Calcutta Notebook

Beyond the Labour Code

Bharat Jhunjhunwala

The Government is to soon notify the rules for implementing the new Labour Code. Some provisions of the Code are pro-labour. For example, the proceedings in a case of misconduct by a worker have to be completed in 90 days. Gratuity will now be payable to workers who have worked more than one year. Fixed-term employees have been given entitlement to all benefits that are payable to permanent employees. Other provisions are anti-labour. Closure or retrenchment for establishments employing less than 300 employees can now be made without obtaining permission from the Government. Previously such permission was required for establishments employing more than 100 employees. The Code is a mixed bag.

The stated objective of the Code was to jumpstart manufacturing and employment generation. The numbers of youth entering the labour market is increasing by the day. The Medium, Small and Micro Enterprises that were creating most employment have been badly hit by demonetization, GST and lockdown. A politician of Muzaffarnagar told this writer that 20 persons are selling vegetables today where only five were selling previously. The income of a vegetable vendor today is Rs 500 per day while previously it was Rs 2000. This has declined because a number of workers have become unemployed and taken to such activities. The industries also have less interest in providing employment to workers. A sugar mill that used to crush 2000 tons of sugar cane everyday 40 years ago, is now crushing 8000 tons of sugar cane but the number of workers has come down to mere 500. One worker is doing the work that was done by 16 workers previously. Reason is that that the cost of undertaking a particular operation by labour is more than undertaking the same operation by machines.

Industrialists will be encouraged to use more labour only if it is cheaper. Let us say a worker used to weave 10 meters cloth in a day previously. It will become profitable for an industrialist to continue to employ him if he starts weaving 20 meters cloth in a day. Otherwise, he may prefer to use an automatic loom and with less numbers of workers.

The model adopted by China was different. China improved the productivity of labour and simultaneously expanded the market. The worker started to weave 20 meters cloth now against 10 meters previously. At the same time the market expanded from 10 meters to 40 meters. Thus, the industrialist who was using one worker to produce 10 meters cloth previously began to use two workers to produce 40 meters cloth. In this way employment grew along with increase in labour productivity because the market was expanding rapidly. Indian situation is fundamentally different because growth rate today not only lower than China's growth rate in the last 40 years but it has also been declining in the last six years even if one excludes the last year 2020-21 that has been unusual due to the Covid-19 Pandemic. Thus increase in productivity today will lead to reduction of employment. The dismal situation is brought to the fore in a paper published in "Developing Economies" that shows that the productivity of an Indian worker was 47 percent more than the Chinese worker in 1978. The situation changed dramatically in the next 25 years. The productivity of an Indian worker was 42 percent less than the Chinese worker in 2004.

The numbers of workers employed will reduce if one increases the productivity of the workers due to the limited market. And, the numbers of workers employed will also reduce if one does not increase the productivity of the workers because industrialist will use machines. There will be job-displacement in both the situations. The only choice before India is whether Indians will reduce the size of cloth by using a scissor or by tearing it.

The second aspect of the problem is that of global competition. The main objective of the Code should have been to secure an increase in productivity so that Indian industrialists could stand in global competition irrespective of whether large numbers of jobs are created or not. However, there is little in the labour code in this direction.

India necessarily needs to increase the productivity of worker to stand in the global market. The Labour Code fails here. The facility of closure or retrenchment without previous permission given to establishments employing 100 to 300 workers is like capital punishment. It makes it easy to "kill" an establishment. It does not enable the industrialist to extract more work from the employed workers. Thus the Code will not beget an improvement of productivity of workers and India is likely to continue to slip in the global market. Further, even if provisions like dismissal without reason were introduced, that would not lead to the generation of much employment because fewer workers will be required to produce the same amount of goods. That will only help the authorities stem the reduction in the current levels of employment but not get an increase in the same.

The government should look beyond the Labour Code for generation of employment. One possibility is to impose high rates of tax on machines that lead to the displacement of large numbers of workers such as JCBs, harvesters and the like. Second possibility is to provide in government contracts such as in the making of highways that specified works will be undertaken by labour rather than machines. Third possibility is to subject goods produced from labour intensive methods to lower rates of GST or Income Tax. The main point is that increased productivity will lead to reduction in employment. Therefore one needs to implement other economic policies to generate employment.

[Formerly Professor of Economics at IIM Bengaluru.]

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Vol. 53, No. 40, Apr 4 - 10, 2021