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(Photo: Mint)
(Photo: Mint)

Opinion | Labour law reform experiments that could show us a path ahead

Changes in labour rules by some states could help us understand how to improve policy elsewhere

It is fascinating to see the reactions to a slew of seemingly radical reforms that a few state governments have announced. Uttar Pradesh, Madhya Pradesh and Gujarat have announced relaxations in the application of many labour laws for businesses over the next three years. A newspaper that did not put these announcements on its front page took care to put the response of labour unions on that page. Several editorials have cautioned against diluting protection measures for labour. It has always been hard to experiment with reforms in India. Critics, however, seem appear unwilling to see many of these as policy experiments that can be tweaked based on experience and evidence. Nor do they seem ready to ask counterfactual questions. They also appear to lack an appreciation of the context.

India had a relatively disappointing last decade in terms of standard economic parameters: economic growth and employment rates. The decade of the 2020s has begun on an even more ominous note. There is an overhang of financial-sector problems, a legacy that originated in the previous decade. Household saving rates have declined and capital formation in industry is languishing. Employment generation is too weak to generate hope and fulfil aspirations of our youth demographic bulge. The risk of another lost decade is non-trivial. India’s factor markets have long eluded reforms. Bold thinking is what’s needed now.

The National Democratic Alliance government that took office in 2014 attempted to improve the onerous and impractical Land Acquisition Act of 2013, but gave up in the face of political resistance from within and without. Similarly, it had the right intentions on labour reforms, but had to confine itself to token measures. An all-party consensus would have served India well and would serve us well even now. But that is a tough ask, as it takes two hands to clap. Therefore, the only option left to the government is to use perceptions of a serious economic crisis to undertake far-reaching reforms and then observe how they play out. This is not very different from what reformers did in 1991.

Most of the reforms that need to happen, barring financial sector reforms, are the responsibility of states. Whether it is electricity generation or distribution, water distribution and pricing, reforms of school education to improve outcomes, or labour and land reforms, all of these are substantially in the hands of state governments. In such a situation, if some states take seemingly radical measures and other states do not, it actually provides a good setting for a controlled experiment. It will give rise to a rich body of evidence that can be deployed to improve policies in the same states, or elsewhere.

We had comprehensive protection for organized-sector workers in our statute books all these years. What is their record? India has one of the world’s highest proportion of informal workers. Commentators question the record of Chapter VB of the Industrial Disputes Act, which applies to industrial establishments employing not less than 100 workmen, in holding back job creation. In other words, with the bulk of India’s establishments employing less than 100 workers, the implicit message is that this ceiling did not act as a binding constraint.

Two responses come to mind. One is that the impact of policy is often asymmetric. Indeed, that is the default effect. The repeal of the said provision may not immediately lead to employment generation because other hurdles remain, but its existence would surely retard job creation. That is what asymmetry is all about. That calls for a comprehensive approach to labour law reforms, instead of a piecemeal one.

The second question to ask is whether rigorous empirical evidence is demanded of other policy changes. India enacted a law on land acquisition in 2013. What is its record? Has it facilitated land sales at better prices, or has it dampened transactions? If it was meant to improve the lot of farmers, then why did so many farm loan waivers have to be given, and why do so many farmer suicides continue to take place? Of course, many other variables impinge on their condition. That is precisely the point with respect to the amendment of the relevant section of the Industrial Disputes Act. It is possible that a weak State compensates for poor execution with stringent rules on the book. It is sensible to have fewer laws and implement them more effectively.

The law of unintended consequences has blighted India’s many seemingly well-intentioned policy decisions in favour of the poor, the marginalized, and micro and small businesses. These have been condemned to the status quo. Not so long ago, the leader of a leading labour union said that companies which earlier needed 100 workers could now operate with just 20 to 30 due to mechanisation; and hence, the Chapter VB threshold should be lowered.

Intelligent Indians should worry about such attitudes and logical absurdities, rather than wailing over the recent reform measures adopted by a few states. We can hold their feet to the fire when needed, but we would do well to cheer them too. Otherwise, the quality of governance would be as sloppy as the criticism levelled against it.

These are the author’s personal views

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