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The economic fallout of COVID-19

Are India’s labour laws too restrictive?

For employers, availability of skilled workforce and worker-management ties are more vital

May 15, 2020 12:05 am | Updated December 04, 2021 10:34 pm IST

Getty Images/iStockphoto

Getty Images/iStockphoto

Some State governments including Uttar Pradesh (U.P.) and Madhya Pradesh (M.P.) have proposed ordinances to exempt manufacturing establishments from the purview of most labour laws. In a discussion moderated by Suresh Seshadri , Amit Basole (Associate Professor of Economics, Azim Premji Unversity, Bengaluru) and K.R. Shyam Sundar (Professor of Human Resource Management, XLRI, Jamshedpur) look at the backdrop for this move and consider what lies ahead for the country’s labour and industrial relations. Edited excerpts:

Are the ordinances justified given the need to both preserve and create jobs in the wake of the COVID-19 crisis?

K.R. Shyam Sundar: First, let me express my profound sense of shock [at the] changes or even disruptions that M.P. and U.P. governments have introduced on the pretext of creating employment and attracting investment. This is a very dangerous kind of political legitimacy that has been invoked.

There are three issues here. The Constitution provides a number of basic rights, and, under the directive principles of state policy, a number of assurances. Now, the kind of changes that have been made, they potentially will hurt, will dis-enable the realisation of the constitutional objectives. Second, the facility of the concurrent subject has been abused. And, we should bear in mind that the national codification and the labour law reform process is on. What is the unholy hurry on the part of the State governments to do this? But, I have an explanation: given the COVID situation and the national lockdown, the trade unions that are already weak cannot mobilise their forces and conduct any kind of a State-level or national struggle. This is a clear case of vulnerability, which the state has exploited.

Now, whether the labour laws constitute rigidities, the answer, in a cautious sense, is ‘indecisive’ because there are research studies on both sides. The World Bank survey, 2014, asked employers... and the employers did not rate labour law regulations as [among] the top five or seven or 10 irritants. For them, the availability of skilled workforce and cooperative labour-management relations were far more important than flexible labour laws. So, the gravest implication of these labour laws [changes] is that it will create industrial discontent, even a kind of labour unrest, which will stifle any hope of achieving industrial progress. And, employers will not benefit because these provisions will hurt labour welfare and thereby labour efficiency.

Amit Basole: One must remember in all of these discussions that India still remains, what economists call, a labour-surplus country. Particularly at the lower ends of the labour spectrum where less education is required, there is usually an excess supply of labour which gives more bargaining power to employers. So, the responsibility of the state in such a context is to safeguard the interests of labour through legislation because the market does not give them the necessary protection.


Second, on the question of how they act as constraints or barriers: of course employers will always want to have a freer hand in managing labour relations, setting wages, conditions and so forth. That just follows from the nature of the capital-labour relations. That does not mean that the state should allow them that free hand. Will employers hire more workers if they are given a freer hand? Possibly, if certain other conditions are also met. [If not], there is no reason to believe that labour laws by themselves will do anything to improve job creation.

Of course, they will make working conditions worse, and life worse for workers. But, on the plus side, will you get any benefit out of a total increase in employment? That is not clear. The well-known things that act as constraints on job creation [include] the overall health of the economy, the level of demand in the economy. What is people’s purchasing power? Are their wages rising or not? What is the stability of the business climate? Is the state trusted by businesses, small and large businesses, to deliver on its promises? What are the export conditions like? Is the government following a consistent policy, sending out the correct and consistent signals on what it wants to promote and what it doesn’t want to promote? All of these macro policies, industrial policies, trade policies govern the climate of job creation, in addition to the overall health of the economy. If none of that is in place, a simple tweaking of the labour laws basically worsens working conditions and doesn’t achieve much else.

Was lack of flexibility an issue retarding manufacturing and job creation even before the pandemic?

Amit Basole: There is also an issue of diversity of employers when we talk about manufacturing. We’re talking about some very large companies. We’re talking about small and medium companies, we’re talking about very small workshops also. And they all experience the government and the labour regime differently. It is certainly possible that at the lower end of the manufacturing spectrum, the labour laws have been arbitrarily and extortionately imposed. There is always a possibility that bribes can be extracted in the name of labour laws not being covered, making life difficult for employers, which creates incentives for them to double book, keep workers off the books. So, do the labour laws act as a constraint on good job creation? In this particular sense, yes, because they do incentivise some employers to evade showing workers on their books, for fear that even if they’re following laws, the state may come down on them on some pretext or the other.


