The labour ministry’s draft Small Factories (Regulation of Employment and Conditions of Service) Bill, 2014, is an overdue attempt to simplify and rationalise labour legislation applicable to micro, small and medium enterprises (MSMEs). Instead of having to peruse 44 distinct Central labour laws and maintain multiple registers, factories employing 40 or fewer workers, would now be governed by a unified labour-related legislation and have to file only one compliance report, which could be done online. This is significant given that compliance can be particularly onerous and expensive for MSMEs. There are several enterprise-size-invariant transaction costs associated with adhering to regulation, often making compliance costs per employee untenably high for smaller firms. A unified legislation would significantly temper these costs. Moreover, by rationalising regulated areas, managerial energies would be diverted from, say, ensuring the legally mandated number of spittoons and washing lines are present to — as the draft law proposes — migrating to a system of bank-transfer salary payments, which would also serve as a record of employment, useful for workers to avail of their rights.
In July, the Central government had taken its first steps to introduce amendments to labour legislation in a bid to improve the ease of doing business in India. But this reformist moment is not of the Centre’s making alone. In fact, the states have led the way. Starting with Rajasthan in June, which had passed amendments to three Central acts, the site of reform has gone local. The Madhya Pradesh government, too, announced changes to 17 Central and three state acts — indeed, the more than 150 state laws are significant tipping points for businesses — on the eve of its investor summit. If India is to realise a demographic dividend, it needs to generate 51 million new jobs over the next seven fiscals. And if it wants to move towards the formalisation of employment (the informal sector currently employs 94 per cent of workers), if the “missing middle” is to be addressed, labour reform is non negotiable.
Yet, labour reform is no magic wand. For instance, Uttar Pradesh, which is not exactly known to be hospitable to doing business, had in 1983 relaxed Chapter VB of the Industrial Disputes Act, related to rules on retrenchment (the relaxation was withdrawn in 2003). Labour reform is no substitute for looking at the other bottlenecks — poor roads, electricity etc — that cramp and inhibit business.
