Can India’s Modi Government Navigate the Tough Terrain of Labor Law Reform?

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Indian Prime Minister Narendra Modi’s success in attracting investments to the state of Gujarat, where he was chief minister, was largely due to labor law reforms. One of his election promises was that he would create a similar environment for the whole of India. Indeed, in Modi’s Independence Day speech on Friday, he urged global businesses to locate their factories in India. “I tell the world: Come, make in India,” Modi said. “Sell anywhere, but manufacture here.” His government has started taking small steps forward. But already considerable opposition is building up.

On July 30, the Union Cabinet approved amendments to three acts — the Apprentices Act 1961, the Factories Act 1948, and the Labor Laws (Exemption from Furnishing Returns and Maintaining Registers by Certain Establishments) Act 1988. Barely a week later, on August 6, two bills were introduced in the Lok Sabha, the lower house of Parliament. The third — the Labor Laws amendment — is being introduced in the Rajya Sabha (the upper house). The Apprentices (Amendment) Bill was passed by the Lok Sabha last week.

The trade unions were up in arms immediately. “We oppose the amendments vehemently because we feel that they are against the interests of the workers,” says D.L. Sachdev, national secretary of the All India Trade Union Congress (AITUC). AITUC is affiliated with the Communist Party of India. “The workers will be at the complete mercy of the employers,” says Tapan Sen, general secretary of the Communist Party of India (Marxist)-affiliated Centre of Indian Trade Unions (CITU). “They will be without any protection and, given the current unemployment situation in the country, the workers will become slaves of the contractors and employers.”

The Congress Party-affiliated Indian National Trade Union Congress (INTUC) took the lead in organizing a meeting of all the prominent trade unions. Together, they claim a membership of around 100 million. The Supreme Court has limited the unions’ power by banning bandhs (total shutdowns), but the numbers give them lots of clout. The joint meeting was also attended by the Bharatiya Mazdoor Sangh (BMS), the trade union arm of the ruling Bharatiya Janata Party (BJP).The unions have decided to hold a joint national convention in New Delhi in the first week of September “to intensify the nationwide agitation.” (For more on India’s labor law reforms, see this opinion piece by Manish Sabharwal, founder and chairman of Bangalore-based staffing services firm Teamlease Services.)

Incidentally, the labor law amendments are not the only target of the unions. They are opposed to almost every reform initiative of the Modi government. A circular issued by Sen states: “The [union] meeting denounced the retrograde move of the government to allow 49% FDI (foreign direct investment) in the defense sector, 49% in the insurance sector and 100% in the railways, and also the government move to go for huge divestment of profit-making public sector enterprises.”

Opposition to the amendments is also building up in the Congress Party. Although the Congress has only 44 seats in the Lok Sabha (the lower house of Parliament) against the BJP’s 282, it is flexing its muscles in the Rajya Sabha (Parliament’s upper house). The Congress has 69 seats there against the BJP’s 42; regional parties make up most of the 250-member house. The Congress was the first mover in some of these amendments; in 2012, then minister of labor and employment Mallikarjun Kharge told the Lok Sabha that on the Apprentices Act “inter-ministerial consultation has been completed and the proposal is being sent to the cabinet secretariat for consideration.”

“The labor laws are probably the single biggest hurdle to unleashing India’s potential.” — Rajesh Chakrabarti

Now Kharge, as leader of the Congress Party in the Lok Sabha, is opposing the changes proposed by the Modi government. The specific objection to the Apprentices Act reform is that the amendment seeks to increase the minimum number of apprentices employable, per quarter, from 50 to 100 per unit, which Kharge says will encourage companies to use more apprentices at the cost of permanent jobs.

Dress Rehearsal?

The Congress and the unions are perhaps more agitated about the developments in Rajasthan, where four labor law amendments have already been passed by the state assembly. This includes the contentious Industrial Disputes Act, which the center has kept on the backburner at the moment.

“The amendments by the Rajasthan government will push out more than 80% of the industrial undertakings, as well as their workers, from the coverage of any labor laws by way of various aspects like working hours, safety, wages, etc.,” says Sen. “The government says that these amendments are for simplifying or bringing in flexibility. But the reality is that it will have a strong negative impact on the workers.” Twitter  Sachdev adds: “The unfortunate part is that both the Rajasthan government and the union government have not consulted the trade unions. That’s a dilution of the tripartite mechanism.”

