7 Labour Law Reforms To Boost Manufacturing

7 Labour Law Reforms To Boost Manufacturing

by Muthuraman - Oct 16, 2014 01:23 PM +05:30 IST
7 Labour Law Reforms To Boost Manufacturing

The Economic Times yesterday reports that the Modi government is all set to begin work on labour reforms considered crucial for the ‘Make in India’ pitch. According to ET, as a first step, the PM will kick start this process by announcing a dismantling of the ‘factory inspection raj’ today.

What other things could the government do on the labour law front to make India an attractive and competitive manufacturing destination?

India’s current labour laws—some 400 of them at the last count, including central and state laws – have been a bee in the bonnet of both Indian and overseas investors in the manufacturing sector. The travesty of labour laws of India is that they are too deep (too many laws) and too narrow (covering only a sliver of the working population) thereby ending up neither helping their intended beneficiaries nor making compliance for employers easy.

7 Labour Law Reforms To Boost Manufacturing

What are these reforms? What specific actions can Modi take which could help create a conducive atmosphere for his ‘Make in India’ mantra?

Here are seven specific suggestions.

 1. Remove sector-specific labour laws

Less than 8% of India’s labour force is covered by any of the 400 labour laws currently in force.  Some 26 crore people or roughly 58% of India labour force is employed in agriculture and another 10 crore or 21% in unorganized retailing and construction sectors. None of these sectors are meaningfully covered by labour laws. Even among the remaining 9 crore workers, only a third are in the organized sector – both public sector and private sector put together according to the Reserve Bank of India (RBI). That is 3 crore employees in a country of 120 crore citizens!

Almost all our labour laws primarily protect the interests of these 3 crore organized employees.

To get an idea about the narrowness and sectoral obsession of our labour laws, sample these:  “Working Journalists and other Newspaper Employees’ (Conditions of Service and Misc. Provisions) Act, 1955”; “Payment of Wages (Air Transport Services) Rules, 1968”; and  “Sales Promotion Employees (Conditions Of Service) Act,1976”. Should the government get into micro-managing such sector-specific issues?  While the vested interests in individual sectors have helped perpetuate such laws, many of these laws have actually ended up pushing companies to circumvent these by opting for temporary staff, rather than helping the intended beneficiaries. Doing away with such sector-specific laws that affect a tiny section of the labour force could be among the lowest hanging fruits for the Modi government.

 2. Rationalize existing laws that are intended to achieve common objective

Did you know that as per the Minimum Wages Act, a “Laundry and Washing Clothes (including woolen)” labourer in Tamil Nadu is entitled Rs 346.20 (no, we didn’t make up the 20 paise bit) per day, and “Fountain Pen and Ball Point Pen industry” labourer in  West Bengal, Rs 245 a day?

How much more ridiculous, and micro-managerial can government get? There must be a battalion of government employees working on each sector, for every year, in every state! What a waste of precious tax resources!

Rationalization of the laws that serve a common purpose (in this instance, fixing a minimum wage keeping in mind inflation and living standards) would spare significant time and resources for both government and the employers.

Likewise, the end objective of various Acts that cover Provident fund, Gratuity, Employee State Insurance (ESI) and Pension are the same–providing a social safety net. Can they not be combined into a single meaningful Act?  Similarly, Acts covering child labour ban, bonded labour ban, equal remuneration, maternity benefits, etc. are meant to achieve a common objective – make the workplace a civilized one.  Several such acts be combined and made more meaningful for the times we live in.

Too many laws end up inflating the cost of compliance for employers as well as provide rent seeking opportunities for labour inspectors. This also leads to miniaturization–keeping the number of employees below the threshold requirements of labour laws by floating multiple entities–which ends up depriving firms the economies of scale.

3. Liberalize retrenchment of labour

This is touted as the most contentious of labour reforms.  The Left and allied vested interest groups use the bogey of wide-spread labour unrest if this is implemented in any form. But as I’ve pointed out, there are only 3 crore organized sector employees in a country of 1.2 billion.  How long can we allow 3% of the population to hold the country’s development to ransom?

7 Labour Law Reforms To Boost Manufacturing

Liberalizing retrenchment of labour could be a single biggest reform that will boost the confidence of global manufacturers to set up shop in India.  Even if implemented in phased manner– say upto 15% of labour strength that can be retrenched in any given year – without any prior government approvals, could go a very long way in attracting investments.

