Labor Law Reform: Promises and Limitations

Workers in a textile factory in India
Source: BBC World Service. Licensed under CC BY-NC 2.0 © Licensed under CC BY-NC 2.0

Amidst the numerous news flashes pertaining to the global pandemic, the current administration has introduced a slew of bold economic reforms. Relaxations in labor law have been instituted in the states of Uttar Pradesh (UP), Gujarat, and Madhya Pradesh (MP), whereby for a period of three years, these states will be exempt from nearly all existing central and state labor laws.

Labor has not been the only area of reform. For instance, the central administration has introduced agricultural reforms, amending both the Essential Commodities Act and the Agricultural Products Marketing Committee Act (APMC), which will widen the scope of privatization of the agricultural sector.

However, public opinion on the removal of labor laws has indeed been divided. There are those who favor the current administration’s pro-business approach. Others question the constitutionality of these actions and protest the loss of protections for workers already highly devastated in these trying times. In this article, we will attempt to balance all these perspectives before we provide our critical analysis.

How Extensive are these Reforms?

In Uttar Pradesh, the ‘Temporary Exemption from Certain Labour Laws Ordinance, 2020’ suspends all labor laws except the Building and Other Construction Workers Act, the Workmen Compensation Act, the Bonded Labour System (Abolition) Act, the Maternity Benefits Act, and section 5 of the Payment of Wages Act which mandates employers to pay timely wages.

Relaxations in Gujarat and Madhya Pradesh are similar, but less extensive, and arguably less controversial, than those spearheaded by the Yogi Adityanath government of UP. 

Most notably, the Factories Act and the Industrial Disputes Act will no longer apply. The Factories Act mandates certain work hour provisions, which in UP are capped at 8 hours a day and 48 hours a week. They also set standards for the health and safety of industrial workers. The Industrial Disputes Act creates dispute resolution mechanisms between employers and employees by allowing governments to constitute labor courts or tribunals, by means of arbitration or legal adjudication, in case a conflict arises. Furthermore, if a firm has over 100 employees, then they must get a government permission for any lay-off and provide laid off workers fair compensation. Permits are also required for retrenchments and closures.

Trade unions and workers’ rights activists have objected to the fact that trade unions have been effectively enfeebled by losing their power to collectively bargain and raise disputes, and that workers are no longer protected from being fired when firms downsize or close.

Undoubtedly, making hiring and firing easier and diminishing the role of workers unions is more favorable towards the business elite (i.e. employers). However, these law reforms also do away with many cumbersome regulations which would effectively drown out remnants of the license raj and de-bureaucratize the industrial sector. Included in the labor law reforms across all the states are measures to ease registration for new firms, renew factory licenses only after 10 years, and eliminate overly frequent factory inspections. In fact, in Gujarat, there will be 100 % online approval for all new industries setting up base in the state and guarantee of all necessary permissions and land allocation within a 15-day grace period.

Easing Doing Business

Land, labor, and capital have often been cited as the three areas neglected by the post 1991 economic reforms. These reforms could certainly fill these gaps and in the best case, continue India’s decades-long progress of economic liberalization.

India’s unemployment rate is at a 45 year high, at 6.7 %, according to the latest NSSO periodic labor force survey (PLFS). The survey was completed before the outbreak of the coronavirus pandemic in India. Data by CMIE suggests that the unemployment rate now stands at about 20 %. In 2019, India already saw a slowed growth rate of 4.5 % from its proudly hailed 6.8 % growth rate of 2018. According to a UN report, India’s growth rate is projected to shrivel down to 1.2 % in the wake of the pandemic. Only times of emergency allow for radical and experimental measures to revive the economy. These numbers cited above are so alarming that even high-risk solutions are now on the table.

So Why Target Labor Law?

The extensive system of licenses and permissions enshrined in India’s labor laws is very costly, and pro-business proponents have argued that this has deterred foreign investment.

The Industrial Disputes Act, with its stringent regulations on firing, entrenchments, and closures, leaves firms with three practical alternatives:

  1. not registering at all and therefore staying out of the formal sector
  2. remaining small in size
  3. hiring contract labor rather than full-time workers on payroll records

This has proven to be very detrimental to the economic well-being of the nation and relying on contract labor is of course detrimental for workers because it does not enable them to enjoy any employment benefits. If firms stay small, then they cannot grow to become globally competitive. Furthermore, such bureaucratic hurdles inhibit a competitive economy. Only those firms favored by the government can jump these hurdles and rise to the top, making rent-seeking and corruption rampant. Reducing bureaucratic hurdles, including those regarding the registration of firms, renewals of licenses, and lay-offs, could very well incentivize more firms to register into the formal economy. This would increase India’s tax base and thus its reserves to spend on social programs. 

To top it all off, there is hardly a more opportune moment to attract foreign investment in India’s industrial sector.

