agricultural Reforms:
  • For decades, Indian governments have largely failed in their attempt to improve agricultural productivity and provide alternative occupational paths for rural households.
  • The government must focus on structural fixes that include access to better seeds and technology, drip irrigation and crop planning for the farmer, an easier path from farms to markets for products, a steadier offtake of farm products and a reduction in middleman costs.
  • Industrial Reform:Despite the economic reforms of 1991, the improvements in the manufacturing sector were minimal. So the government should focus on the initiatives like Make in India, Stand-Up and Start-Up India to promote manufacturing growth and innovation in India.
  • MSMEs Sector:MSMEs are vital to the economy as they are the innovators, job-creators and risk-takers. Government of India launched many schemes to promote MSMEs like TReDS, Credit Guarantee trust for medium and small entrepreneurs (CGTMSE). Government should take further measures like timely credit and low tax compliance to promote MSME sector.

Labour Law is adapted to the economic and social challenges of the India. It establishes a legal system that facilitates productive individual and collective employment relationships and therefore a productive economy. However, the changes brought by the states are not sufficient alone to improve the industrial activities. India at present needs to focus on the structural reforms as suggested above.

Source: Are labour law reforms the panacea to the investment problem?

 Mains Practice Question:

 The labour laws are much more needed in the present time to ward off the humanitarian crisis of lockdown. Critically analyse the statement in light of relaxation of labour laws by various states . (250 words)

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