With lasting ramifications
The four labour codes introduced by the government are highly exclusionary and further widen the productivity-real wage gap — favouring employers against labourers
The NDA-II government, under the leadership of Narendra Modi, had initiated a 'major reform' in the Indian labour market two years ago by notifying four Labour Codes in place of 44 odd labour laws that existed in the country. The stated objective was to simplify Indian labour laws to attract investments that will create more jobs. Nevertheless, it is apprehended that this move will have serious consequences on the life and livelihood of millions of workers of India, most of whom are engaged in the unorganised/informal sector. Unlike the huge protest the Union Government has faced after the enactment of the farm laws, labour sector reforms have not created any ripple in the country.
The Code on Wages (CW), 2019, which received Presidential assent on August 8, was the first of the codes to come into effect. In 2020, three more Labour Codes — the Industrial Relations Code (IRC), 2020, the Code on Social Security (CSS), 2020 and the Occupational Safety, Health and Working Conditions Code (OSH) 2020 — were enacted.
Labour being a concurrent subject, both the Centre and states will have to frame laws and rules. On December 16, the Minister of Labour has informed the Rajya Sabha that as many as 13 states/Union Territories have finalised draft notifications for rules for all the four proposed Labour Codes, as reported by The Indian Express. The highest numbers of draft notifications are for The Code on Wages by 24 states/UTs. 20 states have finalised draft rules for the Industrial Relations Code, while 18 states have finalised for the Code on Social Security and 13 states/UTs have finalised draft notifications for the Occupational Safety, Health and Working Conditions Code. The Union government is likely to notify these Labour Codes in the FY 2022-23.
Strangely, labour leaders have failed to mobilise public opinion against such a regressive move, especially at a time when the economy is passing through a prolonged recession. However, one corporate leader has raised his sane voice against this suicidal initiative. Commenting on the new Labour Codes, Wipro founder Azim Premji said he was shocked to learn of the decisions taken by various state governments to weaken labour laws. The Indian billionaire argued that the dilution of the 'already lax laws' would not boost economic activity, reported The Wire.
Limitations of the new Labour Codes
Code on Wages 2019: It aims to simplify the Indian law on minimum wages and to bring all workers in both the organised and unorganised sectors within its purview. However, there are many shortcomings to the act.
The Wages Code only applies to establishments with more than 20 workers. Scroll reported that this limit automatically excludes a large number of informally employed workers, including commission or piece-rate workers, or those who work in the gig economy. The last Economic Census of India (2013) reported that during 2013-14, 131.29 million persons were employed in 58.5 million establishments. The distribution of establishments by the size of employment reveals that around 55.86 million establishments (95.50 per cent) were having 1-5 workers, around 1.83 million establishments (3.13 per cent) were having 6-9 workers, while 0.8 million establishments (1.37 per cent) employed 10 or more workers. It clearly indicates that enterprises with less than ten workers constituted more than 98 per cent of the Indian enterprises. There is little reason to believe that this distribution of enterprises, done on the basis of employee size, has changed much during the last seven odd years. From this data, it can be assumed that more than 98 per cent of the wage earners of India will not be covered under the Wages Code 2019.
The National Labour Reforms Commission had recommended, in 2002, that the minimum wage need not have any correlation to the type of work being performed. The Parliamentary Standing Committee has also recommended that a 'right to sustenance' be made part of the Wages Code. The Wages Code, however, does not refer to consumption, though the state of West Bengal had notified, on September 29, 2011, minimum wages for 63 scheduled employments with 2,700 calorie intake per day per worker according to World Health Organisation guidelines, reported News 18. Notwithstanding, the Code of Wages 2019 provides that the minimum wage is to be fixed with reference to "the skill of workers required for working under the categories of unskilled, skilled, semi-skilled and highly-skilled or geographical area or both,". It may also consider the 'arduousness of work' performed. The issue of basic needs has been discarded.
In January 2019, the Expert Committee on Determining the Methodology for Fixing the National Minimum Wage — chaired by Anoop K Satpathy — recommended a minimum wage for the labourers in India. Using the consumption expenditure and employment data, the committee suggested Rs 375 per day, and a monthly wage of Rs 9,750, as national floor-level minimum wage, with certain region-based variations. Against the recommendation of the Satpathy Committee, the Union government has set the minimum wage at a mere Rs 178, reported Economic and Political Weekly.
