The government of Uttar Pradesh announced the suspension of some labour laws to facilitate industry that has practically come to a standstill because of Covid-19-instigated lockdown. The states of Madhya Pradesh and Gujarat have also opted for this extraordinary measure. This bold move, implemented as it has been in the time of crisis, has been long in coming.

The reforms of 1991, a major milestone that they are in India’s post-Independence history, primarily focused on the demand side of the economy. GoI had basically let go of what should be produced and in what quantity. But it continued to retain control of almost everything that went into the process of production. GoI exercised major control over land, labour and material resources, and nowhere was it more throttling as in the laws and policies governing labour.

The sheer complexity of India’s labour law regime, which comprises more than 150 legislations with conflicting provisions in different statutes and archaic obligations flowing from them, was unfathomable.

Full compliance was virtually impossible. No other major economy had such a legal regime in place, all in the name of protecting weaker sections of the working force. It was these laws that made India miss the ‘manufacturing bus’ of the 1980s.

Circumstances have presented India with another chance where it can capitalise on the flight of companies from China that is underway because of the Covid-19 crisis. The continued presence of restrictive labour laws, however, continues to make India an unfavourable destination for manufacturing as compared to Southeast Asian economies like Vietnam. However, this latest reform is also significant from the broader perspective of India’s prevailing political economy.

Before the Covid-19 crisis hit India, the economy was already experiencing demand shrinkage while the twin-balance-sheet problem continued to fester. This forced companies to deleverage themselves in a major way and credit growth plummeted. Even as India was wrangling out of this structural stranglehold, it was given a deadly blow in Covid-19 that only exacerbated the prevailing situation.

In such a scenario, GoI has little option but to step in and spend on a massive scale to push demand in the market. This spending could be made in several ways, and policy options suggested range from a huge stimulus package to the use of ‘helicopter money’ — printing large sums of new money and distributing it among the public. But the truth is that India does not have that kind of fiscal legroom, especially in the light of expected decline in tax receipts.

Any attempt at monetising the deficit is a risky proposition, as India’s credit rating is precariously placed just a notch above junk. Worsening this could wreak havoc, as investors can lose confidence, sending the economy in a rapid tailspin. Faced with this Hobson’s choice, GoI has little option but to let its deficit grow to create room for required spending and, at the same time, assure investors and rating agencies that this is just a one-time affair, and that the deficit will be reined in in the medium and long term.

It is in this context that the announcements of labour law reform in UP, MP and Gujarat assumes critical importance. These laws have single-handedly destroyed several industrial towns in UP, Bihar and other states. One of the starkest examples is Kanpur. ‘Manchester of the East’ was once an industrial hub. But most of its industries now lie in ruins.

This is also one of the most sensitive — and, thus, politically difficult —reforms as it are likely to incite major opposition from the powerful labour unions, not to mention opposition parties. Given these realities, the execution of such a reform sends a strong message to the global investor community as well as rating agencies that India has the appetite for big-bang and difficult reforms. It is likely to go a long way in assuaging the concerns of economic catastrophe that is generally associated with high deficits incurred by governments.

Covid-19 pandemic has triggered public health and global economic crises. As the economy struggles with the lockdown and thousands of firms and employees stare at an uncertain future, some of the state governments last week decided to make significant changes in the application of labour laws.

• Madhya Pradesh has allowed units of business and industries to be operated without many of the requirements of the Factories Act.
• Uttar Pradesh has cleared an ordinance exempting businesses and industries from labour laws, except for a handful, for three year period.
• There are reports that several other states are pursuing similar measures.

