States Should Do The Heavy Lifting In Reforming Labour Laws

Labour law reform remains as onerous as it was three years ago when Modi government came to power in New Delhi. The centre is currently in the process of consolidating more than 50 labour statutes into four codes relating to safety, social security, industrial relations and wages. While this is a welcome step, it is a far cry from the reforms the sector needs.

The labour laws are perhaps the biggest obstacle to the ease of doing business in India. Companies find it difficult to fire and hire workers at will. This affects the level of flexibility in companies and they remain small or simply go out of business due to unsustainability. As a result, only 11 per cent of manufacturing companies in India employ more than 200 people, compared to 52 per cent in China.

Though the central government passes labour laws, the laws can be amended by the states to make them suitable to their local realities. So, the states have to take a big chunk of responsibility for reform in this area.

According to Goldman Sachs Group Inc. estimates, revamping labour laws and encouraging urbanisation could add about 10 million jobs every year over the next decade. Around 12 million people enter the job market every year. So, reforming labour laws can nearly solve our biggest problem – lack of jobs.

However, the states are not up to the task. Yesterday (9 May), Centre For Strategic & International Studies (CSIS) came out with a breakthrough index on labour reforms, where it analysed the states that have increased the number of employees a business can have before it is covered by the laws. The report reviewed three acts: the Industrial Disputes Act of 1947, the Factories Act of 1948 and the Contract Labour (Regulation and Abolition) Act of 1970.

It found that only one state, Rajasthan, raised employment thresholds under all the three acts. Andhra Pradesh and Maharashtra raised thresholds under two of the three acts while Madhya Pradesh did it for one. The rest didn't amend the central labour acts.

When will the states wake up to this enormous challenge, also a great opportunity, of creating millions of jobs?

Government think tank NITI Aayog has also outlined the problem of cumbersome labour laws. In its three-year action agenda, published recently, the Aayog prodded the centre to work with states to reform three important laws.

1) It recommends raising the cap on the number of overtime hours allowed from 50 to 100. The Lok Sabha has passed a bill doing just that, but the changes are currently pending in Rajya Sabha.

2) The Aayog bats for easing of restrictions on companies to fire workers, or retrench, if you will. Thanks to the Industrial Disputes Act, firms employing more than 100 workers can't fire them under any condition.

3) The Aayog recommends changing Section 9 of the Industrial Disputes Act which makes it difficult for an employer to reassign a worker to an alternative task. This stifles flexibility.

These are innocuous suggestions, not even remotely radical. But the Modi government, which has been reluctant to usher in sweeping labour reforms, will find it hard to do even this in a Parliament filled with socialists stuck in the Nehruvian era (as is evident from the amendment to Factories Act which is held up in Rajya Sabha).

The only realistic hope towards a progressive labour law regime in India is having pro-business Chief Ministers in some states. The solution, therefore, lies in a bottom-up approach – from the states, not Delhi.