Real Labour Reforms: Laws Have To Ease At The State Level


Better late than never. After much dithering and deferring, India has got down to housekeeping in the area of labour laws. While the maze of labour laws has not prevented India from industrialising or attracting foreign investment, it has made entrepreneurs’ and investors’ life unnecessarily difficult. Consider this, of the 1,536 Acts that govern all economic activity in the country, about one-third pertain only to labour, while about half of all compliances relate to labour. This, in a country where organised labour constitutes less than one-tenth of the total workforce.

The impractical laws, 463 of them across Centre and states, involving 32,542 compliances and 3,048 filings in a year, have been observed more in abeyance than in practice, and rent-seeking and penalties have been treated as the cost of doing business. Now, as the central government has begun tidying the house, it should become easier and cheaper to do business in India and make it more competitive.

However, labour laws are only one of the pieces on the business chessboard. While India’s ranking on the Ease of Doing Business has improved in recent years, it has not created a flood of private or foreign investment. The simplification of central labour laws would certainly be an improvement, but the key is the clarity and practicality of reforms.

The consolidation of labour laws in neat bundles of codes is good. The 44 central Acts that had 1,458 sections, requiring 937 compliances and 135 filings in a year, have been subsumed into four codes with just 480 sections. Changes in the definition of key terms and classifications are particularly welcome, especially related to size-linked applicability of codes. The Social Security Code that has subsumed nine Acts will now allow firms to maintain only 1-2 registers as compared to 20 earlier. Still, they contain much of the old provisions and their micromanagement approach needs to be dealt with. Also, a quarter of the central labour laws remain outside the four new codes. Most significantly, only a tenth of the labour laws are those of the central government. Therefore, to usher in the ‘real labour reforms’, laws have to change at the state level.

A minimum alignment between central and state regulations is necessary to make companies comfortable to do business in multiple states. The existing chaos is a result of too many governments making laws on ad hoc basis for too long. The patchwork of laws has produced a minefield of regulations, which can neither be complied with nor implemented. Worse, the confusing laws consume a lot of management bandwidth, which is an even bigger cost. However, some positive signs are already visible; for example, fixed-term employment has already been allowed by 12-13 states, and the 300-threshold is already applicable in 16 states. One must not construe it as being unfair to workers, as they are entitled to receive all statutory dues that permanent workers in the same unit get.

Although enterprises always find ways around any kind of unreasonable laws, and even governments tend to not enforce such laws too diligently, the economy still pays a price. Foreign companies tend to seek protection from the local law rather than protection by it. Most enterprises in India, unable to bear the cost of compliance, prefer to remain informal. This informality perpetuates low productivity, wages and incomes in the economy.

Any easing of labour laws to ease the compliance burden is a positive move. Hopefully, these reforms could start a chain-reaction in the economy. With ease of compliance would come increased formality, which will lead to proliferation of larger enterprises and more organised jobs, which, in turn, will ensure that more firms and workers pay taxes, increasing government revenues. Less than half of India’s GDP comes from revenues of large companies, vis-à-vis 70% in most of our peer economies. According to McKinsey, India needs to triple the number of large firms than it has now. This is because not only are they found to be 11 times more productive, but employ one-fifth of the people in the direct formal workforce.

However, labour law reforms must achieve a balance between the interests of employers and workers. If either party feels short-changed, the reforms will remain on paper and people will simply game the new system, just as they did before. Some states have swung from too much protection for the labour to too little, which can prove counterproductive. Workers would arbitrage laws of different states to find better deals and local enterprises will end up paying perhaps even higher cost to attract and keep skilled labour.

It is unrealistic to expect harmonisation of labour laws across India as states compete on regulation and are unlikely to give up that choice easily. But states need to work on those issues they lack, so that they do not lose out on the investments on offer. This must also be accompanied by a complete change in attitude of authorities who need to abide by the spirit of the law as against the current practice of conforming to the letter of the law. Businesses, on their part, need to be more responsible and forthcoming to ensure greater compliance. The new law, once implemented, would need industries to file just one compliance return for all four codes. One would expect a positive scenario to emerge, similar to the one seen in direct tax compliance.

The key challenge for labour laws is to achieve a functional and efficient labour market that would promote more formal employment and productivity. It cannot be a free market because of the asymmetry of power between capital and labour. Therefore, to achieve ease and low cost of doing business, it would be necessary to provide reasonable income and survival security for workers. The new labour reforms assure of such protection, which increases the chances of implementation.

By initiating labour reforms, the government has taken an important step, which is expected to make Indian economy more productive and competitive.

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