It is rightly argued that the setting of different state-level minimum wages is now in the hands of respective state governments, so long as they do not place their minimum wages below the floor set by the Central government for that state or region. According to Nivedita Jayaraman (EPW, December 16, 2019), this might lead to a 'race to the bottom' between states that are competing with one another to lower wage rates and bring in greater investments. The consequence of this competitive federalism, based on labour cheapening between states, would depress wages throughout the country, reported EPW. Various studies by UNCTAD (Gordon H 2001); Inter-American Development Bank (Oman C, 2001) have empirically established that the 'race to the bottom' approach, to attract investment, does not help the host country. Instead, the investing firms end up appropriating all the benefits associated with their investment.
In this context, it may be mentioned that the contractors of major international fashion brands have already started to appropriate the benefits of the minimum wage set by the Union government. On December 16, The Guardian has reported that more than 4,00,000 garment workers in Karnataka have not been paid the state's legal minimum wage since April 2020. Quoting an international labour rights organisation that monitors working conditions in factories, they informed that the estimated amounts of unpaid wages so far would be more than £41m.
IR Code 2020: It aims to streamline the laws regulating industrial disputes and trade unions in India. However, the new IR Code is very heavily inclined towards the employers. For example:
The code stipulates that companies with up to 300 workers will not be required to take prior government approval for firing employees and shutting down the plant or factory. Earlier, firms with up to 100 workers didn't require the government's permission to fire workers. Job security and livelihood of the workers have been traded off to mitigate 'industrial disputes'. Furthermore, now 60 days' strike notice is required to be submitted to the management though earlier, two weeks' strike notice was required.
CSS 2020: The Code proposes the creation of a social security fund for extending benefits like maternity leave, disability insurance, gratuity, health insurance and old-age protection to workers in the unorganised sector.
But the new Code confines the social security arrangements to those in the formal sector only. Scroll reported that for those in the unorganised sector, it simply empowers the government to frame a separate set of social security schemes. It is alleged that, unlike the full-time employees, the gig and platform workers will receive the social security benefits in lieu of lower cash in hand. They also argue that not all the benefits of regular employees have been offered to unorganised workers.
In an analytical piece refuting the claim of 'shrinking informal sector', the State Bank of India economist Biswajit Dhar mentions (in Quint.com) that recently the Indian Federation of App-Based Transport Workers (IFAT) — representing app-based transport and delivery workers — along with two individual drivers who have worked with cab aggregators, had filed a Public Interest Litigation (PIL) before the Supreme Court, arguing that gig workers must be registered as 'unorganised workers' or 'wage workers' under the Unorganised Workers' Social Security Act, 2008. They argued that failure to do so would be a violation of their rights to work, livelihood, decent and fair conditions of work, equality before the law, and equal protection under law, granted by the Constitution. The workers further argued that denial of social security had resulted in their exploitation through forced labour in violation of the Article 23 of the Constitution, reported The Quint.
OSH 2020 aims to regulate the safety, health and working conditions of workers employed in establishments. Actually, it has increased the limit for the maximum working hours from 9 to 12 hours! Enterprises are now allowed to operate four days a week provided the minimum 48 hours of weekly work is done!
It is very clear from this brief analysis that the new Labour Codes have been enacted for the benefit of the investors/employers. According to the World Inequality Report 2022, India stands out as a "poor and very unequal country, with an affluent elite", where the top 10 per cent holds 57 per cent of the total national income, including 22 per cent held by the top 1 per cent, while the bottom 50 per cent holds just 13 per cent in 2021, reported the Indian Express. After the implementation of the new Labour Codes, the condition of the millions of unorganised/informal workers would deteriorate further.
It is important to increase the real wage of the workers to combat chronic recession
In 2008 a 'great recession' had gripped the USA in particular and the global economy in general. Noted economist Ravi Batra argued that the financial crisis was just one symptom of a long-festering economic disease — a disease caused by neglecting basic economic principles over the past 30 years. According to him, the root cause of the crisis was the rising 'wage-productivity gap', observed during the previous three decades, in major economies of the world. As productivity is the main source of supply and wages are the main source of demand, if this wage-productivity gap keeps on rising over time, supply rises faster than demand and the economy faces the problem of overproduction which ultimately leads to depression. This has actually happened in the US and many other economies.