“Social dialogue is critical,” says K.R. Shyam Sundar, professor of human resource management at Xavier Labor Relations Institute. “The BMS is opposing the change in the laws because of the absence of tripartite consultation.” Yet that may be just a technicality. On the Factories Act, for instance, the government had detailed all the changes proposed in a written statement to the Lok Sabha in early July. Besides, all the amendment bills were hosted on the labor ministry website and comments were invited.

“These are very important steps in the right direction. The labor laws are probably the single biggest hurdle to unleashing India’s potential,” Twitter  says Rajesh Chakrabarti, a professor of public policy and executive director of the Bharti Institute of Public Policy at the Indian School of Business.”We have nearly 90% of our labor force working in the unorganized sector precisely because of these laws. They hold back employment and, in the long run, hurt both labor and the economy.”

Many see the amendments in Rajasthan, where the BJP is in power, as a sort of dress rehearsal to gauge the opposition. According to the Economic & Political Weekly: “For a state that has very few industries to come up with such proposals shows that the newly-elected BJP government wants to use Rajasthan as a potential laboratory for tinkering with labor laws before extending them on a national scale.” Sen agrees, noting that “the center has been utilizing their government in Rajasthan as a sort of laboratory in its project of overhauling labor laws in favor of employers.”

Sundar, however, says there could be a different strategy at work. “There are hard labor laws and there are soft labor laws,” he notes. “What we are seeing is the decentralization of labor reforms. The center is undertaking the soft reforms, while the hard reforms are being pushed to the states.”

This is possible because labor is on the concurrent list, which means both the states and the center can pass laws on it. “Any state law needs the President of India’s assent before it goes into the statute books. And the President has to act on the advice of the union cabinet,” says Sundar. The president can exercise what is called the pocket veto i.e. he sits on a bill indefinitely. Thus, the union government can exercise control over state laws.

Hire and Fire

Rajasthan has gone one up on the center by amending the Industrial Disputes Act. The key change is that a company may now close down a unit employing up to 300 workers without seeking government permission. The earlier limit was 100 workers. This will allow companies to exit factories or plants that have proved unviable. Permission to close down such units, of course, never comes.

“Rajasthan has raised the limit to 300 workers,” says Sen. “This means that in the majority of the industries, managements will have a free hand. In effect, the government has allowed hire-and-fire for employers, and workers will lose their job security. The employer will pay only the retrenchment compensation and throw them out. Earlier, they had to get the required permissions and the workers had an opportunity to put forth their point. In most of the cases, the applications of the employers were rejected on grounds of public interest.”

The result, however, is that the country is dotted with closed plants. Workers don’t get paid but they hang around in hope. Employers have to write off the capital they have sunk. When Mumbai became too expensive for the labor-intensive textile industry, companies saw moving out of the city as a viable option. In 1982, some 250,000 workers in more than 50 mills went on strike. Technically, the strike continues today. But the mills have either closed for good or moved out. Most of the 250,000 workers lost their jobs.

“What we are seeing is the decentralization of labor reforms. The center is undertaking the soft reforms, while the hard reforms are being pushed to the states.” — K.R. Shyam Sundar

“If it hadn’t been for the labor laws, workers at the Nokia plant in Tamil Nadu would have been happily working for Microsoft today,” says Sundar, giving another example. When Microsoft bought Nokia’s handset business for $7.2 billion, the plant was kept out of the deal because of certain disputed tax demands and the unwillingness of the software giant to acquire a unit where its management freedoms were restricted. Today, Nokia, which is running the plant for Microsoft as a contract manufacturer, has offered voluntary retirement to its 6,500+ staff; more than 5,000 have accepted.

Chakrabarti, however, offers another view. He notes that the closure of the Nokia plan is a result of an acquisition and says: “Given that the workers have voluntarily chosen [retirement], there is not such a huge problem. Closures and exits will be part of the free market system.”

What are the specific objections the unions have to other pieces of legislation that are being amended? One provision of the new Factories Act is that a worker may work overtime for 100 hours a quarter, up from the earlier 50 hours. “The increase in overtime means that the workers will be compelled to do double and triple shifts,” says Sen. “This will result in less employment generation.”

The amendments would also allow women to work in night shifts; they can currently only do so only from 6 a.m. to 7 p.m. “This change is being done in the name of gender parity,” says Sachdev. “But we are opposed to it because we feel that adequate security measures are not in place. In the IT [information technology] and BPO [business process outsourcing] industries, it has been streamlined. But in the factory environment, security is still a big concern….”

