Labour Code: Major changes

  In 2019, the Central government proposed to replace 29 existing labour laws with four Labour Codes on wages, social security, occupational safety and industrial relations. Since the issue of labour came under the Concurrent List of the Constitution, there were over 100 state and 40 central laws regulating the various aspects to it. Government wanted to club the laws to improve ease of compliance and ensure uniformity across the country. The Code on wages, which sets a national-level floor wage for all workers, was passed in 2019 and the other three codes were referred to Standing Committee on Labour, which later submitted its report. GoI incorporated 174 out of 233 recommendations (74%) of the standing committee on labour for the three codes. Some important changes, which have created unrest among labour unions, are discussed here.

Compounding of Offences: It states that for offences with fine, compounding is allowed for a sum of 50% of the maximum fine provided for the offence. For offences with imprisonment, compounding is allowed for a sum of 75%. Labour unions feel that the deterrence to break the law is reduced on account of compounding provisions and reduces security of the labour force.

Size of organisation: A key feature of the new code is that they provide size-based applicability of the laws to various organisations. The new laws raise the thresholds for workers from 20 to 40 under The Factories Act of 1948, which defined any manufacturing unit as a factory if it employed 10 workers while using electricity or 20 workers while working without.

The Industrial Disputes Act of 1947 requires any establishment employing over 100 workers to seek government permission before any retrenchment; the threshold has been raised to 300, with the government empowered to raise it further through notification. Labour unions are very upset with this threshold being raised and they argue that all MSMEs and bulk of the Industrial units get covered under the limit of 300. They feel that the limits can be further raised once the initial protests die down.

The Government’s argument is that existing laws have created an exit barrier for establishments and impacted their ability to adjust workforce in line with production demands. There can be little argument that any layoff should happen under very difficult circumstances where the existence of the Industry is in question and there should be no firing just to improve the bottom line of firms. Security of tenure of works is important for the well being of the country and we need to watch the path that this reform takes and make mid course corrections.

Changes in contract labour rules: The earlier Bill was applicable to establishments that employed at least 20 contract workers and to contractors who supplied at least 20 workers. These limits have been raised to 50 workers. Contract labour do not have the protection that regular workforce have and the increase in threshold number means that greater number of them would work under more difficult circumstances.

The new Code also prohibits employment of contract workers in any core activity but allows for their employment in a specified list of non-core activities such as canteen, security and sanitation services.

Fixed term Contracts: The Code has a provision allowing industries to employ workers on a fixed-term contract. This helps industries in hiring such workers for seasonal jobs or for short-term projects. Fixed-term contract workers will be entitled to all the benefits as regular employees in the establishment, except retrenchment compensation.

Currently, industries hire seasonal workers through contractors, which is both cumbersome and not usually in the best interests of workers. The benefits of contract workers are eaten away by contractors under the present system. This provision would help Industries hire seasonal workers directly rather than through intermediaries, thereby better protecting their rights.

Opponents of the reform say that the Industrial Relations Code, 2020, empowers the industries to convert existing workforce into fixed-term contract employees as the government removed a safeguard, which was there in its March 2018 notification that deterred companies from doing so. They say that the way in which fixed-term employment has been framed will lead to withering away of five kinds of securities: employment, occupational safety, income, social, and skill.

Whether industries would actually convert regular employees who are non-seasonal into fixed term workers needs to be seen. Since firing has also been made easier, it looks unlikely that employers would convert regular employees as fixed term contract employees. Firing is not easy for employers as they need to substitute fired workers and it is difficult to find trained, disciplines workers. It is true that employers would be able to fire undisciplined workers with low productivity.

No clarity on recognising unions, providing welfare schemes: The Code has no criteria to ‘recognise’ trade unions for formally negotiating with employers despite its registering them.

The Code on Social Security also creates enabling provisions to notify schemes for ‘gig’ and ‘platform’ workers, but there are no concrete measures propose presently.

Also, the Bills have not clearly specified norms pertaining to social security schemes, health and safety standards, and working conditions and these are largely delegated to the state governments.

Right to Protest/Strike: The Industrial Relations Code prohibits the right to strike and mandates that unions give a 60-day notice to strike. Further, its is illegal to strike during conciliation. Unions say that the Bill thus destroys the freedom of association guaranteed to Indian citizens under the Constitution.

Compliance: Codes seek to improve the ease of compliance and hiring and firing of workers while keeping labour welfare under consideration.

Little time allowed: The political Opposition has raised the issue of little time being given to MPs to consider the provisions of the Bills or to debate them. It has been pointed out that the Bills (Having 411 clauses and 13 schedules running into 350 pages) were only introduced on Saturday, September 19, and the Business Advisory Committee of the Lok Sabha allocated three hours for them to be discussed and passed this week.

Review: Since a good number of existing provisions have been diluted in favour of the employers, Governments, Unions and civil society needs to keep a close watch over the course that the implementations takes. I feel that some of the fears that workers have might not actually play out. It is not always possible to estimate the direction that laws will take over time. Government should, therefore, constantly evaluate the implementations and assess the change in balance between employers and employees. Course corrections would certainly be needed in time and we should not hesitate to reexamine issues.

Woes of the Indian Economy

India has the third highest Gross Domestic Product (GDP) in the world in terms of its purchasing power parity. In absolute United States Dollar (USD) terms it is fifth in the world. Its journey to reach this place is certainly creditable. For some time now, smugness has crept into the country that we are no longer impoverished and are among the rich nations. Egged on by an International narrative that China and India are the countries to watch in future, we have started feeling that other than a few nudges here and there is very little that we need to do on the economic front.

