Labour law reform unlikely to kick-start manufacturing sector – Aman Sethi


Rise of contract labour means changing laws unlikely to change the way India Inc does business

This summer, the Bharatiya Janata Party ()’s election manifesto promised to “review our labour laws which are outdated, complicated and even contradictory”. Now, with a BJP government at the Centre, industry representatives are hoping Prime Minister  will deliver on his promise. However, the changing profile of the Indian workforce and the growth of contract hiring suggest changing the laws that govern a small and steadily dwindling percentage of workers is unlikely to transform Indian manufacturing.

“We have overregulated to protect a small percentage of the workforce at the cost of the majority,” said , Director Labour and Employment at Federation of Indian Chambers of Commerce and Industry (). “There are too many laws, which means different inspectors from different departments. This needs to be simplified.”

The changes described by Rajpal would make it easier for firms to retrench or dismiss permanent workers and make it harder for workers to go on strike. Firms already have the power to terminate contract workers as they do not hire them directly. (WHAT INDUSTRY WANTS)

Workers and Union members contend the problem is not the law per se but compliance; employers, workers claim, routinely flout labour laws – often in cahoots with the labour department.

 implementation is very poor, employers are doing so many illegal things including blocking the creation of workers unions,” said D L Sachdeva, National Secretary of the All India Trade Union Congress (), who said a majority of labour law violations are never reported, “The way we are seeing their attitude, we cannot leave anything to the employers – there have to be statutory laws.”

India has 47 central laws and over 200 state laws that regulate the relationship between workers and their employers (see box), yet the link between restrictive laws and diminished industrial productivity is a subject of heated academic debate.

“India’s protective job security rules seem to have negative consequences. However, the more difficult question is how much of a barrier they really are to the country’s economic development,” writes labour economist Gordon Betcherman, in a 2014 review of literature on the link between jobs and employment.

Studies reviewed by Betcherman suggest laws that restrict job dismissals have little impact on aggregate employment across the economy but tend to benefit skilled young men at the cost of marginalising women and the unskilled – who find themselves pushed into the informal economy.

“Labour reform, perhaps under the form of similar benefits to those in force today but more latitude for firms to adjust their employment, would certainly help the development of labour- intensive sectors, such as garments,” said Martin Rama, lead economist for south Asia at the World Bank, “But there are other constraints getting on the way of firm dynamism in India: Insufficient infrastructure, power shortages, poor logistics. Labour reform alone is unlikely to make India a manufacturing powerhouse.”

In World Bank surveys, only 15 per cent of firms identified labour regulations as a major constraint to growth.

The laws themselves are applicable to small minority of working Indians – well over 90 per cent of who work in the informal economy. In 2013, for instance, the number of contract jobs in India grew by 39 per cent, according to a survey by the Associated Chambers of Commerce and Industry (). While the services sector has long relied on contract work, the ASSOCHAM survey reveals 56 per cent of workers in the automobile sector and 52 per cent of all manufacturing now work on contract.

“A 100 per cent of job creation over the past 20 years has been in the informal sector,” said Manish Sabharwal, of TeamLease, one of India’s largest suppliers of contract labour, who says restrictive labour laws are the reason. While industry associations like Ficci want a reconciliation and consolidation of the country’s many laws, Sabharwal suggests labour be made entirely a state subject, allowing industry to pick where it would like to set up shop.

Sabharwal offers the  of 1961 as an example where excessive regulation and prison sentences for violations discourages employers from hiring apprentices even as the low stipend and prolonged duration of up to four years keeps young workers from applying.

Reforming the act by increasing stipends and simplifying procedures could transform hiring practices and provide millions of jobs, he said.

Sachdeva from AITUC, however, expressed concerns on scaling up the apprenticeship act. Data compiled by TeamLease suggests, for the first time, there was little difference between entry-level salaries for permanent and contract workers – both were paid close to the prevailing minimum wage. Hiring more apprentices, Sachdeva feared, could provide industry with another avenue to underpay its workers as apprentices are not paid at the same rate as workers.

“The significant and rising share of contract workers means there is already flexibility in hiring and firing,” said economist C P Chandrasekhar. “If, indeed, there is a need for reform, it must be through a tripartite process between state, labour representatives and employers, not by the state succumbing to the propaganda of the private sector.”

(Courtesy: Business Standard)


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