Saturday, January 17, 2015

Recent Changes in Labour Laws and their implications for the Working Class

Recent Changes in Labour Laws and their implications for the Working Class

January 13, 2015


By Anamitra Roychowdhury. The author teaches at St. Stephen's College, University of Delhi.


Sweeping changes in labour laws are taking place in India. While launching the "Shramyev Jayate" (i.e. only hard work will win) programme, the Prime Minister urged us to take a compassionate view on "Shram Yogi" (worker) and use them as a source of "Rastra Nirmaata" (nation builder). It would therefore appear from this, that the current government is championing the cause of labour. Curiously, according to the media reports on the event, the industry lobby (CII, FICCI, ASSOCHAM etc.) unanimously applauded the proposed changes in labour laws, while the central trade unions (including Bharatiya Mazdoor Sangh, the trade union affiliated with the Bharatiya Janata Party [BJP]) complained about not being consulted at all and threatened to launch a nationwide protest on December 5, 2014 (see 17 October 2014, The Hindu). Therefore, clearly there is some confusion over the realcontent of the labour reforms. Thus, it becomes imperative to analyze the class character of the reforms and identify their possible impact on different sections of society. This is precisely what the present article seeks to do, in order to clear some confusion that currently prevails.

Self certification by Manufacturing firms and their Inspection

Mr. Modi's emphasis on building a robust manufacturing sector in India is well-known from his "Make in India" campaign. Towards that end he launched a couple of policy measures aimed at increasing the ease of doing business in India: "Ease of business is the first and foremost requirement if Make in India has to be made successful" (see17 October 2014, The Indian Express). India's rank in the "Ease of Doing Business" index actually slipped from 140 to 142 in 2014-15 (out of 189 countries) and Modi's measures are primarily aimed at improving India's ranking next year.

A significant move in that direction is the unveiling of Shram Suvidha Portal, which would allow employers to submit a self-certified single compliance report for 16 Central labour laws. This reform is expected to simplify business by putting the onus of compliance with the firms through self-certification. The Prime Minster described this reform as follows: "These facilities are what I call minimum government, maximum governance". He justified these in the following terms: "Let's start with trust" (ibid.). However, self-certification suffers from a basic drawback of non-revelation of truthful information, if there are incentives for doing so (like saving on a range of compliance cost in this case) [For a different critique see the article by Jesim Pais in 06 November 2014, The Hindu].

One might argue that the problem of non-revelation of truthful information may be largely curbed if there is a rigorous inspection mechanism in place. It is precisely here that Mr. Modi announced another radical change. In the name of ending the 'Inspector Raj' from now on labour inspectors would not be allowed to decide on their own, the establishments to be inspected. Instead, they would be sent to randomly selected establishments (administered centrally through computerized draw of lot; similar to those done during random scrutiny of income tax returns) and have to upload their reports within 72 hours, without future scope of modifying them. However, since labour inspectors generally have better ground level information about establishments and their functioning, centralized selection of enterprises for inspection even if randomly chosen, is certainly going to compromise on the effectiveness of inspection.

In fact trade unions are apprehensive that even if there are complaints of violation of safety norms by workers, even then labour inspectors might not inspect the offending factories – since now inspection of factories can only be done through random draw of lots. In any case, centralized controlling of inspections violates the International Labour Organization's (ILO) labour inspection convention 81 (1947) – to which India is a signatory. This is because according to Article 12 of the labour inspection convention 81, labour inspectors are empowered inter alia, "to enter by day any premises which they may have reasonable cause to believe to be liable to inspection; and to carry out any examination, test or enquiry which they may consider necessary in order to satisfy themselves that the legal provisions are being strictly observed" (emphasis mine). The new stipulation, by regulatinginspectors' visit to establishments curbs the freedom of inspectors to visit any enterprise, thus violating the provisions of ILO convention.

Moreover, the above move is expected to bring down annual labour inspections (currently 3 lakhs; see, 17 October 2014, The Indian Express) very sharply. But cutting down on labour inspections will adversely impact industrial safety, in a country where the culture of adhering to industry safety standards is already abysmal. It does not need mentioning that the workers will be at the receiving end of such deteriorating industrial safety norms. Moreover, this is introduced at a time when there is clear evidence to show that inspection standards in establishments relating to labour and industrial regulations have declined drastically. In the last two decades especially there has been serious under reporting of accidents – only fatal accidents are reported, since they are difficult to conceal, whereas non-fatal accidents go unreported (06 November 2014, The Hindu). This is reflected in the secular rise in share of fatal injuries in total injuries (Figure: 1).


Figure: 1
Source: Indian Labour Yearbook, various issues

It is easy to see that these policy changes are detrimental to labour rights. The rest of the article is devoted to evaluating the possible implications of the recently changed labour laws in Rajasthan. We chose Rajasthan for discussion since this is the first state to change the labour laws and so far is the only case in point.

