Author : Renita D'souza

Expert Speak India Matters
Published on Aug 04, 2020
Incorporating sustainability in the labour law reform process in India

Lockdowns in the wake of COVID-19 have severely affected India’s economy, with major costs being borne by the labour market. India’s rate of real Gross Domestic Product has fallen over nine consecutive quarters. The pandemic has also resulted in largescale layoffs, jobs losses and cut in wages. According to CMIE, between March and May, unemployment rate increased from eight percent to 24.3 percent in the country.

Under such unprecedented circumstances, the Central and State governments have been burdened with high expenditures and the urgent need to raise funds. Their effort has been concentrated towards augmenting economic growth rate, mainly through fiscal stimulus for improving, among other things, the ease of doing business. Several states have undertaken various policy measures, such as streamlining the mechanism for more effective business operations through easier permit grants and clearances. As the subject of labour falls under concurrent list of the constitution, many states such as Uttar Pradesh, Madhya Pradesh, Maharashtra, Rajasthan, Uttarakhand, Punjab, Haryana and Gujarat, have utilised this opportunity to amend their labour laws by either suspending or relaxing many of them.

Madhya Pradesh and Uttar Pradesh, in particular, have carried out significant changes in the labour laws, largely contracting the scope of Factories Act, 1948. The UP government has altogether omitted the portion that regulates conditions of work – disposal of waste, dust and fumes, artificial humidification, lighting etc. In order to fast-track business operations, MP has done away with laws that dealt with provisions of settling disputes through labour courts and tribunals. It has also relaxed the definition of industrial establishments, allowing the employers to lay off workers without prior permission of the government. To increase industrial productivity, states such as Gujarat, Madhya Pradesh and Himachal Pradesh have proposed to extend the working hours of factory workers from eight to 12 hours a day. Other such amendments have diluted protective provisions that make labour laws more flexible and allow firms to ‘hire and fire’ more easily.

For decades, compliance to India’s labour policies have been discredited for being complicated and necessitating high costs for businesses. There are almost 40 central level statues and over 100 state level laws that regulate less than 15 percent of India’s workforce, making it cumbersome to hire or fire workers without government permission. A 2014 study supports this view by observing that states with less restrictive labour laws showed 11 to 14 percent more productivity than other states in India. Further, under the Industries Disputes Act (IDA) and Factories Act, firms with more than 100 workers have to seek permission from the government for layoffs or retrenchment of workers. From the perspective of the employers, the threshold level was deemed too low, thus suppressing and restricting them from improving their scale of productivity. Lower thresholds have also been considered as one of the reasons for the number of informal workers to be as high as 90 percent of the total workers in India.

The labour law reforms present the market economy with a trade-off wherein productivity and protection of labour stand at loggerheads with each other. The high cost of flexible labour laws has to be borne largely by the labour force. The proposed changes come at the cost of weakening the workers’ protection in terms of wages, safe working conditions and their ability to seek redressal. Reforms from most states have absolved the employers of any responsibility towards their workers for basic safety norms, grievance redressal and payment of minimum wages. Instead of providing formalisation of jobs they may convert the already formal status of existing employees to being more contractual in nature, thus increasing their dispensability and lowering their bargaining power. Additionally, they may also reverse the social gains that provide gender equality. The reforms include suspension of regulations relating to protection from sexual harassment, provisions of transport facilities and creches. Moreover, according to a survey conducted by the World Bank, most firms in India did not even identify labour regulation as their primary obstacle to their operations. The major issues that were identified by them were red tapism, high tax rates and reduced access to finance. Thus, dilution of labour laws may not necessarily translate into higher investments in the market economy.

Given the backdrop of labour laws in India presented above, the conversation on labour law reforms in India must be founded upon the thesis of ‘Creating Shared Value (CSV),’ a proposition by Michael Porter and Mark Kramer. Doing so would incorporate the principle of sustainability in the said conversation to arrive at a sustainable labour law framework in the country. This is to avoid going from rigid labour laws to their complete dilution that in a way violates workers’ rights, as has been the case in India today. We seek sustainability not just in the context of employees’ interests but employers’ concerns as well. Both are inter-connected and the dilemma of choosing between the two is a false one. The view that has long prevailed is that there is a trade-off between economic prosperity and social advancement. Traditionally, labour costs and wages were seen as constraints on producers’ profits and welfare. But the CSV thesis argues in favour of an overhaul of this viewpoint.

According to the CSV thesis, business and societal interests are not at loggerheads with each other. This perceived trade-off is a product of business being approached in a myopic way of optimising short-term gains and losses with no attention to the long-term ramifications of strategies employed.

This myopic way regards capitalising on lower wages to tackle competitive challenges without heed to concerns of productivity as a solution while the CSV thesis views this as untenable. On the same line of reasoning, informalisation of labour to reduce associated costs is untenable as well. According to the CSV thesis, the solution lies in the principle of shared value, which involves creating economic value in a way that also creates value for society by addressing its needs and challenges.” The CSV thesis is the harbinger of constructive change in the thought process of doing business.

What does the CSV thesis translate into in the context of labour law reform in India, where over 90 percent of the workforce is engaged in the informal sector? Informal employment implies irregular and uncertain income earnings, absence of employment and social security, inappropriate working conditions and so on. In other words, informal employment in general implies economic and social vulnerabilities. A singular yet rude shock like the Covid-19 pandemic is sufficient to push those in the informal sector into the mouth of poverty, as has been witnessed in what transpired in the recent past. The economic vulnerability characterising the informal migrants was exacerbated by the realities of the pandemic. Clearly, such a large informal workforce is clearly unsustainable.

By construing labour laws exclusively as costs, businesses are missing the broader point. The need for labour laws must be motivated by concerns of sustainability. Minimum wages, a written job contract that specifies terms and conditions of working, social security provisions etc. increase costs in the short run but augment economic optimisation in the long run by enhancing the productivity of the workforce. A productive workforce adds to the profitability of the business. There are two mechanisms by which profits will increase. The first mechanism relates to the increased output. The second mechanism relates to an increase in aggregate demand entailing the increased output.

Labour productivity is sensitive to not just the physical health of the worker, but also to her morale, dignity, safety, right to justice and so on. Although laws have to speak to all of these concerns, regulatory and administrative compliance must not be burdensome. Here the sustainability of employer concerns comes into the picture. Apart from ease of compliance of laws, the fundamental rationale inspired by the CSV thesis to assess the sustainability of labour laws from the employers’ perspective, is to verify whether short term losses entail long term gains. The result of such verification must determine what constitutes the labour law framework of the country. The ideal way to articulate the labour law framework in India is to bring, to the table, the government, the employer, and the employees, what is referred to as tripartite consultation, adhering to the ILO conventions signed by India.

It is hoped that the policymakers contemplate on the need to incorporate sustainability concerns into their efforts to reform the labour law regime in the country.

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Renita D'souza

Renita D'souza

Renita DSouza is a PhD in Economics and was a Fellow at Observer Research Foundation Mumbai under the Inclusive Growth and SDGs programme. Her research ...

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Shruti Jain

Shruti Jain

Shruti Jain was Coordinator for the Think20 India Secretariat and Associate Fellow Geoeconomics Programme at ORF. She holds a Masters degree in Public Policy and ...

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