Not labour’s love alone

If the law changes work, everyone can celebrate. If not, it will be for want of reforms in several other areas like land, transport, electricity, and tax laws, writes T N Ninan

T N Ninan, Business Standard
2nd October

For close to three decades, those wanting economic reform (ie greater market-orientation) have called for changes in India’s multiple, archaic, rigid and procedure-bound labour laws. Yashwant Sinha proposed some changes when he was finance minister in the Vajpayee government about two decades ago. Following widespread criticism, he had to retrace his steps. And ever since the Modi government assumed office with a comfortable majority in the Lok Sabha, the charge has been that it has not changed the country’s labour laws. The standard argument through three decades has been that the failure to bring about changes has come in the way of labour-intensive industries flourishing in India, as they have done in other Asian countries.

Now comes the test. The labour laws have finally been changed along the lines that most people (other than trade unions) have wanted. Forty-nine central laws have been crunched into four “codes”: One on wages passed last year, and three enacted last month on working conditions, social security and industrial relations. In their totality, the codes give much greater freedom to businesses when it comes to taking on and shedding employees, while putting trade unions to new tests about their representational claims and making both strikes and lock-outs more difficult. Those employing fewer than 300 workers don’t even have to issue what are called standing orders, which specify conduct norms for workmen.

Going further, enormous freedom has been given to governments to exempt industries from the coverage of the codes, and to define the limits within which they will operate. In a sense, Parliament has given governments carte blanche, to do as they will. Watch how Uttar Pradesh recently tried to exempt employers from all but a few labour laws — by ordinance. In its turn, the central government has announced a national ”floor wage” (below which “minimum wages” cannot go) of Rs 178 per day, which works out to Rs 4,628 monthly, assuming 26 working days. Fortunately, most state minimum wages are already well above this absurd level.

Before coming to whether the new codes will pass the test by delivering additional employment, it must be recognised that they do simplify matters by reducing the number of operative laws and acknowledging contemporary realities. They de-criminalise many actions (like not maintaining a register) and allow compounding fines to be paid instead. They also expand the scope of the codes to include fixed-term employees, contract labour, gig workers in the informal sector, migrant labour and “platform” workers (such as drivers who have signed up at app-based taxi companies). So there is much to be said in favour of the changes.

Still, the real test will be growth of employment, in particular an increase in employment in the organised sector where productivity tends to be better and wages therefore higher. The core objective is large-scale factory employment that turns out wage goods like shoes and clothes, as also the local assembly of a range of electronic goods like mobile phones, to be followed by backward integration into components, for the domestic and export markets.

The game is to profit when China is exiting some of these activities, or when companies are exiting China for wage-cost and other reasons. So far, Vietnam, Bangladesh and others have taken up the slack. India too wants to be a player, and is raising tariffs and imposing other import curbs in the drive to promote manufacturing activity.

If it works, everyone can celebrate. If not, it will be because labour law changes are a necessary but not sufficient condition for achieving the intended objectives. Co-terminous changes are required to reduce the cost of factory land, transport, and electricity for industrial consumers (through ending cross-subsidies — a touchy issue), while stopping the arbitrary interpretation of tax and other laws and maintaining an appropriate exchange value for the rupee. Failure to do all this will have the opposite of the intended effect. Instead of increasing higher-productivity work and raising wage levels, workers’ earnings in existing jobs will get pushed down. The risk should not be minimised when the economy has shifted to a slower track and investment in new capacity has dried up. So, fingers crossed.

Disclaimer: This information is from a third party—Business Standard—offered through a tie-up to Kotak Securities customers for free for life. The third party content is not created or endorsed by any business offering products or services through it. The provision of this third party content is for general informational purposes only and does not constitute a research call, recommendation or solicitation to purchase or sell any security or make any other type of investment or investment decision. Also, the views and opinions stated in the content belong to Business Standard. Kotak Securities does not uphold nor promote any of the views. These reports do not, in any way, qualify as a Kotak Securities research report.

A few links for further reading

Not quite flying: Why Modi govt's UDAN scheme is struggling

At least two airlines that won UDAN contracts have folded up; scores of airports and airstrips cannot accommodate flights, and policy changes make business difficult.

Are Indian banks out of the woods?

Earnings season is over at most Indian banks. Looking at the September-quarter results, one might be tempted to say the worst is behind for the India banking industry.

Fix the holes in your investments and insurance plans ahead of the new year

Make changes where required so that your investment and insurance portfolio are equipped to meet the rigours that 2020 may have to offer. With the year drawing to a close, your thoughts may have turned to taking a holiday and visiting a new destination. Or you may want to just curl up in a blanket and laze around by a bonfire. While you do deserve some rest after toiling for the entire year, one essential task you must not overlook is to check your financial portfolio and ensure it is in good shape.

Want to get this in your email?