Promise and pitfalls of new labour deal

But the real question is: Will these new codes make any significant difference to India’s diverse and complicated labour markets?

In developing countries like India, labour has historically been unskilled, unempowered and immobile. In the first two decades of economic liberalization, the availability of skilled and unskilled labour enabled India’s fast-paced economic growth. Now, with growth petering out and unemployment rising, the increase in the supply of young labour is causing huge distress to the political economy of reforms.

That is why there is a deep and renewed interest in amending labour law legislation. The states of Madhya Pradesh and Uttar Pradesh had already suspended labour law protection within their territorial boundaries for three years beginning in May this year, and faced no problems doing so.

But since this push is merely a few months old, it may be more relevant to in fact look at the model put in place by states which went down this path several years ago: Rajasthan and Gujarat. The early indications are not very encouraging, but it is first essential to understand the exact nature of the new deal that is being offered to India’s labour.

The changes

Last week, the Parliament passed wide-ranging amendments to labour laws after a round of discussions with various stakeholders over the last two years. In fact, it was in 2003 that these reforms were originally suggested. So, it has taken 17 years to see the light of day. These laws will now be notified and then the labour ministry will start framing rules and guidelines, which clarify many of the new provisions. It is expected that these laws will get implemented early next year.

Broadly, the changes that have been made are these: Hiring and firing becomes easier now, striking work gets more difficult, trade unions will get pushed to the margins, fixed-term employment enters the picture and a rudimentary security net will now cover sections of the unorganized workforce.

The new law on social security brings together the provident fund (PF), the employees’ state insurance (ESI), maternity benefits, gratuity and other entitlements under a simplified single law. The second law on occupational safety similarly brings together all laws relating to health and hazardous working conditions. It pins liability on the employer and the contractor and makes PDS benefits transferable for migrant workers. It also stipulates toll-free numbers and assistance cells to help free bonded labour.

The third law, which is the Industrial Relations Code of 2020, has redefined the terms “employer", “employee" and “worker". It has also given a new definition for “strike" that now includes mass casual leave by 50% of the workforce employed by any firm.

Twenty-nine different central laws have been merged into three. A fourth code on minimum wages was passed last year. Therefore, a total of 44 extant laws have now been rolled into four. This is not the end of the story though, as labour is a concurrent subject and the 100-odd state level acts that exist now will also be rationalized given this precedent set by the Union government. The labour minister informed parliament that 16 states have already brought in most of the changes which have been newly incorporated under the four labour codes.

The context to these changes is important. Apart from the dwindling GDP growth rate—which had declined even before the pandemic from 7.5% in 2014 to 5% in 2019—India is going to enter a decade in which the number of people newly entering the workforce each year will remain high. India’s population should surpass China’s in about seven years and for the next ten years, at least 10 million youth will enter the workforce each year.

There are 900 million Indians in the working age population of 15-64 years already and with this additional annual increase, India’s supply of labour will keep increasing, thereby keeping labour costs low for a long time. At the moment, there are around 500 million crore workers in the country, including 100 million that are employed in the organised sector.

In order to make hiring easier, the law now prescribes a single licence for staffing firms to hire contract workers across different locations instead of the erstwhile regime of multiple location-specific licences. Besides, it has increased the threshold limit of contractor employees from the earlier norm of 20 to 50.

The occupational, safety, health and working condition (OSH&WC) code also provides for full-fledged surveys on migrant workers, for which the centre will source data from various agencies and states. A National Social Security Board will be set up for formulating suitable schemes for unorganized workers, gig workers and platform workers. It also brings these sections of workers under the ambit of social security schemes that include life and disability insurance, PF, health and maternity benefits and skill upgradation. The code also proposes the formation of a social security fund.

Interestingly, this benefit has been tied to an attempt to delegitimise strikes, which finds a mention in the Industrial Relations Code. Several startling clauses in the code effectively create a legal regime where strikes are impossible and workers will no longer be free to organise or even participate in peaceful strikes. They will be penalised for doing so and the penalties collected will be used to maintain the social security fund.

The simmering concerns

The government has made a strong claim that the laws are pro-worker and will provide statutory protection to unorganized workers. The intention is that these new laws will ensure social security, non-hazardous work conditions and higher minimum wages.

However, scepticism creeps in due to a variety of reasons. Fixed-term contracts, for example, are going to take away all protections from those who can now be given short-term assignments. The informal construction sector that employs the largest number of unskilled workers will also now be free to use labour at will.

