Opinion Bibek Debroy writes: As PM Modi said, the onus for labour reform is on the states

Contrary to some perceptions, this wasn’t only about an exit policy for labour, that is, offending sections of the Industrial Disputes Act (IDA), relating to lay-offs, retrenchment and closure. The inspector raj associated with labour laws affected an enterprise in all three stages of its life cycle – entry, functioning and exit. All this has been discussed threadbare in the literature. Since non-wage transaction costs associated with hiring labour were high, and not just wage costs, production became excessively capital-intensive. In 2021, Teamlease documented 30,000 compliances and 3,000 filings associated with labour laws. That apart, production was fragmented, to bypass coverage of organised sector labour laws.

Since labour is in the Concurrent List, some states introduced reforms. These include Andhra Pradesh/Telangana, Delhi, Gujarat, Haryana, Himachal, Karnataka, Madhya Pradesh, Maharashtra, Punjab, Odisha, Rajasthan, Tamil Nadu, Uttar Pradesh and Uttarakhand depending on how one interprets labour market reform. The Economic Survey 2018-19 classified states into those with flexible labour laws and those without, and the list above is that of those with flexible labour laws.

Flexible doesn’t always mean statutory changes. Flexibility can also be imparted through flexible orders and regulations – the domain of the executive. If flexibility and harmonisation, leading to lower compliance costs, are desirable, what effects have these changes led to? Beyond superficial correlations, few will hazard to answer that empirical question. There are several reasons for this.

First, there isn’t a long enough time-series. Such changes are of recent vintage, say, post-2014. Second, what is the data source? The only possible source is the Annual Survey of Industries (ASI), which imparts some sampling biases. Third, does one mean manufacturing, or services too? Services are essentially covered by state-level Shops and Establishments Acts. Ipso facto, one primarily has manufacturing in mind. Fourth, as an exogenous shock, the Covid-19 pandemic disrupted matters. Fifth, labour intensity in production is a function of relative prices of labour (not simply wage costs) and capital. Thus, it is influenced by subsidies (tax exemptions) that encourage capital usage. Sixth, technology is such that modern manufacturing has turned increasingly capital-intensive and there is also a trend to increasingly use contract labour.

With those qualifications, what does tentative empirical probing show? Flexible labour laws have a positive impact on employment and the setting up of new units, but they aren’t a magic wand. They matter at the margin, underling the need for broader reforms, such as infrastructure, law and order and skills and education.

Against this background, after the recommendations of the Second National Labour Commission (2002), and several other reports, the Union government unified 29 statutes and passed (2019, 2020) four Codes on wages, safety (and health), industrial relations and social security. Note that this was after a lot of discussion and debate, after the Bills had been referred to a Standing Committee. These are statutory changes, to be followed by new rules under the new Codes and one can accept, because of the preceding debate, that these statutory changes are desirable. As the Prime Minister recently remarked (in August) at the National Labour Conference, the onus is on the states.

How nimble have states been in announcing new rules? Let’s focus on the larger states, ignoring the smaller ones for reasons of space. For the Code on Wages (2019), the only major state that has not yet announced Rules is West Bengal. For the Code on Industrial Relations (2020), the list has Rajasthan and West Bengal. For the Code on Social Security (2020), it is Rajasthan, Tamil Nadu and West Bengal. For the Code on Safety, Health and Working Conditions (2020), it is Rajasthan and West Bengal. The mention of Tamil Nadu and Rajasthan is somewhat odd since they had introduced labour market reforms earlier, as mentioned in the Economic Survey 2018-19.

Across the four Codes, the one that really sticks out is West Bengal. In passing, there is a Model Shops and Establishments Act, framed by the Union government in 2016. Labour market rigidities and complex procedures also exist in state-level Shops and Establishments Acts and in accordance with the spirit of the changes incorporated in the four Codes and Model Shops and the Establishments Act, these too need to be made more flexible. Evidence doesn’t quite suggest states are eager to impart that flexibility. Surprisingly, or perhaps not, this lack of eagerness typically characterises the states presumed to have a labour cost advantage. Some states evidently labour under an illusion.

The writer is chairman, Prime Minister’s Economic Advisory Council. Views expressed are personal