Ela Bhatt, founder of the Self-Employed Women’s Association (SEWA), notes that the International Labor Organization (ILO) has ruled that any protective measures applying to women (or any category of workers) shall not be construed as being discriminatory. “In other words, anyone who argues that allowing women to work on night shifts represents some sort of progress toward equality argues in bad faith. The equality we want is not to be achieved by leveling downward…” Congress spokesperson Shobha Oza says, “I don’t think it is advisable to have night shifts for women in factories.”

The Congress view may not matter so much because it doesn’t have the numbers in the Lok Sabha. The Rajya Sabha hurdle can be passed if the government decides to get the bills approved by a joint sitting of the two houses. There are precedents for that: The government of Atal Bihari Vajpayee got the Prevention of Terrorism Act passed in a joint session in 2002.

But it may not be possible to similarly defang the unions. There is a perception that the trade union movement in India has been growing weaker. “I don’t agree,” says Sen. “If that were the case, why are employers and the government so concerned and afraid of the trade unions?” Sachdev concedes a point. “Earlier, the trade unions were mainly based in the organized sector,” he says. “Now, with the closure of many industries, formal labor is being pushed into informal segments. So, naturally, there is a change and the trade unions are reorienting themselves. This takes time.”

Labor Laws vs. Investments

“There are many reforms that are pro-labor,” says Sundar. “The government should start with those. Even the ILO has said that bang-bang reforms can be counterproductive.” Tine Staermose, director of ILO’s country office for India, told Business Standard in Delhi that “rushing through [reforms] is a bad idea. It can lead to labor unrest. Investment is a shortsighted way of approaching such reforms.”

“With the closure of many industries, formal labor is being pushed into informal segments. So, naturally, there is a change and the trade unions are reorienting themselves. This takes time.” — D.L. Sachdev

In a joint statement, the central trade unions have attacked both the haste (“these amendments in labor laws are being pushed through”) and the focus. The statement says: “The unions also expressed dismay over the government’s total inaction in implementing the consensus recommendations on minimum wages…”

Do labor reforms lead to higher investment? “In the medium- to long run, almost inevitably. These are precisely the structural changes needed in the country to bring in investment,” notes ISB’s Chakrabarti. SEWA’s Bhatt disagrees. According to Bhatt, it is a “fallacy” that relaxing social protection and workers’ rights attracts investments and creates jobs. “That would mean that the countries with the lowest wages and without any protective labor legislation attract the most investments. In fact, it is the opposite.”

Bhatt notes that “economic success cannot be achieved by reducing workers to virtual serfdom,” and adds that it depends on many other factors like “high productivity — which requires a secure, protected and skilled labor force — an effective vocational training system, free and universal education, and competent and clean professionals.”

With the first single-party majority in 30 years — and five years of governance ahead of it — the BJP may have a different way of calculating the political cost. Its steps on labor laws may be timid so far, but one way or the other, it will get the changes implemented. Already, states like Haryana, which is ruled by a Congress government, are talking about labor reform. The groundwork has been laid. “We are taking [the proposals] to the cabinet and the chief minister will formally announce it,” state labor minister Shiv Charan Lal Sharma told business daily Mint. Others are also thinking about labor reform — according to Mint, “state governments [are] cutting across political lines [to] compete with each other to attract investments and create more jobs.”

“I think the elections have brought out an important change in the central government’s thinking about what reduces poverty,” says Manish Sabharwal, chairman of staffing services firm Teamlease (see his opinion piece on the labor reforms here). “The previous government — largely guided by the civil service ayatollahs at the National Advisory Council — believed that poverty would be reduced by a regime of subsidies and rights. But this government, thankfully, recognizes that its electoral victory is rooted in a vote for development and jobs.” This means that the government is willing to take on the vested interests — a small vocal minority — that have sabotaged any labor law amendments over the past few decades, he adds. “I think this government recognizes that job preservation is not a form of job creation and creating jobs at the scale India needs cannot happen without tackling the regulatory cholesterol that has [hindered] formal job creation.”

According to Chakrabarti, “The number of people entering the job market in the next couple of decades will be gigantic. Protecting the interest of a small coterie of formal sector employees at the cost of millions languishing in semi-employment or the informal sector will make the entire economy unstable. The government has to make the job market flexible to create more jobs for market entrants. Hire-and-fire is normal and inevitable, but with appropriate compensation and, at times, re-skilling. Many companies do it for their own reputation. The government can set standards there.”

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