In February 1976, a new Chapter VB was incorporated in the Industrial Disputes Act, ostensibly as a compensatory measure to provide greater protection to workers at a time when civil liberties of all citizens were under siege. By then, the intelligentsia had become increasingly critical of the Emergency. Then Prime Minister Indira Gandhi’s advisors had suggested that it would be wise to earn the gratitude and support of workers as a class. As the results of the 1977 general elections show, this didn’t work. But this one section on our statute books has earned much opprobrium from the investor community and is still a roadblock to faster economic development and growth.
Briefly stated, Chapter VB requires all establishments employing a “specified number” of workers to obtain prior permission of the appropriate government or designated authority before resorting to layoffs, retrenchment or closure. Establishments include factories, mines and plantations. Prior to 1976, there was no “prior permission clause” in the Industrial Disputes Act of 1947. When Chapter VB was first introduced, the specified number was pegged at 300 workers. By a later amendment incorporated in 1984, the specified number was reduced to 100 workers, thereby making the provision even more restrictive. This is where the Central law stands today.
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Prime Minister Narendra Modi has made repeated calls to the global community to come and “make in India”. But investors with capital and technology have a variety of destinations to choose from and will obviously look for the best opportunities. In today’s business environment, the ability to right-size the workforce in response to changing market conditions is crucial for success, and restrictions on employee adjustments are considered unnecessary impediments. This does not imply compromising with workers’ protection and welfare for corporate greed. It has been aptly stated that “those who have less in life should have more in law”.
The challenge is to strike the right balance between worker protection and investor confidence. The first attempt to amend Chapter VB was made in 1993, when P.V. Narasimha Rao was prime minister. After the economic reforms of 1991, there were persistent demands from investors to relax the restrictive sections on workforce adjustments. To test the waters, a proposal was mooted to return to the pre-1984 status, but it was stillborn. A similar proposal during the last NDA government also did not fructify. In the 10 years of the UPA government, major labour law reforms were put on the backburner, citing compulsions of coalition politics.
For the first time in 30 years, there is no such compulsion. If the government is serious about converting India into a global manufacturing hub — a sine qua non for employment creation and rapid economic growth — it must replace rhetoric with demonstrable action. Investor confidence will get the necessary boost if the Central government is seen to be spearheading labour law reforms. As a concurrent list subject under the Constitution, the Centre can make or amend labour laws, as can the state governments in their respective jurisdictions. Accordingly, last year, Rajasthan amended Chapter VB of the Industrial Disputes Act and restored the pre-1984 status. It has also amended other labour-related legislation. Gujarat and Madhya Pradesh are following suit. But leaving the initiative to the states may result in regional imbalances. So far, the Central government has only undertaken minor, incremental reforms, such as amendments to the Apprenticeship Act, Factories Act, etc. But these incremental steps are not sufficient. The investor community is looking for big-ticket reforms, and Chapter VB of the Industrial Disputes Act will be the litmus test.
Even if total revocation of Chapter VB is not politically feasible, restoring the pre-1984 status should not be difficult, especially after the precedent set by Rajasthan. As an accompanying measure, the rate of compensation for layoff, retrenchment and closure can be appropriately enhanced. The fear of large-scale worker displacement is also exaggerated. Lifetime employment is a historical relic. Today’s skilled workforce has much greater employability and resilience.
No doubt, several other labour laws also need rationalisation for ease of compliance and business success. But because of the notoriety of Chapter VB, Indian labour laws are seen as some of the most restrictive in the world. That is why it must be flagged as the priority of the Central government.
The writer, a former IAS officer, was senior specialist in industrial relations and labour administration, ILO