 

But, is that all? Countries try to increase their wealth and GDP only to ensure that its citizens lead comfortable and happy lives, to ensure that they have access to the best education and healthcare and to ensure that they are able to live with dignity and head held high. If we drill down GDP to the citizens, the metric of relevance would be the per capita GDP. This measure assumes that the total GDP of the country is equally distributed among all its citizens. The fact that it is not equal equally distributed is a very major concern and would need much more space to discuss. India’s GDP (PPP) is 43% that of China and only 59% that of Indonesia. India is much behind France, U.K. or any other European Nation.

 

In reality, we are still a poor country where malnutrition is rife, where children continue to drop out of school in alarming numbers every year and where millions of untrained young people enter the workforce unfit for anything more than manual labour. All this is best captured in the UN’s Human Development Index (HDI) rankings where India is a lowly 129th out of 189 countries. China, by contrast, occupies the 85th spot and Sri Lanka an even better 71st position.

 

IMF has announced that India’s per capita gross domestic product may be lower for 2020 than in neighbouring Bangladesh. India, which had a lead of 25% five years ago, is now trailing.  More than numbers, Indians will find it very difficult to digest the fact that Bangladesh is better than us. It is a huge blow to our pride. The narrative that we have built over the past few years is that Bangladesh’s poverty drives it’s citizens to sneak into India in order to make a living. We have all believed that we are far superior to most countries in Asia and we feel that we need to compete only with Western Europe, USA and China. This sobering comparison with Bangladesh and being worse off than it is just unpalatable. This relative underperformance will dent the country’s self-confidence the capacity of its citizens in the international arena. Our influence in South Asia and the Indian Ocean and the world will wane.

Where have things gone wrong? The coronavirus pandemic is definitely to blame. But, it has been widely reported that India’s growth has been tapering for ten quarters prior to the covid-19 pandemic. The pandemic has only added to an already slowing growth. In their working paper, Chatterjee and Subramanian have concluded as follows:

A cautious conclusion is that the ability of India’s export growth to outpace that of the rest of the world as indeed it has done spectacularly for three decades—will be increasingly constrained. Both exports of manufacturing and services are skill intensive and becoming more so, and if the quality and quantity of skills available to the economy starts slowing (rising Lewis curve), exports will run into domestic supply constraints. India’s longstanding inability to export unskilled manufacturing products is an indictment but equally it is an opportunity, especially with China vacating export space in these products. An extraordinary policy effort will be required to exploit this opportunity. Equally, policies cannot afford to neglect the skill-intensive exports, which are still dynamic but are losing steam.

 

Chatterjee and Subramanian feel that the right way forward for India is to focus on export led growth. They feel that we have not paid attention to exports that do not need skilled labour and India’s exports have been primarily goods and services that require a skilled workforce. They feel that with passage of time, the quality and quantity of skills available will start slowing down and future exports would be would run into these supply constraints. Bangladesh is doing well because it’s following the path of previous Asian tigers. Its slice of low-skilled goods exports is in line with its share of poor-country working-age population. China held on to high GDP growth for decades by carving out for itself a far bigger dominance of low-skilled goods manufacturing than warranted by the size of its labor pool.

India, however, has gone the other way, choosing not to produce the things that could have absorbed its working-age population of 1 billion into factory jobs. India’s missing production in the key low-skill textiles and clothing sector amounts to $140 billion, which is about 5% of India’s GDP. These sectors have the potential to absorb a large population and pave the way fro bettering education and health standards for future generations, which would propel us on the next growth step. As we are unable to engage our huge unskilled population, they lose the opportunity to pull themselves out of the subsistence economy of they are part. The country too loses the opportunity of maintaining the steady growth rate required.

The government of India (GoI) does not engage adequately with states and industries in order to promote their growth as well as capacity to export outside the country. In most cases the government of India comes up with a reform measure/policy which is often intended to open up the sector and promote industries in the sector. These are decided upon with varying degrees of consultation and more often than not, fall short of the requirements. GoI does not focus much on the subsequent steps including assessing the effectiveness of the reform/policy in meeting the desired objectives. The task is entirely left to the state governments to compete against one another and attempt to promote industrialization. State governments find it very difficult, near impossible, to get the government of India to agree to any policy change that is required to make the policy/reform more effective.

In an interview with ‘The Print’, Raghuram Rajan opines that the growth trajectory of 8% and above will be possible to maintain only if there is an environment of continuous reform. In recent times, GoI has initiated some reforms including the Insolvency and Bankruptcy Code, agricultural marketing reforms, labour reforms etc. Rajan feels that these reforms are sporadic in nature and the environment of continuous reform is absent in the country. This lack of the right environment, he feels, will pull down growth in any country and we have already witnessed the same over the past several quarters.

The reform measures introduced also need to be deepened and more effective at the ground level. The issue of whether business is now easy to carry out, needs to be assessed regularly with feedback from the trade and industry.

A bigger danger is that the policy of ‘Atmanirbhar’ should us take us back to the pre-1991 closed economy days. If this policy means making our products competitive and of better quality, they would then meet the needs of the country and could export as well. Most economists feel if ‘Atmanirbhar’ means protectionism reintroduced, it would damage the country more and slow down the effort to pull out our millions from impoverishment. Firstly, it would mean that citizens of the country would have to pay more for goods of lesser quality. Secondly, it would reintroduce a system of rents where incompetent goods and services would attempt to raise barriers for outside goods that are cheaper and of better quality. Thirdly, Investors will fear that tariff and non-tariff barriers will be introduced at the behest of anyone who feels that their Trade/Business would be affected due to global factors. This takes the country back to a system of favours being doled to protect some players. Classical trade theory tells us that it would lead to inefficient allocation of resources. We would be treading on very thin ice on this route.