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Modi’s labour reforms are the wrong fix. Here’s why

HARSH KAPOOR@catchnews

‘Labour reforms’ is a catchword presented by successive governments and sections of the media as the elusive magic wand that will instantly fix the Indian economy.

Corporates, too, have lobbied for this, asserting that if they could hire and fire with more ease, they would draw more workers into the formal sector.

The issue is much more contentious and complex than that. But its implications are rarely discussed in detail.

The UPA government failed to put these reforms in place. Now, in its bid to spur the economy and create more jobs, the Narendra Modi government has embarked on a major overhaul of labour laws.

These reforms, however, are not aimed only at easing the hiring and firing of workers by industry.

Unified law

The plan is to unify three major labour laws – the Trade Unions Act, the Industrial Disputes Act and the Industrial Employment (Standing Orders) Act – into a single code for industrial relations.

Besides, a new labour law will be enacted for micro, small and medium industrial units.

This will have far-reaching impacts.

The government claims these changes will make hiring flexible and include more workers under labour legislation.

The trade unions disagree. They claim the changes will make it easier for large companies – those employing 300 employees or more – to fire workers; reduce the size of the organised sector; and clip the wings of trade unions.

They also complain that they have not been consulted by the Labour Ministry. The ministry claims their views will be taken into account before the final proposals are sent to the Cabinet for approval.

Irrespective of the consultations, the changes are likely to be challenged by the trade unions.

Nationwide protests have already been planned for September, in a bid to force the Modi government to scale down the changes.

Here is a ready reckoner on the government’s labour reform proposals, what their implications are, and why they matter.

The need for reform

Less than 10% of people work in the organised sector covered by labour laws. This means 10-12 million youth each year are forced to join the informal sector, with no labour protection. Yet, industrialists, as well as many economists, argue that ‘restrictive’ labour laws are holding back the Indian economy.

But is there any empirical evidence to show that India’s labour laws are the only, or even the main, constraint to growth?

Bhattacharjea spells out the evidence that is missing.

What are the main reforms being proposed?

The Industrial Disputes Act

This Act is the principal legislation to deal with core labour issues such as industrial disputes, regulation of strikes, lock-outs, lay-offs, retrenchments and other related issues.

Currently, 85% of manufacturing firms have less than 50 employees and 58% factories employ up to 30 workers.

The present Industrial Disputes Act allows companies employing up to 100 workers to retrench employees without seeking the permission of the government.

The amendments will allow companies employing up to 300 workers to fire or hire employees without seeking any government permission, leaving only a tiny percentage of large companies under the radar of the Government when it comes to retrenchment.

The proposed reforms, however, stipulate for retrenched workers to be paid an average salary of 45 days, instead of the present 15 days’ compensation.

So won’t firing and expansion of workforce in industry then become indiscriminate? Prasad responds.

Under the proposed reforms, there will be a three-year time limit for employees to bring an industrial dispute before a court. Currently, there is no time limit.

It will also be tougher to create labour unions: 30% of workers will have to sign up to register a union. The current requirement is only 10%.

The Contract Labour (Abolition and Regulation) Act

Most companies in India outsource their labour requirements to contract companies. India’s labour market largely comprises of short-term contract workers, making this the defining Act for migrant workers.

Face these facts:

One in every two workers in all manufacturing are short-term contract workers.

80% of workers in the organised manufacturing sector have no written job contract or have sub-one-year contracts. A vast number of them work for sub-contracting firms that supply labour to the organised sector.

An estimated 30% of employees in Government ministries now work on short contracts. For instance, four out of every 10 university teachers are ad-hoc employees.

Out of the 3.6 crore contract labourers in the country, only 60 lakh are covered under the Contract Labour (Regulation and Abolition) Act, 1970, in both Central and State sphere. This law confers rights on contract workers and obligations on the contractor as well as the principal employer who hires the contractor.

The changes proposed by the Modi government will exempt companies employing less than 50 workers from the ambit of the law. The current limit is pegged at less than 20, more than halving the number of those who will be protected under the umbrella of the Act.

Why is the industry keen on this exemption? Usha Ramanathan, independent law scholar on labour reforms, explains.

The Factories Act

This is a social legislation aimed at ensuring occupational safety, health and welfare of workers at the workplace.

This law currently applies to firms with more than 10 workers with a power supply and 20 workers, if the work process requires no power supply.

Labour reform Harsh Kapoor multimedia

Workers unload coal from a ship. Photo: Zakir Hossain Chowdhury/Anadolu Agency/Getty Images

The amendments proposed raise these numbers to 20 and 40, respectively.

