Millennium Post

Modi’s labour reforms more hype than substance

There were two intents  behind prime minister Modi’s labour reforms. One, it was to protect the lower category of workers who are deprived of their social security after changing the jobs. Second, it was to encourage the entrepreneurs to set up factories by letting them free from factory Inspector Raj.
Huge amount of provident fund is lying unclaimed because of complex bureaucratic procedures. The long and cumbersome procedures crippled the claimants, mainly the low paid workers in the unorganized sector, to comply with the procedures and deterred them to claim the social security.

The aim of this reform is to let these workers get out of bureaucratic tangle with unified numbers and help them to have their claims. The second main reform is to whittle down the irrelevant and complex procedures to set up a factory and gear up the employment generation. Under the Factory Act, a factory owner has to fill 16 forms. Now, after reform the factory owner is required to fill one form only. To let the factory owners free from inspectors harassment , a computerized list of inspectors will be generated for inspection of factories.     

But, the reforms missed the real problem of labour issues. The real problems are industrial relation and labour management. Given the manufacturing activities underwent a plethora of changes over the period of six decades, present pattern of manufacturing has little relevance to Factory Act 1948. The main role of factory inspector is to supervise the enforcement of regulations governing health, welfare, work-environment, leave and wages and working hours etc. But, with the induction of automation, better factory management and IT software, particularly in large and medium factories, the hassles by factory inspectors are waning.  As a result, the reforms in factory induced Inspection raj are far off to impart big impact on manufacturing practices.

Today, the main labour issues which bedeviled the manufacturing growth are three. They are industrial relations regulated by Industrial Disputes Act, 1947, employment of contact workers by Contact Labour Act, 1970 and the Trade Union Act, 1926. In particular, Industrial Disputes Act acts as Damocles’ sword and discouraged them for expansion of employment opportunities.

The Industrial Disputes Act disallows the entrepreneurs to lay-off and fire an worker without government permission, if it employs more than 100 workers. The bureaucratic process to get government permission can stretch into years and the government has consistently denied such permission. The rigidness of the law persists since its inception. As a result, the inflexible labour laws acted as disincentive to the entrepreneurs. It geared up the platform for contract labour.

India is among few countries in the world, whose high rate of GDP growth, even after the Lehman shock, is laudable. But, growth failed to boost employment opportunities and is termed ‘Jobless Growth’. It is argued that one of the reasons for this unparallel growth between GDP and employment is the absence of labour reforms. While industrial reforms took place in 1991, no major labour reform was made in tandem. Reforms in labour were stymied by the changes in political situation in the country.

Curbing Inspector Raj is not the panacea for establishing more factories and boost employment. Given the fast growth in large medium and large scale firms, factory inspectors lost their power to wrest the freebies from factory owners. The large medium and large scale firms are well equipped to comply with the multiple procedures. Paradoxically, the Inspector Raj is a paranoia to lower scale SMEs and tiny sectors. It is a persistent irritant to the factory owners and also constitute a big share in the cost structure. The SMEs and sectors are generally equipped with less number of staff. In most cases, the factory owners are filling multiple forms by themselves. As a result, the paranoia of Inspector Raj looms over smaller SMEs and tiny sectors.

The reforms failed to impress the foreign investors and domestic manufacturers. Given the global shift from green field to brown field production, resulting investment flow more in Merger & Acquisition, reforms in factory induced laws were less impressive to the foreign investors and domestic companies to set up new factories. One fourth of FDI in the country is through Merger & Acquisition.

After the Insurance Bill fiasco, Modi government seemed to have been more cautious to push reforms which require legislative amendments through Parliament. Insurance Bill faced roadblock in Rajya Sabha as BJP does not have required strength to pass the bill. During the first 100 days, except insurance, Modi government pitched reforms in such areas which do not require Parliamentary approval. They are FDI policies in defence, decontrol of diesel price, financial inclusion providing banking facilities to everybody, quick clearance of infrastructure projects by curbing the lengthy procedures and reform in the governance.   

Any big ticket reform in labour laws requires legislative amendment and Parliament approval. Reform in Industrial Dispute Act 1947 is most warranted as this regulates hire and fire of workers and the winding or closure of units. Given the global fractured demand situation, where developed nations are reeling under recession, many export oriented economies fall prey to languishing growth. This imparted negative impact on SMEs and led to closer of SMEs units. In Japan, which is a SME based manufacturing growth, closer-rate of SMEs is higher than start-up rate. In this perspective, stringent labour regulations to hire and fire and closing the units act as disincentive to the entrepreneurs.  

Therefore, unless a big ticket reform is made in labour laws, only factory induced reforms will have a simmering impact on employment generation. IPA

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