Last week, the Union cabinet approved the Labour Code on Industrial Relations, 2019, which will allow companies to hire workers on fixed-term contracts across all sectors, to provide more flexibility to industry while ensuring equitable treatment to workers on social security benefits. This Code, which will have to be approved by Parliament, marks the merging of provisions of the Industrial Relations Act, the Trade Union Act and the Industrial Employment Act, the third of a set of four codes the government has proposed as part of a broader labour reforms push early on in its second term. Underway is the amalgamation of 44 national labour laws into four codes on wages, industrial relations, social security and welfare and occupational safety besides health and working conditions, to ease the burden on industry, and to protect the rights of workers.
The latest changes to labour laws follow a half-way house approach, with the threshold for government approval for sacking workers kept unchanged at 100, though there is flexibility for changing it through a notification. Getting these labour codes approved in the near term and persuading states, too, to come on board on a subject which is on the concurrent list, will be the next challenge. If there is scepticism on this count, it is because of the fact that, apart from Rajasthan, few, including large BJP-ruled states with a major industrial base such as Maharashtra, have warmed up to these labour reforms. Political economy considerations have meant that more than a quarter century after India’s opening up, the missing piece has been labour reforms. That has had an impact on India’s manufacturing sector — in terms of discouraging firms from making the next leap on productivity and in creating more jobs. This year’s Economic Survey made the point that units in states that have made the transition towards more flexible labour markets were 25.4 per cent more productive than their counterparts in states which had rigid labour laws.
There is indeed a strong case for greater flexibility on these laws to generate more jobs in an economy where 10 million young people enter the labour market annually and for easing the compliance burden for Indian industry. Even more so considering that Vietnam, Indonesia and Bangladesh are far more competitive in labour intensive sectors, positioning their economies to take better advantage of the scenario unfolding in China because of a tariff war and with foreign companies moving out. The Indonesian President, Joko Widodo, has already promised that major changes to labour laws will be on top of his agenda as he seeks to improve the quality of the country’s labour force. Given this competitive drive in the region to attract investment, any delay or failure to push through the proposed changes by a government which has the comfort of far more numbers this time could further hurt economic growth.