In effect, this reduces the number of workers who will get the right to safer workspaces, provision of drinking water, proper toilets, an eight-hour work day, paid holidays and higher remuneration for overtime.

What are the cascading effects of reducing worker’s safety? Ramanathan explains.

The Small Factories (Regulation of Employment and Condition of Services) Bill, 2014

Here, the attempt is to define a small factory as a unit employing less than 40 workers. The new law will simplify procedures for the owners of these micro, small and medium-sized factories.

However, they will also put them out of the purview of 14 laws governing factories in India – in effect, making them part of the unorganised sector. This means the workers would lose whatever rights and securities the laws provided.

Many experts point out that since 1991, most job creation has happened in the informal sector. There is little to suggest how the proposed reforms will widen the scope of formal sector jobs.

FICCI official Prasad, in fact, sees the future jobs of jobs essentially in the very small firms. One of the most talked about aspects of the reforms is to do with labour inspections.

India has never really had a fully functional system of labour inspection.

For example, in 2012, to implement the Minimum Wages Act, an estimated 3,171 inspectors were expected to cover an estimated 7.70 million establishments – an impossible task.

Expectedly, the actual record of factory inspection is dismal.

The proportion of factories inspected declined steeply from 63.05% in 1986 to 17.88% in 2008.

This does not bode well for compliance of minimum wages, working conditions norms and, most of all, for safety.

Despite the Bhopal Gas Tragedy of 1984, the industrial safety consciousness in India is pretty low.

Bizarrely, the reforms propose a system of self-certification by factory owners. Trade union leaders argue this is a poor alternative to an independent system of enforcing labour standards.

Won’t self-certification increase the scope for violation? Prasad explains why it won’t.

If self-certification is the answer, why does civil society oppose to it?

Ramanthan explains the opposite viewpoint.

Ramanathan also makes a strong case for an independent monitoring body.

So, how significant are these labour law reforms?

India is a labour surplus economy. All the proposed changes, taken together, experts claim, would mean an expansion of the unorganised sector, greater instability in employment and limiting collective bargaining through trade unions.

According to The Economic Survey 2013, this is part of the overall prevailing pattern of informalisation of jobs with little protection. This will provide employers a great deal of flexibility.

How will these laws change the industrial atmosphere?

Here’s what Ramanathan has to say.

These reforms would also limit the right to collective bargaining through trade unions.

So, is there no need for labour law reforms?

There is, in addition to a need to improve their enforcement, including functioning of labour courts which are hugely overburdened. Some five lakh cases were pending up to year 2000 in the labour courts under the purview of the state governments, there hasn’t been a significant improvement there.

Labour reform Harsh Kapoor embed 2

A man cleans a drain in New Delhi. Photo: Sagar Kaul/Barcroft India/Getty Images

Indian labour laws are too numerous and ambiguous with multiple legal definitions of ‘workers, workmen, employees’ or ‘firm type’. They need streamlining and healthy reform and reworking.

What are some other key issues within India’s present labour law that need to be addressed?

Bhattacharjea explains the fine print.

Reform ought not to mean diluting labour laws that protect rights of workers. If that happens, there might be a price to pay in terms of social cohesion and industrial peace. That is why there is a need for public debate on the nature of labour reforms.

Experts, therefore, warn of the downside – the risks of social dislocation and industrial unrest.

Will a lot of workers lose their jobs? Bhattacharjea paints a real picture.

Why are the trade unions opposing the Labour Reforms?

Trade union leaders claim that the government’s aim in aggressively pushing through sweeping changes is aimed at pushing out an overwhelming majority of workers out of the coverage of all labour laws and to restrict trade union rights.

Is their fear a valid one? DL Sachdeva, National Secretary of AITUC says yes.

Shouldn’t the rest of India emulate the growth model used by Modi in Gujarat?

In the run up to the 2014 elections, the Gujarat Model was presented as the ideal for the rest of India to follow. Now, it has been pointed out that under the Gujarat Industrial Disputes (Amendment) Act 2004 and the Gujarat Special Economic Zone Act, the bulk of national labour law did not apply in the SEZs. There was also no explosion in job creation in Gujarat by exempting the SEZs from national labour laws. The SEZs in Gujarat were set up via forced land acquisition on a large scale, this may not be replicable elsewhere and provoke much tensions.

Did exempting units from labour regulations lead to industrial dynamism in Gujarat?

Bhattacharjea separates truth from chaff.

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