In the case of India also, the International Labour Organisation (ILO) has flagged the same apprehension. The ILO has called for stronger implementation of minimum wage laws and for strengthening of the framework for collective bargaining by workers. This is essential to combat persistent low pay in some sectors and to bridge the wage gaps between rural and urban, male and female, and regular and casual workers. According to the ILO, in 2009-10, a third of all of the wage workers were paid less than the national minimum wage. Most importantly, in India also, the average labour productivity (as measured by GDP per worker) increased more rapidly than real average wages. Thus, India's labour share — or the proportion of national income which goes into labour compensation, as opposed to capital or landowners — has declined, reported The Hindu.
If we analyse the minimum wage rate of India with a few other countries, we will observe that Indian labour cost is even lower than its neighbouring country Bangladesh. The minimum wage of India is INR 178 (IUSD = INR75.75) per day, compared to China's CNY 2,480 per month (1USD = 6.38 CNY), Malaysia's MYR 1,200 per month (1USD = MYR 4.23), Bangladesh's 8,100 BDT per month (1USD = BDT85.79), USA's USD7.25 per hour, UK's GBP 8.91 per hour (1USD = GBP0.76).
What is to be done?
In a recession-hit economy, India should have taken appropriate measures to increase the real wage of the workers so that aggregate market demand increased and supply-demand gap reduced. Instead, the government has taken a regressive step that would widen the productivity-real wage gap further and aggravate the recession. Investors are very unlikely to be motivated to invest in a recession-hit economy. Lack of domestic demand has actually forced major automobile firms to shut down their Indian operations and leave the shore. Six major automotive companies and brands – Ford, General Motors, MAN Trucks, Fiat, Harley Davidson, UM Motorcycles – a number of electric vehicle companies and a joint venture of Eicher Polaris have ceased sales operations in India since 2017. More than 464 dealers have been affected by these exits. According to the Federation of Automobile Dealer Association (FADA), these exits have resulted in 64,000 layoffs and a dealer investment loss of Rs 2,485 crore!
The focus has to be directed to address the primary cause of the recession — the rising wage-productivity gap. The governments must pursue policies aiming to reverse this trend. It is a challenging task and the challenge is more political than economic. The real demand, backed by the genuine increase in income, not through the borrowed fund, has to be raised. To begin with, the governments should (i) reform the tax structure and ensure a more egalitarian distribution of wealth; (ii) allocate more money for social security programmes including medical benefits for its citizens; and (iii) create a pro-labour legal and regulatory environment so that the workers are able to negotiate for a secured job, better wages and other benefits. Unless the bargaining power of the workers is improved, the wage productivity gap will not be reduced.
It may be recalled that to address the great recession of 2008, even the USA government had taken pro-worker initiatives to raise their real wage and reduce the wage-productivity gap. The US President has proposed to outlaw offshore tax-saving strategies — commonly used by US multinationals to reduce cost by off-shoring jobs to low-cost outsourcing hubs. Such laws are also used to evade corporate taxes
The policy initiative was taken by the new US administration by proposing radical changes in the corporate tax structure, wherein no preference would be given to firms shipping jobs abroad, instead tax preference would be extended to the firms that would create more jobs in the USA. This restored some bargaining power to the workers.
The US President had taken another initiative that had led to the biggest resurgence in unionisation across the United States. He was firmly behind the so-called card check legislation (formally known as the Employee Free Choice Act, or EFCA) that made it significantly easier for workers to organise.
During the last one decade, most of the countries of the developed world have taken steps to improve the bargaining power of the workers so that supply demand gap doesn't widen further. This compelled the global capital to look for cheap labour in countries like China and India. Low birth-rate in China is now putting pressure on cheap labour supply. India wanted to take advantage of this situation by reducing labour cost and disciplining workers with new rules and regulations. But this move is bound to backfire as no one will be interested to invest in a recession-hit sinking economy.
Labour codes should be judged from a wider perspective. These Codes will have serious long consequences on the economy. Unless the domestic market is revived, the investment will not flow. India has fallen into a vicious circle of poverty wages. Low wage attracts investors but a lack of adequate domestic market compels them to leave the Indian shore. Policymakers must look for a viable alternative policy to attract investment. Cutting labour costs in the name of labour reform is a suicidal policy.
Views expressed are personal