Many multi-national firms are moving out of China, and India could prove a viable alternative. In fact, Yogi Adityanath and his cabinet have been in discussion with US, South Korean, and Japanese MNCs regarding shifting their work units from China to India. The German footwear brand Von Wellx has already shifted their manufacturing base from China to Agra.

Criticism and Concerns

Shakti from New Trade Union Initiative (NTUI), characterizes these reforms as merely “an escape route from the economic disaster’ that has been created by the current administration. He argues that removing the labor laws through an unjustified emergency order, not only eliminates what little security laborers have, but also makes for ‘a lawless society’.

Although Gujarat has maintained its minimum wage law, many are concerned that these reforms will depress wages, which could have the side-effect of pushing women out of the labor force further reducing India’s already dismally low female labor participation rate. Nandini Sharma, of the Centre for Responsible Business (CRB), explained how women will affected disproportionately by the labor law suspension. In rural areas many women take up work out-sourced to them from factories typically at lower wages. However, the labor law changes (ease in hire and fire etc.), are expected to depress wages overall, this will in turn weaken the agency of women home based workers making them further susceptible to exploitation.. The work hour expansion is further disincentive for women with families.

Furthermore, the existing lack of social safety does not inspire confidence for workers’ rights activists. Healthcare as it exists currently does not cover the poor sections of Indian society. You need just look at the stories of migrant laborers who have traversed hundreds of thousands of kilometers to get home without any transport, food, savings, or even shoes. In what ways have they been protected by the Government of India? Even the provisions for the health, safety, and overall well-being of workers in registered firms, such as work hours, leaves, facilities for women employees, a canteen facility, and fire safety, are being eliminated

Mr. Shakti rejects the idea that compromising on law that protects the workforce is necessary to combat the economic crisis because there is not enough evidence to prove so. Indeed, the quality of data in government reserves is poor and surveys on the labor force and rural population, amongst others, are out of date and infrequent. In fact, since Rajasthan amended its labor laws in 2014 to make hiring and firing employees easier for firms, the rate of unemployment and use of contract labor has not decreased. Nandini Sharma opines that any legal cum policy reforms must be backed with well thought through research and analyzed data sets. Today there is either inadequate data or lack of data transparency in the supply chains which invariably employ the workers. Today, internationally there is call towards demanding greater transparency and accountability in the global supply chains. International laws are being drawn up to ensure safeguarding of the interests of all rights holders particularly the most impacted. In times like these, dismantling or diluting labor laws may actually erode India’s competitive advantage and work at cross purposes. Additionally, it is important to note that as the labor reforms are being brought into force, the government of India is drafting it’s first Business and Human Rights National Action Plan which is meant to manage and mitigate the adverse business impacts taking the most severely impacted into account

Without significant evidence to back up their effectiveness, eliminating labor laws and bypassing the rule of law in the process becomes even more unjustified. Many argue that this violates worker’s right to life and right against exploitation, enshrined in India’s Constitution. India is also a signatory of the International Labor Organization (ILO) and most of its conventions, and the ILO has publicly expressed concern about these amendments. Furthermore, The Factories Act regulations cannot by law be exempted save for times of ‘public emergency’. Workers’ rights advocates argue that now is hardly a suitable time to call for emergency measures.

What Can we Conclude?

Firstly, India is full of archaic laws that have undoubtedly stunted economic growth. The existing set of labor laws are probably not an exception. PM Modi is even working to streamline and merge all existing labor laws into four key categories: wages, social security, industrial safety and welfare, and industrial relations.

Secondly, periods of emergency are hardly a renaissance for the rule of law—as reflected in India’s historical track record. COVID-19 is no exception. However, the fact that laws have been jettisoned overnight when such measures are typically debated in parliament for decades is cause for concern. The Centre’s approval for UP’s relaxation of law is still pending. As discussed earlier, the legality of these measures is being questioned. In any case, there should not be any major change in or suspension of law without data-based evidence to back it up. The case of Rajasthan has not proved very promising, although their labor law amendments were not nearly as sweeping as UP’s or Gujarat’s.

It also must be taken into account that the vast majority of India’s workforce is in the informal sector, so more often than not they are not even protected by the law. Even registered firms routinely bypass the law by means of rent-seeking or simply disregarding it without facing any consequence. Or else they rely on contract labor, which is not protected under the law.

On the flip side, it is essential that firms enter the formal sector and be provided the right economic incentives to do so. Madhya Pradesh has relaxed its labor laws to enable business registration in one day, extend licenses for 10 years instead of one, and reduce the frequency of labor inspections. These are all steps in the right direction. As discussed earlier, this is also an opportune moment to usher in foreign investment. However, UP’s 3-year concessionary period for these exemptions is hardly long enough to attract serious investment. Factories would take at least a year to build, so only two years of deregulation would hardly be effective.

At least in the case of UP, it is evident that their ordinance suspending labor laws was not duly deliberated. On the other hand, MP and Gujarat have not fully done away with laws on health and safety standards and minimum wage but have cut away at laws introducing excessive red tape. In regard to all else, we can only wait and speculate.