The future appears bleak, given the lack of new investments, the rise of automation, the near stagnancy of manufacturing activity and a rising trend in hiring contract labour in the formal economy. (Photo: Bloomberg)
The future appears bleak, given the lack of new investments, the rise of automation, the near stagnancy of manufacturing activity and a rising trend in hiring contract labour in the formal economy. (Photo: Bloomberg)

Why India’s labour is rejecting a new deal

  • The labour code expands basic social safety net coverage, but curbs unionizing and strikes. Not everyone is happy
  • If the govt wants to make a headway, it has to ensure that workers are convinced that the reforms will improve their lot. The unanimous feeling is the Centre only cares for the employer

HYDERABAD : Labour reform was a big promise that Prime Minister Narendra Modi had made in the run-up to the parliamentary elections in 2014. In the first six months of its previous term, the Modi government brought in employees’ provident fund number portability, enabled self-certification by firms and altered the Apprenticeship Act to help train greater numbers on the job floor.

However, very quickly, and because of significant resistance from its own trade unions, the party in power had to give up its attempts at serious changes in labour laws. With a formidable majority in 2019, labour law reform is now back on the agenda, primarily because it is one of the unkept promises that the Prime Minister himself had made. The other reason is that private investment has stalled and the corporate sector repeatedly underlines archaic labour laws as a major impediment.

Labour itself is unsure of the new moves. While some of the proposed changes are progressive, others appear heavily loaded in favour of employers. The broad strategy seems to be a carrot-and-stick approach: extending minimal social protection to informal workers, even while making strikes and unionizing difficult for all workers.

More than 90% of India’s labour force works in the informal and unorganized sector. Unemployment, both for the unskilled worker and the educated youth, is at a 45-year high. Most importantly, the future appears bleak as job losses are imminent, given the lack of new investment, the rise of automation, the near stagnancy of manufacturing activity and a rising trend in hiring contract labour in the formal economy.

In this context, the proposed reform and consolidation of labour regulations raise several important questions. What exactly is the big new idea to resolve the inherent tension between minimal rules for businesses and an adequate social safety net for workers? While the jury is still out on the likely impact of the proposed changes, the intention of the government is unclear. There is acute mistrust among most stakeholders. Is the government doing this to please the business lobby or does it have the best interest of the workers in mind? The major question is why is there no discussion on this issue in public policy circles?

Vulnerable workers

Unemployment rates touched an unprecedented high of 10% last year, according to the Centre for Monitoring Indian Economy, even as a third of the educated remained unemployed. Unemployment is at an all-time high, even according to the government’s own surveys, which have been released after attempts to suppress the findings.

Those who are employed are also suffering on many counts. Wage increase is at its lowest. While the corporate sector will see wage hikes of nearly 10% this year, the agricultural labour market saw a drop in real wages for the first time in recent years. Despite all this churn, there is little discussion on jobs, wages and real earnings. Are we effectively increasing the vulnerability of labour in India?

Traditional social protection came to the Western world during times of broad-based economic growth and a faith in the logic of “jobs for all" and “jobs for life". Social insurance schemes, minimum wage laws, trade unions, bonuses, wage increases, medical cover, unemployment allowances, pension schemes and provident funds covered almost all types of risks.

In India, these forms of protection have been available only to less than 10% of the workforce, which is employed with the formal private sector or work for the government. A vast majority who work on farms or in small enterprises are left uncovered.

A large number of Indians lie at the margins and can easily slip back into poverty when faced with even a single contingency. The number of people who slip into chronic poverty due to one episode of illness, for example, is more than 55 million a year. Loss of jobs and price rise are also significant causes of poverty in India, especially in urban centres. Migrant labour, gig economy workers, taxi drivers and house helps are typically very vulnerable to shifts in economic growth and can lose jobs almost immediately as economic growth slows down. All this, and more, is what we are witnessing in India’s labour market today.

The proposed reforms

The idea now is to take the 40 different central labour laws and 100 state laws, and merge them into four codes. The central government has the ultimate say in this regard as labour is in the concurrent list in the Indian Constitution. The first of these proposed new codes will regulate wages; the second will define industrial relations; the third will look into occupational safety, health, and working conditions; and the fourth, most importantly, will regulate social security. The broad goal is to improve and ensure ease of doing business in India.

The four codes have been drafted and put out in the public domain for a while now. The three codes on wages, industrial relations and occupational safety have ensured that employers get a sense of heightened ease of doing business. However, the impact on the worker is uncertain. Trade unions, including the ones closely associated with the governing party’s ideological parent Rashtriya Swayamsevak Sangh, have vociferously declared their opposition.

The fourth code on “Security and Welfare" clubs 15 central laws together and governs provident funds, pensions, leave encashment and medical benefit. It aims to cover all workers, including part-time, casual, fixed-term, domestic, and home-based ones. It is indeed a great move to include the informal economy but there was no need to take away the jurisdiction of states to make locally suited tweaks. By tinkering with the powers of the state on all factor markets, the central government has created an automatic opposition for any changes that it proposes.

