Policy | Restructure labour laws to benefit one and all

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Abhinav Prakash Singh

The COVID-19 pandemic have caused unprecedented disruption in the supply lines and economic activities. However, disruption in the global supply chains and multinational companies looking to deleverage from China has provided India an opportunity to step in as the global manufacturer. It is to attract these foreign companies — and the domestic industry — that several states have enacted drastic changes in labour laws. The change is led by states such as Uttar Pradesh, Madhya Pradesh, and Gujarat.

It is a fact that India has failed to build a manufacturing sector, and it has led to the phenomenon of economic growth without employment. One of the major reasons behind this failure is the archaic labour laws, ostensibly enacted to protect labour but in practice penalising industry for employing labour. India has some 35 central labour laws and more than 100 state labour laws often getting into micromanagement of factories, apart from severely restricting their ability to hire and retrench labour.

The Trade Union Act, 1926 allows trade unions in firms with seven or more workers and union officials can be outsiders. Under Employees’ State Insurance Act, 1948 firms employing 10 or more workers must provide benefits related to old-age medical care, rehabilitation, dependents, etc. Manufacturing units employing 10 workers with power and 20 workers without power are subject to the Factories Act, 1948. The Act is notorious for micromanagement and generating labyrinth of paperwork, which only increases as the number of workers employed rises. All establishment with 20 or more workers should provide contributory provident fund, pension, and insurance cover to employees and family members under the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952. This last law is something which is beyond the capacity of most MSMEs.

Then is the dreaded Industrial Dispute Act, 1947 (IDA), which is applicable regardless of the form size. It not only states conditions under which workers can be laid off but also conditions under which tasks assigned to workers can be altered. Among other things it requires three weeks’ notice for any change in working conditions related to shift work, rules of discipline, technological changes, etc. and workers have the right to object resulting in industrial dispute to be adjudicated by labour courts and tribunals who overwhelmingly rule in worker’s favour. Chapter V-B of the IDA effectively makes it impossible for an industrial establishment with 100 or more workers to lay off or retrench workers even if it is unprofitable.

These are just some of the dozens of myriad labour laws any establishment is subjected to which include the Minimum Wages Act, 1948, the Payment of Bonus Act, 1965, the Payment of Gratuity Act, 1972, the Industrial Employment Act 1946, the Workmen’s Compensation Act, 1923, the Contract Labour (Regulation and Abolition) Act, 1970, and many more.

No employer can ever keep track of these rules and regulations, and instead prefer to adopt capital-intensive production techniques to reduce dependence on labour. This resulted in the curious case of labour-abundant India specialising in capital-intensive production with only a limited market in places such as Africa, while it failed to become part of the global production networks by promoting labour-intensive production where it has a comparative advantage.

India failed to become the hub of assembly-end products where the scale of operation is huge, generating a large number of jobs. Labour laws are the main reason why medium-size enterprises are entirely missing in India.

Manufacturing units prefer to operate as a small-scale enterprise to escape draconian labour laws and attendant rent-seeking by officials. They also rely on hiring labour on contract via middlemen to circumvent the system. However, it breeds the informal sector at the cost of the formal sector leading to deteriorating working conditions for the labour.

By not allowing flexibility in the labour market, these ill-designed laws protected obsolete jobs and not workers who suffered anyways when factories were forced to shut down.

While the recent direction of reforms is welcome, summarily dismissing most of the labour laws without putting in place a new framework will be counterproductive. States must take a more nuanced stance to restructure these laws and put in place a comprehensive State-funded social security system that is independent of the employment status of the workers. This will overcome most of the concerns and opposition to reforms in labour laws.

Abhinav Prakash Singh is assistant professor, Shri Ram College of Commerce, University of Delhi, Delhi. Views are personal.