Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

Building a new labour code for India

The Union government must untangle labour laws to reduce compliance costs

Reforming India’s labour laws has long been nothing more than a talking point in the seminar circuit and among hapless leaders of industry. Finally, some change in the positive direction may be at hand. As reported in Mint on Tuesday, the Union government plans to reduce the number of labour laws from 44 to just five.

Since 1947, India has crafted a plethora of labour laws involving safety at workplace, wages, social security and industrial relations. Each step, from the Industrial Disputes Act of 1947 to the Unorganized Workers Social Security Act of 2008 has added layers of complexity to the overall labour law landscape. On the one hand, it has distorted the labour market and on the other it has increased compliance costs of companies. These laws are a big reason for the substitution of capital for labour. This has hurt Indian labour—in terms of employment, training and opportunities—and has not helped anyone.

As reported in Mint, four of the five laws will deal with wages, social security, industrial safety and welfare, and industrial relations. At some stage, Bills will be tabled in Parliament to make these changes. This will take time. One reason is political opposition to these changes, which are considered unfriendly to labour.

The other is the legal complexity of the issue. These laws have been added, layer by layer, over the last 60 years. Undoing these in one swoop may present legal and administrative challenges. A careful study must precede legislative changes to prevent later judicial challenges to these laws.

The plan, so far, is to bundle related laws into a specific legal code for a particular industrial aspect. For example, laws related to social security—such as the Employees’ Provident Fund and Miscellaneous Provisions Act, the Employees’ State Insurance Corporation Act and other laws—will be bundled into a single social security law or code. Similarly, laws on remuneration of employees will be merged into a single law. In all, there will be four labour codes and a fifth, special law, for small factories.

There are two points worth noticing in the planned reform. One, drastically reducing the number of laws that companies are subjected to reduces compliance costs. The presence of multiple laws, many with overlaps, confuses the regulatory landscape. The notorious labour inspector raj has its origin in a multitude of laws meant for a single set of beneficiaries: industrial labour.

Untangling this knot is not just a matter of sequencing but also of spread. If this process was to be led by states, the results would have been mixed. Big ticket labour law reforms—for example, retrenchment of employees—will undoubtedly help all states. But if each state were to have its own variant of labour law “reforms", the issue of compliance costs will return with a vengeance. From that perspective, it is wise that the Union government is shepherding these changes. Uniformity of change is something that companies will appreciate. The additional factor at work is a signalling issue: if the Union government takes charge, the impression it conveys is that of India moving in the right direction.

So far, the lack of movement on the mother lode of labour law reform—free hiring and firing of employees—has disappointed investors and industrialists alike. It will be wise to tie up other labour laws and take a hard look at India’s labour market first. The institutional paraphernalia required for the smooth functioning of this important market must be put in place before the plunge is taken. This is necessary not only to avoid friction in this market—something that happens even in developed countries—but also to prevent a political backlash at a later date. The potential for that mischief is very real and must not be understated by any reformer.

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