Now, to use that to extend it to the entire manufacturing sector, to vastly productive industries, to large-scale manufacturing, where we know that the labour share of income has been precipitously declining, productivity has been rising, over there can we continue to use the labour laws argument to give this bigger and bigger contract labour force, create precarious working conditions and widen the rift between wages and productivity? We shouldn’t be doing that. There, we are creating, actually, macroeconomic problems for the country in addition to making working conditions worse. So, there has to be a little bit more of a nuanced understanding of where exactly labour laws are a constraint and what can the government do to make life simpler there, while not going beyond a non-negotiable floor.

Industry is reported to have urged the Centre to mandate the return of workers and warn labour of penal consequences. Is this implementable and what does it bode for employer-employee relations?

K.R. Shyam Sundar: The state and the employers could ask the employees to report for work, only if two conditions are met. Given the imposition of lockdown and suspension of public transport, there must be enabling conditions like resumption of public transportation or private provision of transportation by the employers... [Second] COVID SOPs [must be] effectively implemented at the workplace because the workers could withdraw from a potentially hazardous workplace. And third, there must be work. If these three conditions are satisfied and still the workers do not report, action can be taken against them, as per the company rules or agreements or the standing orders under the Industrial Employment Standing Orders Act, 1946. But, the workers should be given a fair hearing.

Do these ordinances risk compromising workers’ rights, including safety?

K.R. Shyam Sundar: So, the professed objective of ensuring occupational safety and security may not be realised for primarily two reasons. Both [ordinances] have frozen the conditions of work like lighting, temperature, dust and fumes and brightness... and there is every incentive for the employer to ignore [these conditions] given the labour market opportunistic behaviour. And these may lead to unsafe working conditions. Second, the extension of working hours. It is well known that long hours of work, repetitive work... deficient conditions of work, pose a considerable threat to occupational safety and health.


One justification spoken of is the need to make India a more attractive destination than China for setting up manufacturing plants.

Amit Basole: Regarding competitiveness with respect to labour, it is true that a race to the bottom is a general accepted principle. It is ironic in a way in the globalisation period, that countries compete on low wages, and primarily on that sort of labour element, particularly the labour-surplus countries. But that said, those are again never the only factors when investment decisions are considered. Almost always, the overall business climate, the reliability of the state and its policies, the infrastructural situation, electricity supply, logistics and transport, the quality of labour and the skill of labour, human capital issues. All these things matter as much, if not more, than the level of wages and the laxity, or lack thereof of the labour laws. So, if we don’t do anything on the other fronts, and only expect that somehow, with the stroke of a pen, diluting labour laws will magically bring in investment then we are very sadly mistaken.

Given that job creation is crucial and that trade unions have been weakened, what lies ahead for our labour force?

K.R. Shyam Sundar: During the financial crisis when the trade unions were taken into confidence by the employers, the trade unions were willing to offer concessions in terms of deferring increments, agreeing to regular overtime wage rate, or to work on a Sunday or to have some kind of structured lay-off systems. So, instead of making macro-level, uncalled for interventions, which are draconian, the governments should have held social dialogue and asked the trade unions: “Look these are difficult times, we need to create jobs, we need to get out of the COVID crisis, how can we go about it?” And then, if the trade unions set unreasonable demands, then there is a call for introducing certain directives.


Amit Basole: At this point, in the immediate months to come, the responsibility actually lies squarely on the government to restore some health to the labour market... because we were in a slowdown, even going into the lockdown. [P]rivate investment may not pick up. Jobs also may not come back. In the immediate term, there is a necessity for the government to come out with a fairly strong fiscal package that creates optimistic conditions by providing employment to people, something that tightens the labour market a little bit, puts money in people’s pockets, and creates demand in the economy; the private investment then will follow as it usually does. And, once that happens, once there’s some health restored in the economy and economic growth has been restored, then, a lot of these things are discussable: we can go back to the labour reform issue.

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