India Can Do With Less Rigid Labour Laws, Reformation Is Key To Manufacturing Sector Growth

With the world’s fourth largest economy and several factors working in its favour, India is poised to become a leader of the global economy in the coming decades. India recorded an impressive 7.4 percent economic growth rate in the second quarter of 2015-16, even as the Chinese economy slowed down to its lowest growth rate in 25 years. A right impetus can make India’s manufacturing sector the driving force of global economic growth.

However, despite low wages, India is not a global manufacturing hub, even while being one of the fastest growing service sectors in the world. India’s service sector has grown at an annual growth rate of 9 percent since 2001, and contributed 57 percent of the GDP in 2012-13. The industrial sector, meanwhile, only recorded a negligible increase and contributes nearly half at 26 percent of GDP.

Economic analysts and the industry in general consider this disparity to be an outcome of high rates of corruption and excessively complex worker-centric labour regulations, Low labour productivity  is another headache. Despite the availability of human resources, India has not been able to leverage its demographics for industrial development.

The World Economic Forum’s Human Capital Report 2013 ranked India 78th in overall human capital status, 63rd in education, and 112th in health and wellness, out of 122 countries. It is predicted that the size of India’s workforce will swell to 249 million by 2050, while China’s is set to decline to 166 million during the same period. So how should the Indian government and Indian industry build India’s human resources for the cause of future growth?

India’s Rigid Labour Laws Date Back Decades

In the pre-independence period, British colonialists in India suppressed labour rights, trade unions and the freedom of association among workers. As a result, labour activism became a part of the Indian freedom struggle. In 1950, the then newly framed Constitution of India looked to undo these wrongs by including fundamental labour rights, along with complex labour laws which made hiring additional workers increasingly difficult. Despite several decades of economic progress, these laws have not been amended or reformed in order to foster a friendlier climate for business.

Low labour productivity is another cause for concern. Studies conducted over the years have shown that India is affected by low labour productivity (defined as output per employee) in comparison with other developing nations. As a result, in the early days of offshoring, Western firms showed greater interest in setting up manufacturing facilities in Thailand, Mexico, China, Vietnam and Philippines rather than in India. All of these countries had as bad a record of bureaucratic corruption as India did at the time, but labour productivity was found to be higher.

Politics is also to be blamed for this. In Kerala alone, for example, there were nearly 363 hartals between 2005 and 2012, causing loss of working days. In addition, in the 1970s and 1980s, Indian politics was dominated by socialists who created the impression that profit making by private enterprises is undesirable. Policymakers at the time also further strengthened India’s complicated labour laws.

Nevertheless, the current Union government has adopted an industry-friendly attitude and promises to transform India into a manufacturing hub over the coming years. As early as in 2002, the Second National Commission on Labour suggested the formulation of labour codes similar to those in Russia, Germany, Poland, Hungary and Canada. The commission recommended that labour legislation be divided into five broad areas: industrial relations, wages, social security, safety and welfare, and working conditions. The need for similar labour reforms now finds wider acceptance among the Indian public.

Complex Regulations Discourage Industrialisation And Business

Indian labour matters come under the purview of 45 central government laws and more than 100 state statutes, sometimes overlap or contradict. Several studies have indicated that India has one of the most rigid labour regulatory frameworks in the world. A case in point is the Industrial Disputes Act of 1947, which stipulates that a firm with 100 employees or more cannot close down without government permission. Such laws curtail the growth of a firm by forcing it to hire fewer workers and remain small.

There are also high costs involved in complying with several labour laws. Under the Factories Act for example, firms with 10 or more workers and firms which use electric power are required to keep records and file regular reports on matters such as overtime work, wages, attendance, sick leave and worker fines.

In order to promote the growth of businesses, India should cut down the number of labour laws in operation, while simplifying them to meet current industry demands. India’s own experience in this regard shows that states with greater flexibility in labour regulation and lower compliance costs tend to have higher productivity and employment in the formal manufacturing sector.

Key Reforms In India’s Labour Laws

The current Union government is proactively involving labour unions and other stakeholders in drafting the Industrial Relations Bill. States such as Maharashtra, Madhya Pradesh and Gujarat have also been trying to pass amendments to difficult labour laws in their states.

The newly proposed Central Industrial Relations Bill ought to include the following provisions:

• Factories employing less than 300 workers should be able to shut down without prior government approval.
• Trade unions should be formed only if 10 percent of the employees or 100 workers, whichever is lesser, support the move. Under the current law, even seven employees can form unions.
• Subject to the provision of security by the employer, restrictions on night shifts by women should be removed to encourage employment of women.
• Electronic records should replace existing registers maintained by employers.
• Micro, Small and Medium Enterprises (MSMEs), units of less than 40 workers to be exempted from cumbersome labour laws. The definition of a factory should be revised from 20 employees to 40 for units operating without power and from 10 to 20 for units operating with power.
• Overtime limit should be increased from the current 50 hours in a quarter to 100 hours.
• Worker health and safety should be safeguarded by mandating personal protective equipment and obligating employers to take precautions against toxins.
• Eligibility criteria for annual leave with wages should be reduced from 240 days to 90 days.
• Employers should provide cafeteria facilities if they employ more than 200 workers (presently, the minimum cut-off is 250 workers), and factories employing a minimum of 75 workers should provide restrooms and lunchrooms (currently, those employing less than 150 workers are exempted from this law).

The Way Forward

Legislative reform alone won’t result in a more productive workforce; governments, organisations and people themselves need to bring about a change. Empowering women to enter the workplace and providing additional support to the physically challenged are much needed steps in this direction.

States should also follow the example set by Karnataka, which granted exemptions to IT industries from the Industrial Employment (Standing Orders) Act of 1946, which undermines the employer’s autonomy in determining the terms of employment, working hours, leave grant and similar matters.

Meanwhile, people with disabilities are currently provided up to 3 percent reservation in governmental and government-funded jobs. This figure could be increased, while also ensuring that workplaces are disabled-friendly. Providing social security to workers in the informal sector would also pave the way for a more satisfied and productive workforce.

India has a demographic advantage of about 20 to 25 years in comparison with many other countries which have an ageing workforce. But in order to utilize this dividend, India needs to invest heavily in training its talent. India’s supply of labour presently outnumbers industry’s demand for them. As a result, the government and manufacturing firms need to invest in training and skilling.

The guiding principle for India’s labour policy reformers should not merely be ring fencing jobs but safeguarding workers through social assistance, re-employment support (such as that which is provided in several Western nations) and skill building, and supporting employers in employee training and development.

An earlier version of this article was previously published by Centre for Public Policy Research.