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Stepping up the pace of job creation in a country where 65% of the population is less than 35 years old was one of the key planks of the BJP’s campaign for the April-May general election. Photo: Ramesh Pathania/Mint
Stepping up the pace of job creation in a country where 65% of the population is less than 35 years old was one of the key planks of the BJP’s campaign for the April-May general election. Photo: Ramesh Pathania/Mint

Labour market reforms: Can Modi govt pull off what no earlier regime has attempted?

The government is trying to overhaul decades-old labour laws to make them more business-friendly, generate jobs and boost manufacturing

New Delhi: Ginni International Ltd is an 18-year-old manufacturer and exporter of cotton yarn, woven fabric and denim, with a workforce of 2,000 people employed at its textile plant on the Delhi-Jaipur highway, 120km from the national capital.

Chairman and managing director Sharad Jaipuria says the company wants to grow faster, expand its product portfolio and increase headcount by more than threefold as it chases the ambition of tripling annual revenue to 1,600 crore from 517 crore in the year ended 31 March.

His plans depend on India’s labour laws becoming attuned to the times, said Jaipuria. Overbearing and intrusive labour laws have inhibited the growth of Ginni International and that of the manufacturing sector as a whole, he complained.

“If our labour laws become in-sync with the times, we would like to expand from fabric manufacturing to complete product manufacturing in the textile space for both domestic and export markets. If the atmosphere becomes conducive, our employee count can go from current 2,000 to 7,000 within the next three years," Jaipuria said.

India’s new government, led by Prime Minister Narendra Modi, is doing something about that. Since assuming office on 26 May, it has made reform of archaic labour laws one of its top priorities as it attempts to revive economic growth that slumped to sub-5% levels in each of the previous two years, create more employment in a country where 12 million job aspirants enter the labour market every year, and turn India into a manufacturing power.

An overwhelming proportion of India’s workforce is employed in the so-called unorganized sector, as workers in small industrial units, or household helps or are self-employed as vegetable sellers or scrap collectors—occupations that aren’t regulated and offer them no job benefits or social security nets.

“There is a realization that labour laws have restricted growth of the organized sector," said a labour ministry official who didn’t want to be named. “Even after 67 years of independence, only 7% of the Indian workforce is in the organized sector. If you want to give more financial and social security benefits like provident fund, medical care and insurance facility (to people), a bigger chunk of the labour market must be in the organized sector."

The lead was set by Modi’s Bharatiya Janata Party (BJP) government in Rajasthan which, in July, passed amendments to four key labour laws—the Industrial Disputes Act, Factories Act, Contract Labour Act and the Apprentices Act.

Indian companies need to comply with 44 federal labour laws, many of them older than half a century, in addition to the dozens of state laws that govern how workers can be hired and let go, their safety and compensation.

The Industrial Disputes Act, 1947, requires companies employing more than 100 workers to seek government permission to let go of employees. The Factories Act of 1948 limits overtime in firms with more than 10 employees. Women aren’t allowed to work on the night shift in many industries.

There are regulations governing everything that ranges from the restrictive to the absurd—from a rule that requires employers to limit contractual workers to non-core activities to one that specifies the number of spittoons that a workplace must maintain, and where, and spells out penalties for breaching the rules.

‘Dark age’ laws

Such regulations have been counter-productive, say employers and backers of business-friendly labour law reforms. Factories have stopped adding to their headcount, relying instead on contract labour, because of the difficulties in letting go of surplus staff when the business cycle turns adverse.

Hiring more people has become like a “noose around the neck", said Sandip Somany, joint managing director of Hindustan Sanitaryware and Industries Ltd, a manufacturer that has around 17,000 workers.

Hindustan Sanitaryware has, over the last three-to-four years, added 3,000 workers, but could have taken on twice as many, had there been more conducive labour laws for employers, said Somany.

The only way for businesses to trim the workforce at present is by offering a voluntary retirement scheme (VRS), said Somany. VRS is essentially a golden handshake that allows employees the option of retiring early in return for a severance package.

Labour laws need to change from the “dark age of regressive dominance" to “current economic requirements", said Somany.

Employment laws for companies that have more than about 100 workers are stricter than all but two of the 34 countries in the Organization for Economic Cooperation and Development (OECD), resulting in a disorganized economy composed mostly of small businesses where employees have few rights, Bloomberg said in a recent news report.

The BJP government of Rajasthan has, in a small way, shown the way, passing an amendment that will allow companies to let go of up to 300 employees without seeking government permission, raising the threshold from 100. The state has made it tougher to register labour unions. The Contract Labour Act will now be applicable in the desert state only to companies that employ more than 50 workers against the previous 20.

The federal cabinet has approved proposals to amend Factories Act, 1948, Apprentices Act, 1961, and Labour Laws (exemption from furnishing returns and maintaining registers by certain establishments) Act, 1988. The government introduced the Factories Amendment Bill, 2014, and the Apprentices Amendment Bill, 2014, in the Lok Sabha, the lower House of Parliament, this month, and within a week, on 14 August, the latter was approved by the Lok Sabha.

“We have to keep in mind that industries should not face any problem. If industries are troubled, jobs will not be created," federal labour minister Narendra Singh Tomar told a group of state labour ministers.

To be sure, the proposed legislation contains provisions that are friendly to employees.

The proposed changes to the Factories Act talk about improving the safety of workers; doubling the provision of paid overtime from 50 hours a quarter to 100 hours in some cases and from 75 hours to 125 hours in work related to public interest; relaxing the norms for women to work in some industry segments at night; and reducing to 90 from 240 the number of days an employee needs to work before becoming eligible for benefits like leave with pay.