Recent labour law changes in Rajasthan

The subject of labour being in the concurrent list, the BJP government in Rajasthan led by Ms. Vasundhara Raje recently proposed amendments to three key labour legislations namely, the Contract Labour (Regulation and Abolition) Act (CLRA), 1970; the Factories Act, 1948 and the Industrial Disputes Act (IDA), 1947. Her cabinet approved these amendment bills. The proposals then went for Centre's approval and faced no hurdle – as the BJP in its election manifesto promised to amend the labour laws. Finally, it went to the President seeking his approval and acquired so – thereby turning them into law (see 8 November 2014, Business Standard). These changes are supposed to set off a domino effect as other states are likely to follow suit [According to the media reports the states of Haryana and Madhya Pradesh are already moving along these lines]. This would in effect decentralize the Indian labour market, with 29 states each vying to offer the most lucrative labour regime to attract industries.

The concrete change in case of Contract Labour Act, 1970 is that it would now be applicable only in case of establishments employing 50 or more workers instead of the earlier threshold of 20 workers. Before amendment the Factories Act, 1948 covered those factories employing 10 or more workers (using power) or 20 or more workers (without using power). The recent amendment increased this threshold to 20 workers (using power) and 40 workers (without using power). Finally, according to Chapter VB of the Industrial Disputes Act (IDA), 1947 previously it was necessary to obtain prior government permission to retrench, layoff workers and closedown factories in an establishment employing 100 or more permanent workers1. The recent amendment raised the employment threshold to 300 workers. In this article we shall comment on each of these labour law changes seriatim.

With regard to the Contract Labour Act our observation would be limited to the following implication: making Contract Labour Act (restricting the use of contract workers) applicable to establishments employing 50 or more workers instead of 20 workers would mean that all regular jobs in establishments below 50 workers (but above 20 workers) would be abolished. According to 2010-11 data, around one-third of 2.15 lakh regular workers in the manufacturing sector of Rajasthan were located in establishments employing less than 50 workers. This move would bring in insecurity in the lives of these workers. Moreover, this employer-friendly move would also implicitly encourage the use of contract workers more liberally in establishments employing more than 50 workers.

Let us now discuss the implications of the amendment to the Factories Act, 1948. Any firm engaged in manufacturing activity and registered under the Factories Act comes under the organized segment of manufacturing. Therefore, by increasing the workers' threshold in establishments that is required to register under the Factories Act, some of the factories erstwhile registered under the Factories Act (namely, factories employing 10-19 workers using power and 20-39 workers not using power) would no longer be required to do so. Thus, at the stroke of a pen, these manufacturing establishments would now be categorized under the unorganized sector. Consequently, workers in these establishments now being placed in the unorganized segment of manufacturing would stand to lose on various rights like social security benefits, old age benefits and other benefits (Chandru, 2014).

Additionally, this would deteriorate the quality of manufacturing sector data. This is because Annual Survey of Industries (ASI) conducts survey every year only for the organized manufacturing sector i.e. only those manufacturing establishments registered under the Factories Act, 1948. Because survey is carried out every year therefore data on organized manufacturing is considered to be reliable/firm. However, the same cannot be said for the unorganized manufacturing sector data – since survey in this segment is conducted in five years interval – and for non-survey years estimates are obtained by updating the survey year's figures by the Index of Industrial Production (IIP) (see Roychowdhury, 2005 for details). With the recent amendment, since some of the erstwhile organized manufacturing firms would be pushed into the unorganized segment therefore, as things stand, they would not be surveyed every year by ASI – leading to deterioration of data quality. Next we turn to the most contentious move of amending the IDA, 1947 and try to examine its rationale.

It is normally argued in the literature that Chapter VB of IDA creates unnecessary obstacle in adjusting the workforce of an establishment (and its closure) and consequently hinders employment creation in the manufacturing sector (Kapoor, 2014). Also notice that this particular legislation gives some bargaining power to the working class vis-à-vis employers, by conferring security of livelihood even in midst of a vast pool of unemployed workers.

The reason typically put forward as to why supposedly rigid labour regulations result in stymied employment growth, is succinctly captured by the following observation: "In face of adverse shocks employers have to reduce the workers' strength; but they are not able to do so owing to the existence of stringent job security provisions. On the other hand, when the going is good and the economic circumstances are favourable, the firms may want to hire new workers. But they would hire only when they would be able to dispense with workers as and when they need to. Thus, separation benefits accruing to workers become potential hiring costs for the employers. This affects the ability and the willingness of firms to create jobs" (Shyam Sundar, 2005). This piece of legislation is also identified to be the main reason for India's inability to build a proper manufacturing base.