 4. The buck should stop with employees of the rolls

Successive governments in the past have passed on their inefficiency in monitoring compliance with labour laws on to the organized sector employers. So, as per the current laws, employers are responsible, not only for compliance of their own labour, but also for those working on contract with them.

The history behind this is interesting. This amendment was brought in when the government realized that many of the employers were circumventing the labyrinthine labour laws by employing less than the threshold number on their rolls and adding additional labour through contractors.  The employers responded by employing such contract labour for shorter durations and continuously churning such contract labour. In this never ending cat-and-mouse game, the real casualty has been skill development of the casual labour due to the frequent churn.

The responsibility of compliance for contract labour is too onerous which no employer is ready to take, forcing the use of multiple small contractors leading to further miniaturization.

A simpler solution is fixing responsibility on employers for only those employees on the rolls, and simultaneously improving compliance standards through simplified labour laws.

 5. Contribution towards training and redeployment

The larger purpose of the mother of all labour laws – Industrial Disputes (ID) Act 1947 –is to prevent indiscriminate “hiring and firing” of labour, which could cause serious economic and social difficulties for blue-collar workers who may not have the necessary skills and expertise to find alternate employment.

This is a genuine concern, but the ID Act has miserably failed to address this effectively.  More often than not, large scale industrial disputes have ended up in lock-outs and eventual bankruptcy of the companies, due to inordinate delay in resolution of such disputes. This is a classic case where the cure is much worse than the disease itself.

A much larger economy with a wider employment base provides alternate mechanisms to address the concerns of retrenched labour.   There is also an acute shortage of skilled labour across sectors and geographies.  These two factors can be combined to create an effective solution in the form of a Skill Development Plan.

Employers can remit a certain contribution to a fund, to be administered independently, for training and redeployment of retrenched labour. The contribution can be linked to the number of retrenched labour, akin to an insurance policy contribution. Such contributions can be utilized towards imparting vocational and technical skills for retrenched labour, by co-opting private sector training and educational institutions.

The key to the success of such an initiative is the creation of a new independent body for implementation, with identified source of funding (such as NHAI, which is a runaway success compared to its predecessor, CPWD despite both being run by babus!).  Existing archaic institutions such as National Productivity Council or employment exchanges have miserably failed in meeting such objectives.

7 Labour Law Reforms To Boost Manufacturing

 6. Create a new, transparent and efficient dispute resolution mechanism

One of the vexatious issues for employers is the inordinately long legal process involved in dispute resolution. The Industrial Disputes Act and its accompanying machinery are too archaic and overloaded to handle the modern day disputes.

Large scale reform of the existing dispute resolution mechanism, with time bound disposal of disputes and provision for alternate resolution mechanisms (such as arbitration) are the need of the hour.  Experience in other sectors proves that new independent institutions such as the Telecom Regulatory Authority of India (TRAI) and the Central Electricity Regulatory Commission (CERC) with necessary powers and staffed adequately can function better.

A track record of timely resolution of labour disputes has a host of tangible benefits including effective redeployment of labour within useful working life of the affected persons, absence of frivolous disputes, dismantling of the inspector raj  and also minimal deterioration in value of assets to recover worker dues (in the event of bankruptcy or liquidation).

7.  Compensation based exclusion

Most of the labour laws today make the distinction between industrial labour and others. It is the employers of the former who bear the brunt of these Acts. Thus, today, an industrial worker earning Rs 75,000 a month at Maruti Udyog enjoys a protective net that an IT employee with one-third his salary does not.  So, it’s hardly surprising that India could make big strides in the IT (and other services) sector globally, but remains a minion in the area of manufacturing. This anomaly can be easily addressed by making the exclusions based on compensation, rather than based on the sector or industry.

Labour laws should be modified to exclude those who earn above a certain threshold compensation level (say Rs 25,000 per month), and at the same time include all those below the threshold, irrespective of the sector. Such targeted regulation will ensure that the Act is aimed at protecting only those who deserve such State protection and not misused by qualified technical labour.

India has suffered for far too long under the labour laws devised during the socialist era.  They have long outlived their purpose.  The unintended side effect of these all-pervasive laws is that, many corporates are relocating their manufacturing setup in more investment-friendly countries despite India having world’s youngest and largest work force.  If some of these labour reform measures are implemented, ‘Make in India’ will not remain a pipedream.

N Muthuraman runs Riverbridge, a boutique investment banking firm. He was formerly the director of ratings at CRISIL, India’s premier ratings firm
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