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April 04, 2017 @ 01:15 PM

How Labour Reforms Can Boost Business Environment in India?

Published : Tuesday, 28 July, 2015 11:02 AM

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How Labour Reforms Can Boost Business Environment in India?

25 years have passed since the Government of India ushered economic reforms in July 1991 which was the watershed in economic history of India. The economic reforms of 1991 primarily introduced the policy of LPG (Liberalization, Privatization and Globalization) to put the economy on the path of high growth trajectory which was crippled with the Hindu Rate of Growth. Economic reforms primarily liberalized the industrial policies (liberalization), reduced the government’s role in running businesses (privatization) and removed the barriers to foreign trade (globalization).

These reforms certainly transformed India into a high growth economy but the country is yet to achieve its true potential. In order to introduce a fresh wave of high economic growth, time is ripe for introducing a second generation reforms of which labour reforms are an integral part.  

The Indian labour laws are very archaic, inflexible and complex in nature which do not match the economic reality of today’s world. Though India is a labour surplus and labour intensive economy, still the prevailing laws have failed to uplift the quality of life of vast Indian labour force. Raison d'être, they cover only the organized sector and their rigid nature curbs the growth of labour force in organized sector.

According to a study by FICCI, multiplicity of labour laws – 44 central and about 100 state laws – present operational problems in implementation and compliances that need to be looked into. In fact, the Indian labour laws are a major impediment in growth of employment opportunities in organized sector and more than 10 million youth who enter the labour force every year are forced to join the unorganized sector. In 2009-10, when the economy clocked one of the highest growth rate ever of 8.59%, the employment growth was at dismal rate of 0.92%. This dichotomy between the growth of GDP and employment can only be removed if laws related to labour are made as flexible as the Indian economy.

If the labour laws are made little flexible, it would immensely improve the business environment of the country. To avoid the curse of unemployment, India strongly needs labour intensive and labour friendly industries.A favourable labour regulation would facilitate growth of industries which could absorb the growing work force. Once gainfully employed, the income of the labour will also increase which will create additional demand thus providing an incentive to the producers to invest more and create additional employment opportunities.

Also, most labour laws were enacted during the first half of the 20th century to curb the exploitation of labour in manufacturing sector. At that time India was an inward looking closed economy with least interaction with the rest of the world. Today, the world has entirely changed with the revolution in information and communication technology (ICT). Big corporations are relocating their bases to the countries where it is easy and cost effective to do business. China, despite being a communist country has succeeded in becoming the factory of the world because of cheap labour regulated by flexible laws and the enabling environment provided by the government.

India is also a labour surplus country where majority of workforce is below 35 years of age. When the developed world is moving towards the aging society, India is poised to gain from the rising demand of work force from these countries. However, in order to realize this opportunity, two conditions have to be fulfilled. First, right skills must be imparted to the workforce to make them eligible for the future jobs. Secondly, the labour laws must be made resilient and should address the needs of current market where higher productivity and competitiveness are the keys to survive.

 If the government failed to address the concerns of entrepreneurs regarding labour laws, ‘Make in India’ dream could never become a reality and our neighbours would move ahead in the race of economic development. Already, country like Bangladesh and Vietnam are fast becoming the new centres of manufacturing for global brands like Nike, Gap, and Wal-Mart etc.

According to World Bank, India has one of the most rigid labour markets in the world which in turn is a drag on manufacturing, which accounts for only 16% of India's $2 trillion economy in contrast to China where share of manufacturing is 32%.Experts cite these rigid labour laws as the biggest stumbling block on the way to make ambitious ‘Make in India’ a success which has the potential to create job for 200 million youth which would add to the job market in the next two decades. However, taking cue from the fate of land bill which opposition blocked calling it ‘anti farmer’, it is highly likely that political opposition would do every bit to stall the bills related to labour reform as well calling them ‘anti-labour’.

Fearing the labour backlash in the event of ushering labour reforms, the current government is contemplating to leave these reforms as the responsibility of state. For that matter, the central government has asked the BJP ruled states of Madhya Pradesh and Rajasthan to initiate the steps for unshackling this sector. It is reported that the results from these two states were very encouraging and now government may introduce it to other states as well. FICCI in its paper too had asked the government to remove the ‘labour’ from concurrent list of the constitution to ‘state’ list which states would have better say in formulating the labour laws according to their needs and multiplicity of laws would also be removed.

Labour reforms are often criticised as the policy of ‘hire and fire’ and a worker can be removed even at a drop of a hat. However, labour reforms are not the introduction of ‘hire and fire’ but their transformation according to the present needs of the economy. For instance, as per the current policy, factories employing 100 workers or more need approval for layoffs. Since government rarely allows a company to lay-off, it becomes impossible for the employer to adjust in case of a downturn in the market and thus becomes a sick unit ultimately resulting in the threat of closure of the business.

As the part of proposed reforms, a factory employing fewer than 300 workers would be allowed to lay off workers without government permission while the severance package would be increased by three times.The planned changes would also make it tougher for employees to form unions or go on strike, but would make all employees eligible for minimum wage. In gist, the labour reforms are an effort to ensure that laws are not biased against either employers or employees.

Rigid labour laws discourage firms from trying to introduce new technology which often requires retrenchment. This deters FDI because of the fear that it would not be possible to dismiss unproductive workers or to downsize during a downturn. Hence getting FDI into export-oriented labour-intensive sectors in India has not been fully achieved. These reforms cannot be delayed any further.

It is expedient for the government to bite the bullet by initiating the next phase of reforms which would serve as the thrust for holistic growth in future or else, the socio-economic indicators of the country would continue to deteriorate and our glorified past would be the only thing left with us to thump our chest with pride.

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