Reforming Labour Laws

Bharat Jhunjhunwala

The Union Cabinet has approved the frst tranche of labour law reforms. The Factories Act is presently applicable on units employing more than 20 workers. This will now be made applicable to units employing more than 40 workers. This law requires factories to adhere to many conditions such as employing workers only in shifts of 8 hours and installing safety guards on moving machines.

However, the big ticket reforms have been put in the cold storage, for the present, at least. The Industrial Disputes Act will continue to be applicable to industries employing more than 100 workers. Industries employing more than 100 workers will not be able to close down without first taking permission from the labour department. They will not be free to dismiss workers whom they find to be inefficient. The Contract Labour Act will continue to be applicable to those employing more than 20 workers as at present. The main problems of industries in generating more employment remain unaddressed.

The small industries generate most employment in the country. The cost of production in small units is more due to use of manual machines and due to the absence of highly skilled engineers. They are able to compete with large units mainly based on their lower labour costs. They find it extremely difficult to face labour trouble.

Considerable evidence is available that easier labour laws help generate employment. Increased enforcement efforts in the case of Brazil led to more unemployment. Doubling of minimum wages in Indonesia led to a two percent increase in unemployment. Labour market reforms in Germany pushed down German wages relative to other countries, thereby increasing German competitiveness. This was one reason that Germany was able to better able to face recession of 2008.

The petty changes in the labour laws approved by the Cabinet fall much short of the needs twice. First, they do not face the main constraints in generation of employment. Two, the proportion of workers employed in the organized sector is very small. India's population is about 120 crore. Of these, about 60 crore would be of working age. Of these, only three crore are employed in the organized sectors. Of these, two crore are government servants. Only one crore are employed in the private sector where these reforms will have some positive impact. Now, say, the numbers employed by the private sector increase from one crore to two crore as a consequence of implementation of these reforms. That will reduce the numbers seeking jobs from 57 crore presently to 56 crore. It will be a drop in the ocean. It is necessary to directly provide stiff incentives to employment to jumpstart the process of employment generation in the organized sectors.

About Rs 40k crore per year is being spent in MNREGA today. This money may be used to provide a subsidy of, say, 40k per year per new worker employed in the organized sectors. This will provide a huge incentive to the industries to employ workers instead of machines. About one crore jobs would be created. The total amount spent by the Union Government on various welfare schemes including diesel, fertilizer and food subsidies is around Rs 500k crore per year. Providing this money in form of employment subsidy would create 12 crore jobs. The remaining workers in the unorganized sectors will also be benefited because of less availability of workers in the unorganized sectors. The problem is too big to be handled by reforms in the labour law alone.

There is a bigger danger lurking around the corner. Studies show that reforms have directly led to reduced employment even if they have led to increase in employment in the economy as a whole. One study found that workers displaced as a result of privatization in the cashew sector in Mozambique were thrown into a large pool of the already unemployed, and largely remained so. Another study found that workers displaced due to the closure of textile mills in Ahmadabad typically replaced their moderately well-paid formal sector employment with low-income informal sector labour. The danger is that reforms will immediately and directly lead to loss of jobs and this will create a huge social unrest in the country while the new jobs created in sunrise sectors will be far and few. NDA-II should not forget the experience of NDA-I. It is unquestionable that the efforts of that Government led to the IT revolution in the country and projects such as the Golden Quadrangle led to a huge improvement in connectivity. But this was not sufficient to keep the NDA in power. Implementation of reforms without providing incentives to jumpstart new jobs will take NDA-II along the same track.

Vol. 47, No. 19, Nov 16 - 22, 2014