Mirza & Associates, Advocates & Attorneys

An article by Ms. Sheena Khan consultant at Mirza & Associates, Advocates & Attorneys

India being the most labour-intensive country in the world, recently, took a progressive move of codifying 29 of its national-level labour laws into 4 codes which were 70-80 years old, enacted at the time of the industrial era. Many of India’s labour laws were framed after independence with respect to its agrarian economy. But rather than boosting job creation, the existing laws of India focus more on income and job security. This is evident from the existing provisions, for instance, strict laws for the termination of employees, prohibition of contract workers, striking and unionising etc. Therefore, it can be said that labour laws in India hold rigidity and create restrictions to mobility. These vague provisions provide a lot of discretionary powers to the executive which has turned out to be an extremely debilitating situation in India. As has been made out in several surveys among investors, their major concern pertains to labour laws. These laws guarantee that a formal sector employee cannot be removed from their job and also sets down that firms hiring more than 100 employees need to seek prior permission from the labour authorities to implement things. Such an overreach of the government has given a good reason for the labour laws to be reformed.

WHY SWAP SECURITY WITH INCOME?

In India, labour reforms are one of the most controversial issues. In the current times, while the wages of labour are low, the cost is higher as compared to other Asian countries. Therefore, improving labour productivity is a serious impediment in expanding manufacturing and escalating the Indian enterprises. The lockdown resulted in a massive economic disruption in the employment sector. As the Indian economy was already in a grip of a slowdown, a halt on almost every activity led to a sheer rise in the unemployment rate. Due to the rise in unemployment, the country is facing a low aggregate demand. This issue could have been curbed by the Code on Wages,  2017,  which sets forth a  national minimum wage,  but due to the absence of employment generation on a large scale, it cannot ascertain benefits. Presently, the labour protection measures hold little to no value as employment opportunities in India are being generated at a lesser rate which is almost as half the rate of new entrants to the market for a job. That being said, if there is no employment, who does the labour laws protect?

The Labour Ministry recently introduced the new wages code with four labour codes which have been passed by the parliament but not implemented in the respective jurisdictions. Under these new wages, code allowances would be capped at 50%. This indicates that a basic wage of an employee would be half of his gross pay. Now, to calculate a contribution of the provident fund, a basic wage percentage is required along with the pay and allowance. In order to reduce the provident fund and the income tax outgo, the employers try to keep the basic wages of the employees low by splitting the wages into numerous allowances. Therefore, the purpose of the new wages code is to mandate the contribution of the provident fund as a proportion of 50% of gross pay. After the new codes are implemented in the respective jurisdictions, even though there will be a reduction in an employee’s take-home pay, the provident fund liability of an employer would increase. This will lead the employers to restructure the salaries of their employees. But it is highly unlikely that these codes will be implemented anytime soon in this fiscal year as the states are slow with the drafting of the rules. There might be a political reason behind the slaking of drafting since the Uttar Pradesh elections are due in February 2022 and there are higher chances of reduction in the taking home pay of the employees as well as the increased liabilities of the provident fund on the employers. If these proposed labour codes are implemented, there are higher chances of the achievement of a V-shaped recovery by the Indian economy.

Due to economic stagnation in response to covid 19, the unemployment rate at 24.6% has led to a state of financial emergency and thus, the states have been facing challenges to follow through their promises of policy changing agenda and responding to the desire of changing the restrictive labour laws. The pandemic gave rise to new trends like working from home, part-time work systems etc. which exposed the failures of existing systems and made it di cult for the smooth functioning of businesses. This has led to the decline of investment in the manufacturing sector even with the availability of low-cost labour.  Therefore, it should be taken as a motivation to make reforms in the labour laws in order to attract foreign capital as well as the manufacturing firms. In order to facilitate growth, operational freedom in a free market is one of the critical factors in achieving success. For instance, some of the major economies in the world follow a five day work week. It has been a well-known fact that recreation leads to a more relaxed work environment and happier employees with a more efficient work mechanism. Whereas, the model of 8 hours workday and 6 days work week hampers the satisfaction of employees and causes deterrence in the hiring process.

COMPARING CHANGES IN CHINA, BANGLADESH AND VIETNAM

It is also a matter of consideration that the labour laws of India are equal to that of its peers whom it seeks to compete within the global value chain in the developing world. Countries like Vietnam, Bangladesh etc, have shown tremendous benefits by adopting several codes which sets an example for India to imitate. There are many low-end manufacturing firms who recently vacated China in order to move to either Vietnam or Bangladesh to scale their businesses in footwear, apparel and leather.  This initiative led to the increased availability of jobs and has been successful in dragging millions out of the state of poverty. Bangladesh increased the real wages and has outperformed India in the sectors of health and education. In the earlier stages of the growth stories of such countries, methods of improving the labour incomes were adopted instead of laying emphasis on the factor of saving the job losses which later made an impact on their provisions of contract work, striking and unionizing. For Instance, in the 1980s a number of reforms were established in China at the advent of capitalist modernization where provisions for lifetime employment were removed, wages were made to be centrally administered, managerial staff was promoted etc. and therefore, within a period of 10 years China’s workforce labour share shot up to 39% from a mere 4% in the early years. This was the result of implementing business-friendly labour laws focussing more on China’s low-cost labour along with the flexibility in managerial provisions.

Similarly, Bangladesh’s growth story began with the implementation of labour laws where in order to begin a trade union, consent of 30% of the workforce is a must. Strikes are not permissible within the first three years of operations and the Export Processing Zones (EPZs) has established legal sanctions in case of unionisation. In Vietnam also, new labour policies have been adopted. Such policies entitle the private companies to have their own recognized salary structures and wage scale. They also have the authority to implement conciliation procedures and have more flexible dispute resolution. It is intriguing to know that such a war-torn country has turned out to be a bigger success than China in constraining poverty which has dropped to 10% from 60% which would not have been possible if flexible labour policies, efficient supply chain links and infrastructure were not reformed.

A DIRE NEED FOR REFORMATION

In the 21st century, Indian industry has seen slow growth and reacted ineffectively to global economic shocks. Such failures are a result of rigidity in the Indian labour laws. In the year  2015,  India’s financial problems peaked to an extent where  600  textile mills were shut down and such situations are prone to rise in the upcoming years if more strict actions are not taken up for the reformation of labour laws sooner. Comparing the international labour laws with that of India, it is important to have a more flexible approach towards these laws. Therefore, If we look at the establishments of countries like China, Bangladesh, Vietnam etc. reformist ends were achieved with the help of acquiring legislative means. Even though it meant lowering of labourers’ safeguards, legal provisions regarding the issues of the minimum wage were curbed. Therefore, to make India a trillion-dollar economy, codes should be established to foster growth in order to drive security and maintain the stability of employees.