States have a right to customize and localize interventions because nascent labour law reforms have already catalysed large-scale contracting and this has ensured—as per the National Sample Survey Office data in 2011—that the share of contract labour in organized manufacturing was 34%, while it was 14% in 1996. Where does this then leave the labour force?

Firstly, the government has already sent a signal by reducing its expenditure on the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). There are also doubts being expressed regarding an increase in spending on insurance premiums, health benefits and direct cash transfers. Secondly, the new codes have seriously altered key definitions—of workman, employer and wages. The Centre will also administer a country-wide minimum wage, redefine what is a legitimate strike or shutdown and draw up a new role of trade unions.

Workers have a reason to feel vulnerable. Under the changes envisaged in the Industrial Relations Code, only firms that employ more than 300 workers need government approval to fire its staff (revised upwards from the earlier limit of 100 workers). Strikes are on the way to getting almost banned, with strict provisions on notice periods and harsh penalties for defaulters. Minimum wages will now be revised only once every five years, and the code is also rather vague on interstate differences and on payment for overtime work.

New and unique challenges

In the current context, there are a number of challenges that the social protection debate must focus on. Firstly, there are huge problems due to increasing inequality and regional differences in paucity of work and employment opportunities. Bihar, for example, has a workforce participation rate (share of those in the working age group actively seeking a job) of less than 28%, while Andhra Pradesh is at 52%. Minimum wages in Tripura are at 40 a day, while they are upwards of 300 a day in Kerala. Medical cover makes sense in Himachal Pradesh and in Tamil Nadu where district hospitals work well and provide good quality care. In Uttar Pradesh and Madhya Pradesh, with patchy healthcare facilities, any amount of health cover does not help.

Sustainable solutions

The problems are largely known. It is time to look for solutions, and look beyond the code that the government has put out, where necessary. There is now an all-round acknowledgement on the need for strong reforms in all factor markets. India’s labour, land and capital markets remain hugely shackled.

If these three are to be ranked, it is quite clear that need for labour market reform heads the list by a mile. It is inflexible and responsible for the poor labour mobility that industry constantly complains about.

It is important to first realize that the new economy is not going to generate lots of low-skilled jobs for millions of reasonably skilled and educated youth. Automation, robotics and machine learning will replace labour even as manufacturing shrinks and the services sector takes over. While the highly educated and those with an education in the arts will thrive, employment for the large majority is going to be redefined, to say the least. Therefore, a new responsibility for the state emerges, not one where jobs are created, but where those who cannot find jobs are protected too and taken care of.

In India, we have never been able to create enough quality jobs as the manufacturing sector could not grow beyond contributing a fifth of the gross domestic product (GDP). There was a time when an increase of 2% in GDP would see an increase in employment of 1%, exactly as explained by a widely used principle in economics called the Okun’s law. However, Okun had also said that for unemployment to constantly decline, the economy must grow to its potential. The Indian economy, with low private capital investment and an inexplicable reduction in demand, has been growing at a rate far lower than its potential.

That adds to the problems which began when two-thirds of GDP started coming in from the services sector, which employs less than 30% of the workforce.

The answer clearly lies in understanding that the new workforce will need strong and sustained support. Sikkim has already started a universal basic income for its citizens. The Telangana government launched its much-acclaimed Rythu Bandhu scheme, through which six million farmers get 5,000 per acre, twice a year, for the rabi and kharif seasons. The central government has announced the Pradhan Mantri Shram Yogi Maan-dhan, a pension scheme for unorganized workers . It also runs the Atal Pension Yojana and the new health insurance scheme Ayushman Bharat. The direction in the future will have to be towards social protection schemes that exist independent of the payroll and do not assume steady employment, which was the case earlier.

Given that labour reforms, in some form, will be pushed through Parliament very soon, the responsibility of providing social protection to vulnerable workers lies on these job-delinked innovations that rely on investments in the capital market, on private providers and on large contributions from the state.

What needs to be understood is that an economy which shows increasing inequality, poor economic growth and an underperforming education sector must relentlessly innovate on its large cash transfer programmes, on the public distribution system, on schemes like MGNREGS and on new ideas like negative income taxes. All of this should be done even while ensuring that the old problems of leakages are solved bit by bit.

Ultimately, a sustainable solution to labour law concerns will only come when the government is able to convince workers and unions of its intent. It will have to also simultaneously convince the corporate sector that rigidity in legislation will not come in the way of the ease of doing business.

The new laws should not be seen as making it easier to bring in a hire-and-fire policy. If the government wants to make any headway, it has to ensure that the worker constituency is addressed first and convinced that the reforms will improve their lot.

Right now, the unanimous feeling among labour is that the government only cares for the employer. Till this impression is turned around completely, there will be no lasting solution.

Amir Ullah Khan teaches economic policy at the Indian School of Business and the Nalsar University of Law.

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