By Shreya Bajaj

Edited by Nidhi Singh, Junior Editor, The Indian Economist

The current elections were surely the third big elections after the elections of 1951-52 the first independence elections and of 1977 that marked the defeat of Prime Minister Gandhi and restored democracy in the country. The current elections seemed to be of utmost importance where a chief minister who has no experience of serving as a prime minister has taken the charge. There is a sense of euphoria all around. And this is not at all ill-founded. After around 30 years, we have a government in power, which has absolute majority Common man as well as the business class have a lot of expectations from him and believe that he would set the reform process into action.

The budget seems to be around the corner and the business class is looking forward to some reforms that would accelerate the stalled manufacturing sector. In India there is a bias towards services reflects not just in its share of global trade, but also in the structure of the economy. Services command 60 per cent of India’s GDP, while manufacturing accounts for just 15 per cent, and it has not changed much over the past several years. According to a recent report by UNIDO, India’s per capita manufactured value added which is a measure of income generated by the manufacturing sector per person – was one-eighth of China’s, and one sixth of Brazil’s in 2010. Manufacturing is the most important segment for any country because it is the most labour intensive sector and hence with the development of this sector more employment opportunities will be generated and India would be actually able to reap the benefits of the demographic dividend.

But now the question arises what are the hurdles to the development of manufacturing sector? So there are many uncertainties in policy regime that prevent investors from investing, difficult business environment, infrastructure deficit, lack of bank credit and surely the most important one is the stringent labour laws.

The biggest look forward for the business segment is a change in the labour laws. There is a long story of controversies and debate over the labour laws in India, difficult to determine the priorities that the law must emphasise on whether it should protect the rights of the labour or make it easy for the business segment to hire and fire workers. However the Indian government always chose to protect the labour rights despite this fact the Indian reality provides a unusually strange picture about India’s labour policy during the past 50 years, that it covers only a small fraction (less than 8 per cent) of the labour force. Neither labour law nor labour policy has kept pace with the changes in country and in the economy. For good governance what is required is implementing the changes that focus on both equity as well as efficiency.

Political parties have always tried to get the maximum benefit out of this situation. The election manifestoes of the major political parties in the 1998 general elections had a consensus of their concerns about labour. They emphasised on employment creation and Job protection, Extending protection to the unorganized sector, Some promised improvement in living standards of the workers while others talked about linking wages to productivity, Vocational training, skills development and apprenticeship, Social security benefits, including pension etc. The agenda of the government had always failed to cover the less populist measures like Paradigm shift in the labour policy environment, Alignment of labour policy with economic policy, Labour law reform and Competitive labour policies at the state level.

Sixty years ago, in the newly independent and industrializing India, the state vowed its commitment to the welfare of workers. The politically controlled economic system then required a politically oriented economic action by workers. An influential section of the union movement endorsed the state’s preference for judgement rather than formulate the need to promote collective bargaining. In today’s world the policies of protection, import subsistence and self-reliance are giving way to policies of competition with a view to integrating the national with the global economy and to boost foreign investment and exports. To catch up with the other industrialized countries, India also needs to attract capital, enhance competitiveness and cut costs.

There is also an urgent need to align the labour policy with the industrial policy of the country and towards this end, labour policy should stress on: implementing a set of minimal labour standards, investment in training and education providing apprenticeship so that workers can gain experience and eliminating the mismatch between required and acquired skills and there should be fewer laws but a better enforcement of those laws.

Labour market flexibility is a very important factor that influences the flow of foreign direct investment in any country. The minimum that foreign investors expect is: a clear enunciation of the rights and responsibilities of employers and workers/unions; an unambiguous and easily understandable legal and institutional framework; predictable arrangements concerning union recognition, collective bargaining, skills development, flexibility and workforce adjustment; and an administrative and judicial system that ensures transparency, integrity, accountability expediency and efficiency.

The desirability, possibility and feasibility of competitive labour policies merits serious consideration. In the entire global economy labour law as an autonomous subject stands at a crossroads, there are no clear cut directives. Some judges feel compelled to interpret law not on the basis of the text of the clauses, but in the light of the preamble to that particular piece of legislation and more importantly the Indian Constitution itself. Therefore, they might sometimes question the ‘new economic policies’ as inconsistent with the Indian Constitution. Elsewhere in the world, there is another view gaining ground: The social vision of labour law, which went with the old-established institutions and practices has come under challenge to change or risk irrelevance. In the current scenario we require to strike a balance between these two extreme viewpoints.

There has always been a perception that the existing labour laws give virtual veto power to unions in the organized sector to block any sort of technological changes as well as changes such as improvement in plant and machinery, growth of productivity and rationalization of manpower. Further, there is a view that labour legislation has paved the way for multiplicity of unions, growth of intra- and inter-union rivalry, excessive intervention by the state in industrial relations and exacerbation of industrial strife

There is a need for major thrust of changes in labour laws: like having fewer laws but ensuring better enforcement i.e it would be still more equitable to have one labour code instead of numerous laws and legislations, as China and Vietnam did in the mid-1990s. We need to regard the fact that the nature and extent of protection for labour has little to do with the number of laws. We also need to eliminate multiple definitions that exists across different legislations and sections, for instance, wages are defined in a dozen ways in many legislations, or the legal distinction between worker, workman and other worker is exclusionary. There should be one national minimum wage act for all occupations rather than separate ones for select notified occupations. It should also be made easy to understand, be simple to administer and effective in enforcement. The provisions of the Industrial Disputes Act should be reviewed while preparing the Labour Code. An important point to consider is that some studies point out that job protection laws impede job creation. Increase in the price of hiring labour and its relative inflexibility to fire them have also been found responsible for the stagnation of job opportunities. These studies have also found that job loss was less with adjustment than without it. It is necessary to investigate the technological determinedness of employment decisions, employment effects of adjustment vis-a-vis non-adjustment and consequences of job creation on further job creation and the claims of the unemployed and fresh entrants to the job market. The cost of job protection and its effects on job creation require careful analysis.

While there’s a lot that needs to be done labour sector reforms are an important concern. There’s no second thought about the view that in order to enhance the manufacturing productivity and increase and promote FDI inflow we need some key reforms in the labour laws, i.e. aligning the labour policy with industrial policy and we expect to see some key changes and proposals in the next budget that will be presented by BJP in July.

Posted by The Indian Economist | For the Curious Mind