Social security protections should have been uniformly applicable to the entire Indian workforce. Instead, we now have arbitrary categorisations that leave millions of working poor out. Only sites that have more than 10 workers will be covered by the law. Also, “personal residential construction work" is excluded and these are the places where a bulk of our unorganized workers find employment and need protection.

The parliamentary standing committee had recommended the removal of the definition of a “wage worker" as it excludes many of those at the margins. However, the wage ceiling to fall within the definition of a wage worker exists and will again be used arbitrarily across states.

Safety at the workplace has been highlighted, but the provisions are extremely weak. Most of our unorganized labourers work in small establishment and in small groups. The safety committee that the new law seeks to put in place will only be applicable to workplaces that hire more than 250 employees. This means 90% of our labour is left out. Also, the liability of the employer in case of death due to workplace accidents is paltry, at ₹100,000. This is in spite of the fact that the workplace in India is extremely dangerous and kills more than 40,000 workers every year. Safety measures, even if they are superficially in place, are appalling. It was important to fix criminal liability on employers who flout workplace safety norms, resulting in death and injury.

Several small firms, which hire nearly 90% of India’s workforce, now have complete impunity in hiring and firing employees. These are firms that hire less than 300 workers. Gig workers have not been identified as unorganized workers, and this category is the most vulnerable.

The categories of self-employed, piece-rate workers and home-based workers are simply not covered under any social security mechanism. Inter-state migrants have found mention in the new acts, perhaps due to the shameful tragedy which unfolded after millions were forced to walk back home due to the lockdown. However, nearly 80% of the country’s migrants are intra-state workers and they find no mention in the new law.

The lesson from states

There is a real-world setting where the effects of some of these labour law changes are already visible, since states like Gujarat and Rajasthan had gone down this path several years ago. The Modi government heralded the changes made by the Vasundhara Raje-led administration in Rajasthan in its 2019 Economic Survey but failed to note the wider impact that these laws have had in the state.

Workers continue to be underpaid, are as vulnerable as they were, and wage rates have stagnated. The state’s unemployment rate steadily went up and is now among the highest in the country (10.6% while the national average is around 7.5%). The most significant fallout has been the increase in the number of contract workers, who account for about 43% of Rajasthan’s organized workforce.

Almost in step with this rise in contractualization, labour productivity has also increased. Therefore, the employers are celebrating. Increase in per capita output without a commensurate increase in wages is after all ideal for a firm as it becomes more competitive.

In Gujarat, the state’s Industrial Disputes Act of 2004 and the SEZ Act exempted the Special Economic Zones from all national labour law stipulations. The Industrial Disputes Act was also diluted and employers could dismiss workers without bureaucratic approvals. This was viewed as being instrumental to Gujarat gaining access to a great deal of private investment, which turned the state into a major manufacturing hub. But apart from these legal changes, the state had also granted fiscal incentives by way of tax holidays, cheap land and other subsidies. It is not clear at all whether it was the dilution of labour protection laws or the freebies which brought in the new investors. It is important to note that Gujarat also saw some serious worker agitations and strikes as the laws got diluted.

The essential point to note is that the scientific literature on labour market flexibility is still not very conclusive. It is true that India’s labour laws were indeed very rigid and did contribute to keeping firm sizes small. However, the answer is to not simply just change the law and do nothing else. It is important to ensure that the state focuses on building support institutions for skilling and apprenticeship, and also guarantees social security and basic incomes. Those measures will mitigate labour market risks which are inherent in any economy’s transition into a modern and formal economy.

Merely tinkering with the laws will neither advance labour welfare nor improve economic activity. Importing laws that are predicated upon the existence of a formal sub-structure on an economy that is based on part-time employment, seasonal work and land parcels owned by the family is set up for failure.

The problem is that our workers are far too vulnerable and poorly paid to be able to afford disproportionate increases in productivity and decreases in real wages. Labour law reform must first address the marginal informal worker who works in difficult circumstances; gets paid lower than even the minimum wage in most circumstances; has no social security and is often rendered unemployed.

The chronology for labour law reform should have been the worker first and productivity and mobility next. Instead, as the Rajasthan case shows, several firms may now show great alacrity in using the flexibility that has been granted to quickly reduce their workforce and get contract employees to work harder and for longer hours. Ultimately, it is indeed the intention of the law that matters more than the words.

The writer teaches development policy at TISS and at ISB in Hyderabad