Covid crisis offers room to erase thresholds of Industrial Disputes Act that affect workers, employers

What makes such a visual moving, in more ways than one, is that those in the picture belong to the category of the instant destitute. It just took a week or two of joblessness to drive these workers to despair — their economic body mass index is that low. Supply and demand economics speak in tongues that are remote; they don’t respond directly to the visual shock of this image. What made so many migrants suddenly long for their village, the very place they were happy to leave just a short time ago?

The answer lies in our Industrial Disputes Act (IDA), the motherboard of our labour laws, which has encouraged short-term employment, low skills and zero security. It did this by setting up thresholds which disincentivised long-term commitment of workers to entrepreneurs and vice versa. It also kept firms informal and unwilling to invest in human capital. This is why when the lockdown happened, that image on the highways played out like a spontaneous, macabre, flash dance.

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How exactly did the thresholds in the IDA accomplish this? We can cut to the chase and go to Chapter V-B of the IDA, where its core provisions are stated almost “mantra-like. There are three thresholds which are absolutely pivotal: Hire more than 99 workers, and you will have to notify the government before you can fire any one of them. Hire more than 20 and you open yourself up to provident fund commitments and bonus payments. Finally, the ultimate threshold: If you want to deny workers severance pay, never keep them continuously employed for more than 240 days.

Given these provisions in the IDA, it will need either a foolish entrepreneur or one with extraordinary courage to hire more than 99 workers for over 240 days. The non-exceptional employers, that constitute the majority, are naturally tempted to observe these thresholds and duck under the radar. This is made easier by the fact that these thresholds mesh well with the fear that the middle-class — and upwards — have of a working-class takeover.

As a result, these thresholds have only encouraged the informal sector, where both unregistered labour and unregistered entrepreneurs dominate. Since there are constraints on both the workforce size and duration of employment, upskilling and R&D naturally become early casualties. India spends only 0.7 per cent of its GDP in R&D, one of the lowest in the world, while South Korea spends 4.2 per cent.

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Not surprising, then, that the IDA has created a perfect storm. It has led to the proliferation of informal enterprises and low-skill workers. In the first 15 years of this century itself, over half the increase in total employment has been that of contract workers. This has also led to a phenomenal rise in MSMEs as the IDA has spooked entrepreneurs from harbouring any ambitions to grow big and formal. The MSMEs have, consequently, increased in number from 3.6 crore units in 2012 to about six crore today.

Sadly, over 94 per cent of MSMEs are in the micro sector and their contribution to GDP is just not measuring up. In 2012, MSMEs produced 37.54 per cent of our GDP, but this number fell to 30.7 per cent in 2015, and in 2019 it decreased further to 29.7 per cent, though they are still working full throttle. Yet, the lure to stay on the good side of the IDA thresholds is so compelling that even formal units are today outsourcing from the informal ones. Over time, the IDA has succeeded in converting a large number of organised sector companies into strange, hybrid economic creatures, both fishy and foul.

In the ultimate analysis, the IDA does not produce winners, only losers. The workers remain skill-stunted and insecure, and the entrepreneurs, too, pull back from releasing their much-vaunted “animal spirits”. Now, imagine a different scenario without the IDA thresholds. Under this altered dispensation, every worker — regardless of factory size — is entitled to the same rights. Likewise, every employer, regardless of factory size, can hire and fire workers.

The outlook changes dramatically. There is greater freedom on both sides, but this freedom comes with a price that does not discourage either size or skills in an enterprise. The worker can now be fired without notifying the government, but must be compensated with severance wages, regardless of the size of the firm. Also, unlike the IDA, all the firms must have a formal dispute resolution board.

Now that the enterprises have been freed of the size threshold, entrepreneurs get no advantage in dwarfing their firms. Other reforms can soon follow, such as allowing for workers’ representation in a firm’s supervisory board, as it happens in Germany. Measures such as these create trust between employees and employers, and also remove the threatening spectre of a working-class strike. We have to free ourselves from that psychological corner before the next epidemic strikes, else the migrant workers will be on the streets again.

Speaking of health, India has an opportunity here. The lockdown has etherised our economy and this is the right time to strike surgically. The IDA thresholds must go and not be merely fiddled with, as some states have done.

We need a specialist with a scalpel, not an urchin kicking the can down the road.

This article first appeared in the print edition on May 30 under the title “Law that produces losers”. The writer is a Delhi-based sociologist.

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