Centre needs to continue pace of labour reforms

Over the last three decades, the Indian economy has been experiencing rapidly changing production relations, structure of production and pattern of growth but without any reforms in labour legislations.

In this backdrop, the recent announcement of reforming and simplifying the labour legislation (now passed by Parliament) has captured the interest of many, particularly when everybody is waiting for revival of manufacturing sector.

Though the economy has managed to record an average GDP growth of 7 per cent for the first decade of the 21st century, the contribution of the manufacturing sector to the GDP has remained constant at around 16-17 per cent since the 1980s.

Of late, the growth rate in the manufacturing sector has started showing a negative trend.

Employment in formal manufacturing sector declined from 12.5 per cent of the total workforce in 2004-05 to about 10 per cent by 2010. The slump in the manufacturing sector has given rise to doubts of the economy entering into a phase of de-industrialisation in the near future.

The rigidity of the labour market and lack of labour reforms are considered to be one among the key factors responsible for an underdeveloped manufacturing sector in India.

Particularly, the Industrial Disputes Act (IDA) and Contract Labour Act, along with restrictions on employment of female labour, are responsible for the growing number of small scale firms and the rising proportion of informal sector. In order to remain outside
the ambit of complex and outmoded labour laws, entrepreneurs shun from expanding their medium scale businesses to large scale.

For instance, IDA restricts the firms employing 50 or more workers from reallocating work load, changing working hours and hiring and firing the workers, owing to which firms remain reluctant in employ more workers in the same firm and instead prefer setting up multiple small units.

This deters the productivity growth and restricts the firms from enjoying economies of scale. Such a structure has not only promoted large informal sector and capital intensive techniques but has also kept foreign investments away from India’s manufacturing sector.

Potential physical boundaries for business of multinational companies have expanded, and standardised production processes have become the order of the day. Businesses face an increased competition in international markets where good and services, capital and labour move freely across borders. Relocation of jobs has become common and easy. This dynamism of competition calls for flexible labour markets.

Though labour is abundant, market for skilled labour in India remains tight. In this background, flexible labour markets that allow the use of multi-skilled workers, introduction of technological changes without prior notice, and cooperation from workers in firms’ decisions regarding job rotation and relocation are important so that they can participate in the dynamic global market.

Against this backdrop, an initiation on reforming labour laws could prove to be a small step towards reviving India’s manufacturing sector. Introduction of a unified labour portal is expected to make compliance with labour laws less complex, more transparent and check the rent seeking behaviour of labour inspectors.

Single window system which would enable the employers to file one online return with respect to 16 labour laws in place of a separate manual return for each labour law, is another reform to simplify and facilitate compliance to some extent.

Apart from making compliance easier for employers, similar reforms have also been introduced for employees. These include provision of ‘Universal Account Number’ to make provident funds portable for organised workers in case of job relocation and change and revival of ‘Rashtriya Swasthya Bima Yojna’ for labour in the unorganised sector.

Benefitting workers, firms

A major reform comes in the form of an amendment to Apprentices Act 1961, materialisation of which would benefit both the workers and the firms along with boosting productivity growth in the longer run. Apprentice Protsahan Yojna (APY) has been launched with the objective of facilitating vocational training to overcome the shortage of skilled labour and thus removing a supply side bottleneck.

Through this programme, the government has announced raising the stipends and has offered to reimburse half of the cost of such training programmes for a couple of years to the employers.

The APY is a potential incentive for both the firms to create more skilled labour and raise their output and for the workers to enhance their skills and improve their future employment prospects. If implemented properly, this would prove to be a concrete step towards creating a reservoir of skilled workers and thus raising the output as well as employment in the manufacturing sector.

Though the labour legislations have been simplified in some respects, the oft-demanded reforms in IDA and CLA have been left for the states to deal with. Business ambience is different from state to state. Therefore, these acts can be better amended by the states.

However, the state policy with respect to these acts should be one which is able to strike a balance between introducing flexibility for the firms and at the same time assuring social security to the workers to avoid breeding discontent and hampering the dialogue between the employees and employers.

The labour laws certainly represent a small step but the introduction of even small reforms in labour legislations was long awaited to keep at bay the rising
discontent among domestic as well as foreign entrepreneurs from India’s manufacturing sector.

Keeping up the pace of labour reforms would help in not only boosting investors’ confidence but also making the regulatory environment business friendly.

(The writers are with the Observer Research Foundation, New Delhi)