Amidst the Corona fiasco, three State governments of Madhya Pradesh, Gujarat and Uttar Pradesh have relaxed their labour regulations in effort to facilitate economic activity and to increase growth. As expected, the move was met with heavy criticisms accusing the deregulation to be ‘inhumane’, ‘predatory’ and bringing back ’slavery’. Even though there are lots of literature on labour reforms and why they are important, through this post we will look at the basic arguments in favour of reforms and why such accusations are ill-informed to say the least.

 

Let’s see Data

The current framework that governs employment regulations is the Industrial Disputes Act (IDA) of 1947. Although there have been more than hundred amendments, the framework that still exists was written during and for the British period. This archaic law was made furthermore restrictive to any kind of growth in 1970s when India came very close to being a dictatorship. To paint a picture of the unnecessary red tape, there are 47 Union laws and 157 State laws which overlap making labour regulations convoluted. Labour, being in the Concurrent list has been pet by both Center and States to satisfy the loudest proponents of ‘worker rights’ Unions who represent, at most, less than ten percent of the workforce in the country.

Jobless Growth

Since LPG reforms of the 1990s India’s growth has increased manifold. GDP at current US$ in 1991 was 270.105 billion, this has increased to 2.719 trillion in 2018 and working towards 5 trillion in the near-future. At the same period, labour force participation has actually reduced from 58.4% in 1991 to 49.3% in 2019.

This fall in employment is due to the change in composition and nature of employment. For instance researches attest that from 2005-10, informal jobs have increased substantially from 8.6 to 21.9 million whereas formal regular jobs have reduced from 18.6 to 5.7 million.  So is Liberalisation the villain of the poor as some would want you to believe? Far from it.

At the same time since 1991 poverty levels have plummeted in India. From 45.3 % in 1991 to 21.9% in 2011; this must have reduced even further in 2020. So what is the cause of this jobless growth?

Strict labour laws wouldn’t let people grow. These regulations have restricted economic growth for the employers and thereby employment growth for the employees. It has made it difficult and cumbersome for employers to recruit and fire workers even with proper cause. The result of which is seen clearly when compared with China and Bangladesh. The largest garment manufacturing units in China houses 30,000 workers; the number for Bangladesh goes upto 10,000 workers while India is stuck with not more than 1000 workers in a single unit.

Business is a dynamic entity whose requirements change seasonally but the regulations have been static thereby limiting growth of large industries and foregoing formal employment opportunities for Indians.

 

Formal-Informal

Although formal employment opportunities have been made difficult, there is still work to be done. This encourages informal labour force- exploitative contracts, rented workers, bonded laborers and so on. In India around 94% of the workforce is informal without any social security and other benefits. The Unions who are averse to any kind of labour reforms represent only less than 10% of the total workforce.

Apart from agriculture, informal non-agricultural workers have been rising from 75.3% in 2010 to 80.28% in 2018. Researches have concluded that the immediate reasons for a growing informal economy is increased taxes, social security contribution burdens, intensity of regulations and low quality of public services. Employers take the short-cut and hire from the informal sector for their dynamic needs thereby pushing demand up in the informal sector.

The World Bank in its World Development Report of 2013 surveyed businesses from 102 countries. They found out that larger firms tend to be more productive, innovate more and compete in the export market often. They also pay better wages and provide decent security net for the workers. It is obvious that employers pay more only when they can afford to; and they will be able to afford only when they grow. But the nature of India’s labour regulations disincentivise businesses from expanding and moving to the formal sector. Researches also confirm that the value added per worker in the informal manufacturing sector is one tenth of that of the formal sector; even then employers favour informal workers due to the fear of labour laws and the rent-seeking, arbitrarily raiding State.

 

Hangover of Good Intentions

‘The road to Disaster is paved with Good intentions.’

Everyone wants what is good for people but some fixate on the good intentions alone and turn blind to the outcome of such intentions. Those advocating for the existing labour laws seem to be hung over from 20^th century Socialism of good intentions. They fail to see the abysmal state of manufacturing sector in India even with a huge population of unskilled and semi-skilled labour waiting to be useful.

In 2004, researchersBesley and Burgess studied amendments to the IDA from 1958 to 1992. They classified the amendments as pro-worker, pro-business or neutral based on their respective nature. They found out that States which made more pro-worker amendments saw low employment, output, productivity and investment in formal manufacturing while informal sector boomed. Although this study was criticized on the basis that it only factored IDA leaving other regulations out; but further studies also point out similar results. States including Gujarat, Andhra Pradesh among others seem to have made pro-business amendments and flexible labour markets which has helped them achieve positive results in employment and growth.

Strict labour laws were fashionable in the 20^th century when mercantilist societies exploited their colonies for cheap labour but such violation of human rights do not exist in today’s modern world. It is in the informal sector that workers are treated badly without any social security and insurance to fall back on.

Formal business employ short-term informal contract labourers in an exploitative manner instead of going through the troublesome and over-demanding statutes of employing formal labourers. We should also note the financial inability of small businesses to comply with social security requirements and labour regulations as mandated by the statutes. This may lead to increased unemployment or over-mechanisation or both, because employers would invest on capital instead of labour. Therefore people advocating for stricter labour laws are indirectly batting for pushing more workers into the informal sector which resembles 20^th century exploitative practices. In a nutshell, they are indirectly oppressing employers thereby workers with the tyranny of good intentions

The government should incentivize businesses to make it easier to comply with the regulations thereby encouraging formal employment and growth instead of restricting further growth. The recent move towards single window registration and IBC reforms for exiting the system is on the positive trend even with all their minor issues.

 

Why waste a Crisis?

 Historically India has been able to make structural reforms only during crises, in that way crises are good. However Public Policy thinkers opine that no one can stop an idea whose time has come. At the same time no one can force an idea whose time hasn’t come. They also opine that reforms cannot be done without an intellectual consensus prevailing before the crisis. For example even before the 1991 crisis, an intellectual force was batting for reforms which helped when the reforms actually happened.

Similar consensus on the incapacity of the labour regulations is present in the intellectual space among policy thinkers. Many feel the need for a simple course correction to capitalize on the enormous demographic dividend and the resources India has been blessed with. May be the time has come for structural labour reforms in India to formalize the bulk of workers. This will energize the 'Make in India' intiative and integrate India with the global supply chain, given current global apprehensions with China; thereby improving living standards of workers. So, petty old moral arguments like accusing reforms as ‘slavery’ could and should be avoided because it again pushes back the intellectual conversation at least by a decade, worse if it sympathizes with the 20^th century idea of excessive State control. 

  

By Benolin

Mute Spectator is the primary series of our blog where we express our opinions on current affairs