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Photo: PTI
Photo: PTI

Opinion | India needs labour law reform but must do it the proper way

The attempts of states to change laws without debate and in wrong areas could evoke opposition even to genuine reforms

For years, economists, including your columnist, have been crying hoarse about the failure of successive Indian governments to reform laws and regulations that govern factor markets — land, labour and capital — but especially labour. These are the so-called “second-generation" reforms — the “first generation" reforms, of markets for goods and services, having occurred with India’s economic liberalization in 1991 and continuing in spurts through the early 2000s. Pointedly, the Manmohan Singh-led government (2004-14) failed to pursue any meaningful reforms during its two innings in power.

The Narendra Modi-led government, in power since 2014, did accomplish some important reforms, but they have steered clear of any serious attempt to reform labour laws. Perhaps, as I have earlier suggested, its disastrous experience with attempting to reform the land acquisition law, early in its first term, soured any appetite it might have had for such reforms. And, before defenders of the government begin to protest, let us be clear that consolidating and codifying a large number of different labour laws and regulations under a smaller number of statutes is not structural reform in any meaningful sense. It is, at best, an administrative reform of a type that the Modi government has excelled at.

As with many other aspects of life, the current covid-19 crisis has thrown India’s settled political economy of reforms into turmoil. Several important states, most notably Uttar Pradesh (UP) and Gujarat, are attempting to reform labour laws in their respective states via the ordinance route. Under these proposals, many key labour regulations would be held in abeyance for a period of three years in the hope of enticing both domestic and foreign investment with the carrot of lax labour rules.

Understandably, these announcements have raised the hackles of labour unions—some, no doubt, politically motivated—and objections have been taken to the International Labour Organization (ILO) as well as the Union labour ministry. The ILO has noted its concerns, and even the labour ministry has reportedly expressed scepticism.

Be that as it may, does this approach make sense? Unfortunately, the short answer is “no". This avenue to reform is flawed in several important respects. For one, the fact that these lax labour rules have a three-year sunset clause is likely to deter serious investors. Why would a firm make a large investment in brick-and-mortar production capacity, which would take a few years to turn a profit, when apparently favourable labour conditions will disappear soon after that?

Second, and perhaps more important, relaxing labour laws that make it easier to hire and fire workers—something that various economists who have analysed the Indian situation support—must not be conflated with abolishing occupational health and safety regulations, arbitrarily raising working hours, or impinging on the ability of labour unions to bargain fairly on behalf of their members. Relaxing labour laws cannot be an alibi for returning to work conditions that existed in the era of bonded labour but ought to have no place in a civilized society. What is more, attempts to make these changes via the ordinance route erodes any democratic credibility they may otherwise have enjoyed.

Not only are states such as UP and Gujarat unlikely to benefit from temporarily relaxed labour rules—if they even pass muster with the Union government, which seems decreasingly likely—the whole exercise, unfortunately, is sure to tarnish the case for much-needed labour reforms, even if done the right way. Ideologically driven opponents of even sensible attempts to relax the most egregiously restrictive of India’s labour laws will now point to dubious experiments in UP and Gujarat as evidence of the nefarious intentions of economic reformers and technocratic-cum-autocratic politicians who pay heed to them. The inevitably unsavoury associations will make it that much more difficult to push genuine and sensible labour reforms at the Centre, and will make an already diffident Union government even more reluctant to grasp the nettle of politically difficult structural reforms that India needs.

All is not lost, however. If the Union government rejects the UP and Gujarat ordinances, these states—as well as others—will have the opportunity to attempt labour law reform the right way. This would involve democratic consultation with stakeholders, or, at the very least, an attempt to promulgate amendments to the relevant state legislation—which will have to be debated and voted on in state assemblies—and seek central approval the conventional way. It is far better, in the long run, to invoke public reason as a rationale for reform, rather than forcing through changes that have been little debated or discussed via the midnight route of ordinances. Not only does the latter approach lack democratic legitimacy, it runs the risk of throwing the baby out with the bath water, and eliminating legitimate worker protections, in its zeal to entice investment by relaxing more onerous and less sensible labour regulations.

Needless to say, if legitimate attempts to reform labour laws bubble up from the states in this way, Modi, whose mantra has been cooperative and competitive federalism, should embrace them and the Union government should quickly give them a nod. And, if a few states pursue such reforms and are rewarded as a result—as, indeed, a few did early in the Modi government’s first term in office—then the demonstration effect may encourage other states and the Centre, too. This is the right way to go about labour reforms.

Vivek Dehejia is a Mint columnist.

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