“It is a very balanced Act on behalf of the government. It takes care of overtime, women working at night, improves safety. It is doing the right thing without affecting labour security. This is common sense, which should have been done a long time back," said Venu Srinivasan, chairman and managing director of TVS Motor Co. Ltd.

Job growth flags

The proposed labour law changes follow a decade of slow employment growth in a country of 1.25 billion people. Between 2004-05 and 2009-10, India created just 1.1 million jobs and during 2009-10 and 2011-12, the country added 13.9 million new jobs, according to Economic Survey 2013-14. Those were the years when the Congress party-led United Progressive Alliance (UPA) was in power.

In contrast, as many as 59.9 million jobs were created in the five years between 1999-2000 and 2004-05, when the National Democratic Alliance (NDA) was in power.

In a background paper, the labour ministry said the proportion of people in the labour force declined from 43% in 2004-05 to 39.5% in 2011-12, with a sharp drop in the female participation rate to 22.5% from 29%.

“Employment generation is one of our most important priorities. Our focus should be on ensuring job-rich growth. We want to maintain a balance between reform and labour welfare," labour minister Tomar said.

Stepping up the pace of job creation in a country where 65% of the population is less than 35 years old was one of the key planks of the BJP’s campaign for the April-May general election.

“Revamping labour laws and encouraging urbanization could add as many as 110 million jobs over the next 10 years," Goldman Sachs said in a May report. “That’s enough to absorb the 100 million Indians that the United Nations says will enter the workforce in the coming decade, a demographic that Goldman estimates could contribute as much as 3 percentage points to annual economic growth from 1.7% now."

The Apprentices Amendment Bill, once it becomes law, will expand the scope of employment as apprentices on the shop floor. It aims to link the wages of apprentices with the wages of semi-skilled industrial workers, and make work time and leave benefits similar to those of regular workers. It will also allow industries to take in non-engineers as apprentices, depending on the nature of the job, and will introduce new trades for apprenticeship training.

Currently, India has the capacity to absorb 490,000 apprentices in thousands of industries. Once the law comes into force, it can take the number of apprenticeships to 2.3 million, Tomar said.

Germany has three million apprentices, Japan has 10 million and China 20 million, according to numbers cited by the minister, adding that to provide a job-ready workforce to industry, it’s time to change the law. The government also plans to reimburse 50% of the monthly stipend of apprentices in small-scale industries.

The government is linking the stipend of apprentices to the wage structure of a so-called semi-skilled industrial worker: in the first year, the apprentice will get 70% of a semi-skilled worker’s wages, 80% in second year and 90% in the third year. From an average monthly stipend of as low as 2,100, the proposed changes could take the monthly stipend to as much as 6,700.

The low monthly stipend and little awareness of the opportunities available for apprentices on the shop floor have meant that there were few takers for the programme.

According to Dhruva Ghai, dean of engineering and technology at the Indore-based Oriental University, none of his students had perhaps ever applied to become apprentices.

Higher stipends may help change that. “Though we know that the placement scenario in smaller cities of India are not good, why would anyone join an apprenticeship programme and earn 2,000–3,800 a month," said Prabhat Panda, a student of a technical course in Bhubaneswar. “Even an unskilled, less educated daily labourer under the National Rural Employment Guarantee Scheme (NREGS) makes more money."

Lingering scepticism

Under the job guarantee programme, one member of every rural household is entitled to 100 days of manual work every year.

The Apprentices Act amendment will allow industries to also take in non-engineers as apprentices, depending on the nature of the job, and will introduce new trades for apprenticeship training.

To be sure, there are sceptics about the Apprentices Bill.

Given that India is able to absorb just 280,000 apprentices, when it has the capacity to take on nearly half a million, how can its companies hire more, N.K. Premachandran, a member of Parliament (MP) from the Revolutionary Socialist Party (RSP), said during a debate in Parliament.

“What is the intention of the Bill... you are giving employers more flexibility."

The central government is also seeking to reduce the so-called “Inspector Raj" of clearances and approvals by introducing a single-window system for compliance with various labour laws so that companies can function without fear of being hauled up for minor infringements.

“There is too much of inspection, and industries are looked upon with suspicion," said Mahesh Gupta, managing director of Kent RO Systems Ltd, a maker of water purifiers. “After complying with all the rules, one opens a company; but you have to get the licence renewed every year under the Factories Act. Why can’t the government give a licence for five or 10 years at a stretch?"

Gupta is hoping the new government’s initiatives will improve things.

Labour law changes are in sync with Modi’s ambition of converting India into a manufacturing power. The government wants to increase the share of manufacturing in gross domestic product, or GDP, from its current level of 16% to 25% by 2022.

In his Independence Day address to the nation on 15 August, Modi invited foreign manufacturers to “come, make in India", products ranging from paper and plastics to submarines and satellites to enable the country to reduce its reliance on imports and boost exports.

“Today, if we want to give more and more employment opportunities to the youth, then we will have to promote the manufacturing sector," said Modi. “I want to tell people of the whole world: come, make in India. Come and manufacture in India. Go and sell in any country of the world, but manufacture here."

Of course, the unions don’t like the talk of reforms and the government is likely to face resistance in its attempt to change decade-old laws.

Even the move to allow women to work night shifts in some industries is bad and the change in the apprenticeship law is aimed at providing businesses cheap labour, said Rakhi Sehgal, an executive member of the New Trade Union Initiative, a confederation of labour unions.

Women who join the industrial workforce tend to be from the marginalized sections of society, and forcing them to work night shifts will make them more vulnerable to exploitation, said Sehgal. “Will the industrialists allow them a right to say ‘No’, or will she lose her job for saying so? Will she get an equal wage for equal work? Will apprentices have the right to collective bargaining."

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