However, there is neither proper theoretical backing nor any empirical evidence to suggest that the slow employment growth in Indian manufacturing is primarily due to the labour laws. The two most quoted empirical studies in favour of undertaking labour reforms are Fallon and Lucas (1993) and Besley and Burgess (2004). The first study has been criticized thoroughly on grounds that the results are not statistically sound (Bhalotra, 1998). With regards to the second study Bhattacharjea (2006 and 2009) noted that the labour regulation index constructed by Besley and Burgess suffers from a number of shortcomings. Besley and Burgess classified the states of India (pro-worker, pro-employer and neutral) according to their constructed regulatory index and it is precisely here that the shortcoming of their index comes out most starkly. Among various shortcomings in the construction of the index, one important aspect is to neglect the implementation of law. For example, according to their index Kerala is designated as a pro-employer state whereas Gujarat and Maharashtra are demarcated as pro-worker states. This is so even though a World Bank (2003) study [quoted in Anant et. al. (2006) p.256] reports that small and medium enterprises in Kerala receive twice as many factory inspections per year as in Gujarat and Maharashtra.

Such anomalies arise because Besley and Burgess, by putting excessive emphasis on legal statutes, missed out on important counts like implementation of the law and larger macroeconomic issues during their sample period (1958-92). For example, Anant et. al. (2006) noted that reading off directly from state amendments to measure rigidities could be exceedingly misleading because the effect of laws could only be fully realised into labour market outcomes through proper implementation. Implementation in turn depends upon a range of intermediate factors like enforcement environment, culture of governance and compliance, among others. Limited consideration of these aspects can very easily deflect or nullify the presumed effect of the statutes – and hence impair accurate construction of the regulatory index. Now, Bhattacharjea pointed out that since the study profusely used this evidently flawed regulatory index in deriving its results, the outcome of the study is open to question. In fact, there is no study at the all India level conclusively showing manufacturing employment to be adversely affected by restrictions on hiring and firing (the content of Chapter VB).

Alternatively, many micro-level studies document large scale employment adjustments in face of adverse demand shocks. For example, Breman (2004) provides evidence on thousands of workers having lost their jobs in the collapse of Ahmedabad's textile factories in 1980s and 1990s; specifically, restrictions on retrenchment did not stand in the way of adjusting the workforce when about 36000 workers lost their jobs due to closure of several mills in Ahmedabad during 1983 and 1984 (see Papola 1994). Similarly, Sharma and Sasikumar (1996) studying 233 manufacturing firms in the Ghaziabad and Noida industrial belt found that neither employment growth nor fixed capital investments of firms were constrained by labour laws. In fact, at the all India level Nagaraj (2004) noted that, "Between 1995-96 and 2001-02, 1.3 million employees (13 per cent of workforce) lost their jobs". Now, if restrictions on hire and fire really operated as a constraint, how is it that the firms could retrench such large sections of the workforce in such short period of time?

On the other hand, there is evidence on systematic downsizing of the workforce through innovative means like the voluntary retirement schemes (VRS). Indian government constituted a dedicated fund to that end namely, National Renewal Fund (NRF) as part of its 1991 reform process "to provide funds [among others] …. for compensation of employees affected by restructuring or closure of industrial units both in the public and private sector" (Zagha, 1999). It is estimated that until July 1995 the dedicated fund enabled firms to retrench 78,000 labourers from the public sector and further aimed to reduce 2 million workers (ibid).

On top of this there is evidence on firms already introducing reform in the labour market through the back door or, to use Nagaraj's term "reform by stealth". This is through the route of creating informal employment within the formal sector. Commentators have pointed out that employers enjoy enough de facto flexibility through the employment of contract workers in the organized manufacturing sector (Guha, 2009). This is easy to understand; Chapter VB of the IDA applies to only permanent workers of an establishment and not to workers employed through contractors (contractual workers). Thus, there is no prior permission needed to retrench contractual workers of an establishment. Let us see in figure2 what happened to this contractual workforce in the organized manufacturing sector.


Figure: 2

Source: Annual Survey of Industries, various years

It is clear that the contractual, contingent workers sharply increased in the last two decades, precisely coinciding with the period when India went ahead with liberalization policy. Thus, according to the 2010-11 data, one-third of the organized manufacturing sector workforce is out of the ambit of IDA requiring no prior permission for retrenchment. However, the share of contract workers in total workers is an underestimate of the proportion of workers not covered by Chapter VB – this is because even the regular workers employed in establishments employing less than 100 workers are out of the ambit of law. Thus, if we add the number of regular workers below the employment threshold to the contractual workforce then in 2010-11 the proportion of workers for whom no prior permission from the government was necessary for carrying out separation stood at almost 60 percent of the total workforce (Roychowdhury, 2014). Therefore, with such large proportion of workforce not covered by IDA it is difficult to argue that the organized manufacturing sector is crippled by stringent restrictions on hiring and firing.


The foregoing discussion shows that the recent labour law changes, while strengthening the hands of capital, would bring in its bogie uncertainty and insecurity in the lives of millions of workers. Also, they are not based on sound economic logic but are rather gifts to the corporate sector, which has reportedly spent huge sums of money on BJP's election campaign. It is payback time to the corporate sector and the BJP, it seems, is keeping its promise well.

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– Bhattacharjea (2009), 'The Effects of Employment protection Legislation on Indian Manufacturing', Economic and Political Weekly, May 30: 55-62.

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– Roychowdhury (2014): "Recent Changes in Labour laws: An Exploratory Note", <>emEconomic &Political Weekly, October 2014.

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