Some Major Indian Labour Legislation

• Labour falls in the Concurrent List of the Indian constitution and there are many laws enacted by the Centre and the states.
• There are four major central legislations, that form the core of labour laws in India.
  • Factories Act, 1948:The main objectives of this act is to ensure safety measures on factory premises, and promote the health and welfare of workers.
  • The Shops and Commercial Establishments Act, 1961:It aims to regulate hours of work, payment, overtime, a weekly day off with pay, other holidays with pay, annual leave, employment of children and young persons, and employment of women.
  • The Minimum Wages Act, 1948:It sets the minimum wages that must be paid to skilled and unskilled labours.
  • Industrial Disputes Act. 1947:It relates to terms of service such as layoff, retrenchment, and closure of industrial enterprises and strikes and lockouts.

Issues Pertaining to Evasion of Labour Laws

Creating an Enabling Environment for Exploitation

• The immediate suspension of labour laws by the states is far from being called a reform as it will strip the labour of its basic rights and also drive down wages.
• As for the suspension, most of the provisions under the Factories Act, 1948 and the Industrial Disputes Act,1947 would mean workers in factories may be denied basic working facilities such as cleanliness, proper ventilation, drinking water, canteens, and restrooms.

Counter Productive Step

• These steps are far from pushing for a greater formalisation of the workforce.
• This move will in one go turn the existing formal workers into informal workers as they would not get any social security.
• Also, there will be no way for any worker to even seek grievance redressal.
• Resulting fall in wages will further depress the overall demand in the economy, thus hurting the recovery process.

Forced Labour

• Article 23 of the Constitution prohibits “forced labour”.
• The Supreme Court, in case PUDR v. Union of India (1982), held that “the word ‘force’ would mean any condition arising from the compulsion of economic circumstances which leaves no choice of alternatives to a worker.
• Thus, the suspension of labour laws by several states reduces the bargaining power of labour, their right to negotiate and hence may turn them into Forced Labour.

Against the International Commitments

• These amendments in labour laws are the spirit of the International Labour Organization’s ‘Employment and Decent Work for Peace and Resilience Recommendation, 2017’.
  • It requires states to ensure marginalised groups “freely choose employment” while rebuilding after any disaster.

Issues Related to Indian Labour laws

Complex Set of Laws

• There are over 200 state laws and close to 50 central laws, and yet there is no set definition of “labour laws” in the country.
• The multiplicity and complexity of laws make compliance and enforcement difficult and lays the foundation for corruption, rent-seeking and exploitation of workers.

Inflexible Laws

• Indian labour laws are often characterised as “inflexible”.
• It has been argued that firms (those employing more than 100 workers) dither from hiring new workers because firing them requires government approvals.
• This has constrained the growth of firms on the one hand and could not improve the job prospects of the workers.

Applicability of Labour Laws

• A large number of workers that are engaged in the unorganized sector are not covered by labour regulations and social security.
• At present nearly 83% of India’s workers are part of the informal economy.
• Thus, the current framework of labour laws falls short of securing the interest of all the labourers.

Steps To Be Taken

Short-Term Step

• With respect to Covid-19 pandemic, the central and state governments in India should follow what most governments have done across the world.
  • The government should partner with the industry and allocate a percentage of the GDP towards sharing the wage burden and ensuring the health of the labourers.

Long-Term Steps

• The government has proposed four labour codes:
  • Labour Codes on Wages
  • Labour Code on Industrial relations
  • Labour Code on Occupational safety, health and working conditions
  • Labour Code on Social Security and Welfare
  • These should be passed by the parliament as soon as possible.
• Labour laws applicable to the formal sector should be modified to introduce an optimum combination of flexibility and security.
• Make the compliance of working conditions regulations more effective and transparent.

Road ahead

For sustainable industrial growth in India, there is a need for holistic labour laws reforms, which would enable firms to expand, while keeping the interest of labours intact, thereby resulting in the formalisation of the Indian economy. These labour law reforms not only give India a fighting chance to be a possible destination for global manufacturing, but they also provide GoI with a mast to sail through the fiscal headwinds during these times of crisis. It is, therefore, important that other states also follow suit, so that the message going out of India is consistent across political parties and its effect multiplied.