The proposed labour reforms seek to weaken worker protection at a time when the Indian economy is not creating enough jobs, and the right kind of jobs.
On September 2, 10 trade unions in India organised what was said to be one of the largest labour strikes in history. An estimated 120 million workers took part. The unions were protesting against the government’s unwillingness to grant a 12-point charter of demands they had put forward. A year ago, unions had signalled their discontent by having a similar nation-wide strike.
This year, one of the principal demands of the unions was an increase in the daily minimum wage for unskilled workers from Rs.246 to Rs.692. They rejected an increase in the wage to Rs.350 offered by the government. Some of their other major concerns were: proposed changes in labour laws; growing casualisation of labour; privatisation; and greater opening up to foreign direct investment (FDI).
Future tense, present imperfect
Labour is restive today. It is apprehensive about what the future bodes for itself. But it’s not as if labour militancy has gone up in recent years. On the contrary, man-days lost due to industrial disputes (lockouts and strikes) came down from 23.7 million in 2001 to 13 million in 2012 before rising to 19 million in 2013. These figures are considerably lower than those in the 1970s and 1980s.
However, there is little doubt that organised labour in India, as in the rest of the world, sees itself as a loser in the changes unleashed by liberalisation and globalisation. It fears that if the government goes ahead with some of its proposed “reforms”, its losses will begin to mount.
Indian businesspeople as well as many economists have long clamoured for greater “flexibility” in labour laws, a euphemism for freedom to hire and fire. The Industrial Relations Code Bill, 2016, which is said to favour such flexibility, is due to be tabled in Parliament in the near future. It is bound to evoke a strong reaction from unions as well as Opposition parties.
Several economists say that rigid labour laws are the reason India has not generated enough jobs in the formal sector — only about 10 per cent of jobs are in the organised sector and the remaining 90 per cent in the unorganised sector. As large firms do not have the confidence that they can shed workers in adverse conditions, they do not wish to enter labour-intensive, low-skilled sectors. This is the reason India has not been able to replicate the Chinese success in labour-intensive manufacturing.
This argument may have well been overtaken by events in the global economy. Many other low-cost economies have already positioned themselves in these sectors. Automation in the West means that the window of opportunity in these sectors is fast closing. The idea that reforming labour laws will trigger a huge expansion in low-skilled manufacturing is thus highly suspect in today’s changed situation.
The experience so far
Moreover, the academic literature on the subject is not unambiguously in favour of easing labour laws as a means for hiring more labour. Dismissal laws in France are more stringent than in India, but that did not come in the way of France’s prospering for over a century. China itself has made its labour laws more stringent so that they are comparable to those in India (except in special economic zones).
Indeed, some of the literature suggests that giving workers greater protection helps increase productivity by giving workers more incentives to invest in firm-specific skills. Along with collective bargaining, worker protection leads to more egalitarian outcomes in society. There is also evidence that the bias against workers in Indian industry may have more to do with tax incentives for capital than with restrictive labour laws.
A second issue that agitates unions is the growing trend towards casualisation of labour. This was one of the reasons for labour unrest at Maruti’s plant at Manesar in Haryana last year.
Companies find it expedient to employ labour on contract. They can then leave the job of managing regulations and inspectors to the contract labour firms. They can also stay small and escape various labour regulations. Most importantly, contract labour tends to be cheaper in general; at Maruti’s Manesar plant, contract workers earned less than half the wages of permanent workers.
Contract labour is a serious assault on workers’ rights. The Supreme Court has made strong observations on companies’ resort to contract labour in order to avoid statutory obligations. The Economic Survey (2015-16) believes that contract labour is merely a corporate response to “regulatory cholesterol”. However, reducing worker protection in the organised sector may not be the answer — many firms would still prefer the contract option simply because it’s cheaper. Rather, we must extend worker protection and benefits to contract labour as well.
Privatisation and FDI are other areas of concern for organised labour. It is not that we have seen major initiatives to sell off PSUs. But there are clear attempts to further shrink the role of the public sector. Public sector banks (PSB), for instance, have been starved of capital and many banks are today without chairmen and managing directors. Moves have also been initiated to merge PSBs. Unions see these moves as impacting jobs in the formal sector adversely.
In principle, FDI should mean more investment and more job creation. However, in a situation where domestic firms have weakened by inadequate growth, FDI is seen as displacing jobs in domestic firms.
It’s the jobs
The proposed labour reforms seek to weaken worker protection at a time when the Indian economy is not creating enough jobs and the right kind of jobs. The rate of growth of employment slumped from 2.8 per cent in 2000-05 to 0. 5 per cent in 2011-12. In the same period, the labour force grew at 2.9 per cent and 0.4 per cent, respectively. In the organised sector, the share of informal employment rose from 48 per cent in 2004-05 to 54.6 per cent in 2011-12.
Job creation in the private sector is depressed by the low rate of investment. Investment itself is constrained by numerous factors: high levels of debt, high interest rates, a deceleration in corporate loans growth in PSBs, etc. In these conditions, a focus on weakening dismissal laws in the organised sector as the key to job creation is misplaced.
The International Monetary Fund’s World Economic Outlook (April 2016) lends support to this view. It cites studies that have shown that weakening dismissal conditions under adverse economic conditions tends to reduce employment. The IMF argues that if such changes to labour laws are to be carried out, there must be offsetting fiscal expansion that helps raise demand for labour. India is in no position to meet this condition as we are still in the process of fiscal consolidation.
There is a time for undertaking certain structural reforms and there is a time for not doing so. Focussing on changes to labour laws at the present time, far from fostering job creation, is likely to be counterproductive and can only result in greater labour unrest.