In response to India’s deteriorating macroeconomic situation, at least three state governments in the country have issued a slew of provisional legislative changes to their labour laws amid possibilities that more states would follow. For instance, to revive industrial growth, which is suffering in the wake of the Covid-19 pandemic, BJP governments led by chief ministers Yogi Adityanath in Uttar Pradesh and Vijay Rupani in Gujarat have promulgated an ordinance to suspend 38 labour laws for industries for the next three years. Shivraj Singh Chouhan in Madhya Pradesh has also exempted new manufacturing units from all, but some provisions, of the Factories Act, 1948 for the next 1,000 days.
State governments — mainly belonging to the labour exporting, low-income parts of the Hindi heartland — are responding to a long-held desire to see reforms in India’s abstruse and restrictive labour laws. Faced with large additions to their workforce each year, and the lack of a commensurate provision of jobs in the formal economy, they have been left frustrated by the Centre’s inability to streamline India’s approximately 200 labour laws for the states along with several national labour laws.
This has contributed in large part to the manufacturing sector failing to rouse investor sentiment, despite the availability of low-cost labour and the voluble promotion of schemes such as ‘Make in India’. With a state of financial emergency resulting from economic stagnation in response to Covid-19, and unemployment rates spiking at 24.6 per cent, states have been presented with an opportunity to follow through with some of the more challenging promises on their policy reform agendas.
Changes in China, Bangladesh and Vietnam
Considering that the motivation to revise labour laws is driven by the desire to attract foreign capital and manufacturing firms, particularly the ones shifting base from China, it is important to consider how India’s labour law regime matches up with its peers in the developing world—especially those that it seeks to replace or compete with, in global value chains.
One major theme has guided the approach of developing countries towards labour reforms in the manufacturing sector. In the early stages of the growth story, the emphasis in such countries was on improving labour “income” instead of preventing job losses — thus affecting their laws on hiring-firing, contract work, and unionising and strikes. For example, in China, under Deng Xiaoping in the 1980s, as the process of capitalist modernisation began, a wide range of reforms were institutionalised — removing long-standing provisions for life-time employment, centrally administered wages, and state-controlled appointment and promotion of managerial staff.
Later, in the 1990s, business-friendly labour laws sought to link up China’s low-cost labour with flexible provisions for managers, particularly in special economic zones (SEZs). Between 1985 and 1995, the share of contract workers in China’s workforce shot up from 4 per cent to as much as 39 per cent. By 1997, about 10 crore employees had been signed into formal labour contracts.
In Bangladesh, whose growth story is more temporally aligned to India’s, labour laws require an onerous 30 per cent of the workforce to consent before beginning a trade union. Unionisation is also legally impermissible in export processing zones (EPZs). Moreover, in factories set up in collaboration with foreign firms, no strikes are permitted within the first three years of operations.
Similarly, Vietnam, which has been one of the largest beneficiaries of production relocation from China, adopted a new labour policy. Set to be in force from 2021, the policy will allow private companies greater leeway in setting their own wage scales and salary structures, and make dispute settlement more flexible by emphasising conciliation procedures over state intervention and administrative settlements. Also, independent trade unions will require permissions from the state-run Vietnam General Confederation of Labour to operate. On this front, in 2015, around 600 textile mills were shut down in India due to financial problems created by strikes/labour problems, lock-outs, etc.
India’s untapped formula for job opportunities
Labour market deregulation has created jobs and economic opportunities for labourers — effectively offsetting the precarity created by the lowering of legislative safeguards. This is because deregulation allowed private companies to increase their manpower without fears of high compliance costs, enabling them to establish economies of scale, and absorb the export-related risks. For instance, an average textile firm in India has about 240 employees, while in Bangladesh, garment factories boast an average of 797 employees per enterprise.
The ability to scale is primarily why low-end manufacturing firms that have vacated China in the last decade, moved to either Bangladesh and Vietnam in the case of apparel and Vietnam and Indonesia in the case of leather and footwear. In turn, by increasing the availability of jobs, these countries have been able to pull millions out of the poverty trap. To return to Bangladesh’s example, due to increases in higher real wages, it has now continually outperformed India on functional health status and educational leaning indicators.
International comparisons clearly show that reforms towards more flexible labour laws in India are now vital. As economist Kaushik Basu argues, provisions such as the 1947 Industrial Disputes Act imposed “heavy restrictions on firms’ ability to contract workers and expand their labour force, ultimately doing more harm than good”. Industries either gravitated to capital intensive sectors or contracted out labour requirements to the largely unregulated informal and unorganised sector.
However, in China, Vietnam and Bangladesh, legislative means were used to achieve reformist ends. In these states, even as safeguards for labourers were reasonably lowered, certain legal provisions — concerning minimum wages for example — were retained to limit the compromise of worker’s rights.
Ameya Pratap Singh is a PhD candidate at University of Oxford and Urvi Tembey is a international trade and investment lawyer. Views are personal.
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