Long Time Coming: A Modern Labour Code

The Lok Sabha on Tuesday passed three labour codes — namely the Occupational Safety, Health and Working Conditions Code, 2020, the Industrial Relations Code 2020 and the Code on Social Security Bill, 2020. These changes reflect the changing nature of employment and were indeed necessary for India to improve its share of manufacturing activity.

To put things in perspective, any Indian economic development course taught at either the graduate or the undergraduate level discusses reforms, including some that happened in 1980s, the 1991 reforms, the reforms that happened in late 1990s and early 2000s — and that is where the discussion shifts to pending reforms — namely APMC, land and labour amongst other few.

There was an attempt at land law reforms in the previous tenure of Narendra Modi government that unfortunately did not materialise.

However, a lot has changed since then as we have now witnessed APMC reforms and labour reforms — interestingly, both in the same parliamentary session.

The government has definitely recognized, and followed the saying ‘never let a crisis go waste’ in true letter and spirit as it has used it as an opportunity to push for some of the most politically-sensitive reforms.

The problem with India’s old labour codes was that they were too many laws with too many inspections and little flexibility for businesses.

One of the most discussed laws that dampened large-scale economic activity in India was the Industrial Disputes Act. The act required private companies to take permission from the government before retrenchment of workers.

This was originally applicable on companies with more than 300 employees — but was subsequently reduced to firms with more than 100 employees.

These rules often incentivised companies to remain small — and thus, inefficient which resulted in India missing the manufacturing bus.

The new code on industrial relation restores the condition back to 300 employees, thereby granting some flexibility to small and medium manufacturers.

However, ideally, the provision itself should have been removed.

Nonetheless, the fact that it took decades to reverse a bad decision on a particular provision of a labour code illustrates the political difficulty of such reforms in the first place.

The key point here is that under the new law, if companies with more than 300 employees do file for approval before retrenchment and authorities do not reply, then their request will be deemed to be approved. Thus, the onus is on the government to deny rather than on the company to obtain the approval.

Moreover, the new industrial relation codes also views the issue of worker strikes and mandates that instead of the previous two weeks, now workers will need a 60-day strike notice.

Moreover, they will have to wait for 60 days after the conclusion of proceedings before a tribunal or National Industrial Tribunal. This will overall discourage flash strikes for all industries and not just for critical areas such as public utility services etc.

Moreover, the new code also leaves the provision for states to further undertake labour reforms and exempt any company, or companies (or sectors) from complying with one or more of these labour laws.

This will be critical as it gives states a much-needed provision to alter their labour laws with the intention of attracting investments as supply chains reorient themselves over the coming quarters.

That these reforms are needed was a given as India attempts to seriously make an aggressive push for attracting supply chains. The motive here is to attract investments and allow for a gradual shift of surplus labour (and land) from low productive primary sector towards manufacturing sector.

The process will be one that will create several positive second- and third-order effects.

The other provisions in the three laws are more tuned towards strengthening the rights of employees while also providing employers with flexibility thereby balancing the interests of the two.

This is important as we cannot allow for suppression of labour and their wages as in other countries, including China. Such a strategy is neither ethically correct nor politically feasible nor economically viable over the long term.

While there could be stiff opposition from certain political parties on these provisions, it is important to recognise that experts, economists, and government committees have advocated for them for decades.

More importantly, the key problem of small and inefficient firms renders the dream of a manufacturing revolution an unrealistic one as we need large firms to be able to create the kind of employment needed to utilise our demographic dividend.

The proposed changes in the law are an attempt at precisely the same as government attempts to create a framework which gives businesses the necessary flexibility in wage contracts and enables them to scale their operations over a period of time.

The central government has clearly done its bit by undertaking these changes — one hopes that the states will be willing to take the next step and further relax these norms and allow for a vibrant private sector to flourish.