Labour Reforms in India

Ram Rattan Sharma
To exploit the demographic dividend, India needs to meet the growing needs of those entering Labour force. Labour regulations have been reported to be significant barriers to growth and employment generation. They have been called regulatory cholesterol holding up India’s real economic potential. India has been advised to give top priority to the issue of Labour reforms by the chief economist, World Bank .  Economists have been arguing that India has a large number of Labour laws, which at times, create confusion, beside the country has moved very slowly in the areas of reforming laws. The Government of India has committed to Labour reforms in the first as well the second generations of the economic reforms process.
But various Governments have not been able to affect the kind of Labour reforms which are required by the developing economy. Again there are many areas where the Governments have not been able to even start the process. The industrial communities together with workers trading in  small and medium enterprises have been complaining about the urgent need for Labour reforms in India. Experts and economists have pointed out many areas where the non conducive, contradictory and outdated Labour laws have been hampering the cause of faster growth of industries and enterprises in the country in more than one way. As per the World Bank a careful review of the actual effect of Labour policies in developing countries yields a mixed picture. Most studies find that impacts are modest certainly more modest than the intensity of the debate would suggest. If Labour laws really constrain firms they would respond in predictable ways.
The increased use of capital intensive techniques is reflected in a steeply rising capital/ Labour ratio for the organized economy. This raises the obvious question: whether it is justifiable for a relatively Labour abundant country like India with low wages, to be increasingly resorting to more capital intensive technology. Countries would use more capital per worker as they get richer but the capital intensity is higher and has increased at a much faster rate for large firms than it has for small firms in India even while they have created fewer jobs. India’s Labour regulations have been criticized on many grounds including their sheer size and scope, complexity, and inconsistencies across regulations. There are 45 different national and state level Labour legislations in India. The Labour laws apply only to the organized sector as the size of the factory grows, it increasingly becomes subject to more legislation. A few specific pieces of the legislation are particularly constraining. According to chapter VB of the Industrial Disputes Act, it is necessary for firms employing more than 100 workers to obtain permission of the state Government in order to retrench or lay off worker,   Section 9A of the Indian Dispute Act lays out the procedures that must be followed by employers before changing the terms and conditions of work, which introduces additional rigidities for firms in using their existing workers effectively in particular, worker consent is required in order to modify job descriptions or move workers from one plant to another in response to changing market conditions. Indian Labour laws have been hampering different sectors of the economy in a big way. Agriculture sector is being hampered the most due to the absence of the requisite Labour laws. In the year 2000, Government of India announced some major changes in this sector-gave it the categorization of industry allowed contract and corporate farming etc. But the sector has failed to attract any big investment either as corporate or contract. Experts blame the Labour laws of the country for this. In addition to the smooth, transparent and hassle free land acquisition and contract/lease laws, the most important ingredient that the country lacks is the right kind of Labour laws. Though  recruiting Labour is not tough in India, it is tough to retrench. Farming being a seasonal activity, requirement of Labour fluctuates according to the seasonal variations in farm practices. Labour inclined Labour laws of India deter corporate investment in the sector – whether they enter as corporate farmers or contract farmers, the same Labour laws will apply.
Industry:  A rapid expansion of the manufacturing sector has been a key element of the growth experience of successful developing countries, especially Labour abundant ones. In this context, the Indian manufacturing sector exhibits many peculiarities. It contributes a rather small and stagnant share to GDP; its composition is more skewed towards skill and capital intensive activities compared to countries at similar levels of development, only a small share of employment in manufacturing is in the organized sector accounted for almost 70% of total manufacturing employment in 2009-10 and employment is heavily concentrated in small firms. The degree of concentration is much higher than in other Asian countries.
Services: Most of the service sector enterprises in India are in smaller or medium scale category, the non conducive Labour laws of the country not only discourage them from expanding in to big scale enterprises, they also do not provide them any encouragement to recruit labourers formally. This is why most of these units are managing their activities with the help of informal labourers. This not only hampers the growth and development of these industries, it also breeds high level of uncertainty of job among the informal Labourers.
In India reforms are typically implemented only after they have been subject to a lot of debate and after some kind of political consensus is reached on them. It is therefore imperative that consensus building on Labour market reforms should start soon. It may take time to make polconsensus for fundamental reforms. In the meantime time, states could be allowed more flexibility to experiment without coming into conflict with central statues. Rigid labour laws are determined to be the key constraining factor in the creation of productive jobs. Existing permanent workers can continue till retirement with their privileges left untouched. The remaining  workers could be encouraged to move into contractual employment that can be terminated but which gives the workers some protection –  Recent times have seen more determined and patient attempts of labour reforms by the Government at the centre. Government’s moves towards labour reforms are faced with increased opposition from the trade unions and the pol parties. Several good moves have come in this regard such as arrangement of health insurance for the labourers of the unorganized sector, pension schemes, amendment in the apprentice ship law, launch of the unified labour portal, employees insurance scheme, digitization of the EPF, changes in the bonus laws and reforms related to employment benefits of the contract labourers being the major ones.  Job security has been a thorny issue in other countries, too. It is believed that in the absence of certain degree of safety net available to the workers enacting the right kind of labour reforms will be quite detrimental   to the socio pol conditions of the country. Taking clues from the global experience experts suggest the Government to first put in place an effective bankruptcy law and unemployment benefit schemes for the workers.
(The author is  former Dy Librarian University of Jammu)
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