Hard truths about India’s labour reforms

Source: The post is based on the article “Hard truths about India’s labour reforms” published in The Hindu on 19^th August 2022.

Syllabus: GS 3 – Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Relevance: About the impact of labour reforms.

News: While the numbers of Indian billionaires increased during the COVID-19 pandemic, hundreds of millions of Indians lost their incomes when the country was locked down during the pandemic.

The problem is not just employment but also poor quality of employment.

About employment and social and economic freedom

The dominant ‘theory-in-use’ to increase employment is to improve the ease of doing business. The investments in businesses will improve citizens’ ease of earning good livelihoods.

According to this theory, large and formal enterprises create good jobs. But for that to happen the labour laws must be ‘flexible” to attract investments.

About India’s labour reforms

The primary purpose of labour laws is to protect the rights of workers, not promote the interests of investors.

Prior to 1991, Indian labour laws protect labour more. But after 1991, labour laws’ principal thrust is to improve administration by simplifying procedures and digitisation. However, the government did not make the labour laws more employer-friendly.

Reforms post-2014: The Government designed a framework for reforms. Since labour is a concurrent subject, it encouraged States to implement changes. The first state to do so is Rajasthan.

Labour laws cover many subjects — payment of wages, safety conditions, social security, terms of employment, and dispute resolution. The proposed national reforms aim to convert all these laws into four codes.

What are the key findings on the impacts of labour reforms?

The V.V. Giri National Labour Institute released an interim report titled “Impact Assessment Study of the Labour Reforms undertaken by the States.”  The report has focused on the reform of the Industrial Disputes Act.

The report spans the period 2004-05 to 2018-19. The report defines “formal” employment as the grant of paid leave, a written contract, and some “social security”.

Key findings: When the emphasis was on administrative reforms, the share of employment in plants employing more than 300 people increased from 51.1% to 55.3% between 2010-11 to 2014-15. But when the emphasis was on labour reforms, the ratio increased less from 55.3% to 56.3%, in 2017-18.

The report stated the following reasons for such factors. These are,

a) Labour laws are only one-factor affecting business investment decisions, b) An enterprise must have a growing market for its products, c) Many things must be put together to produce for the market (such as capital, machinery, materials, land, etc.) not just labour, d) Investors do not hire people just because it is easy to fire them.

What one can conclude from the impact of labour reforms?

1) Reforms of labour laws have had little effect on increasing employment in large enterprises, 2) Labour reforms cannot induce the creation of large enterprises. This is because the laws such as Industrial Disputes Act still apply to them.

What should be focused on instead of labour reforms?

The government need to understand that more GDP does not automatically produce more income at the bottom. The government has to enable a) The generation of better-quality livelihoods for Indian citizens, now and in the future, b) Fundamental reform is required in the ways policies are made, c) Fundamental reforms are required in the theory of economic growth.