The myth of India Inc’s labour pains
It’s not just the inability to downsize that constrains it but opaque hiring practices and the illogic of size-based legal thresholds that encourage companies to stay small
When the Second National Commission on Labour made a study tour to China in 2002 to understand the highlyacclaimed and liberalised labour law regime, it was in for a major surprise.
In its report to the then National Democratic Alliance government, which suggested dividing India’s 44 labour laws into four codes (which is being implemented now), the commission wrote a detailed note on “misconceptions about Chinese laws” after it received scores of suggestions from employers to follow the Chinese model.
“Perhaps those who advised us to recommend labour laws similar to what China has, may have to undergo a second thoughts… because the kind of freedom that they thought the entrepreneur had in China is not found in the laws as they exist,” the commission wrote, noting that it was not true that companies are “completely” free to set up and close enterprises, to hire and fire at will.
For decades, the corporate world and economists who support the principles of “free market” have been arguing in favour of easier “hire-and-fire” policies for companies in India as a key labour law reform. This is because in India the moment companies hire 100 or more workers they need to seek official permission for retrenchment, according to the Industrial Disputes Act of 1947.
But at least eight states in India have already allowed more firms to retrench without knocking at the government’s doors (by increasing the threshold from 100 to 300). It is another matter that only three states — Gujarat, Madhya Pradesh and Rajasthan — have subsequently increased the severance pay from 15 days of an employee’s wages per year worked (one of the lowest in the world) to different levels.
Covid-19 has brought back the long-standing demand for reforming labour laws in India with comparisons being drawn with China and Vietnam.
But is “hire-and-fire” a cakewalk in China? First, companies in the Communist-ruled nation are required to comply with the labour laws related to contract workers, minimum wages, trade unions (though there is only one which is state-owned), social security, occupational diseases and work safety.
Most of these were strengthened significantly in the Labour Contract Law of 2007, which stipulates the need to have a written contract for hiring permanent workers, task-based workers or those on a fixed tenure, also known as fixed-term contracts. This is the first step towards clearly establishing an employer-employee relationship. For part-time employees, who work four hours a day on an average, oral contracts continue.
There are conditions to hiring workers on a fixed-term contract. Employers can hire the worker immediately but need to firm up a written contract within a month otherwise they have to pay double the normal wages in the second month. If employers fail to give a written contract to workers within a year, workers are automatically entitled to become permanent workers. The short-term contract can be renewed twice after which the worker will become a permanent employee. India has also proposed a fixed-term contract system, which is a part of the upcoming labour codes, but it puts no cap on the number of times a contract can be renewed.
The written contract in China has to state the work-related conditions, including job role, contract term, working hours, leave and rest, retrenchment compensation, insurance, workplace protection, and so on.
India’s labour laws do not make it mandatory for companies to give workers appointment letters, which most often serves as a written contract. Over two-third of workers in India employed on a regular salary do not have a written contract, according to the official periodic labour force survey conducted by the National Statistical Office in 2017-18.
This means a large part of the workforce with regular income have no clue about their employment terms and this is a major part of the problem that millions of migrant workers faced when they were forced to go back to villages after the national lockdown.
In India, companies (but only those hiring at least 100 workers) need to frame what is known as a “standing order”, which has to be placed on a notice board at or near the entrance of the unit, specifying the conditions of work and the retrenchment norms. But that’s not quite the same as a bilateral contract. The government is seeking to correct this by introducing a clause in the Occupational Safety, Health and Working Conditions Code.
In China, firms do not have to seek official permission for lay-offs but there are strict measures that need to be followed. On paper, severance pay is double the sum required to be paid in India. Mass lay-offs (to the tune of 10 per cent of the workforce) require consultation with state-owned trade union for 30 days and companies need to inform the local labour authorities before implementing the plan.
What makes businesses fear India’s labour laws, then? The answer is simple: it’s complex. There are 674 compliances under labour laws, which companies need to follow at the central level and another 26,484 at the state level, according to data compiled by Teamlease Services. There are 44 central and 387 state labour laws in total.
What deters businesses from expanding in terms of manpower? The manner, in which the labour laws are designed on the basis of size-based thresholds ( see table). To stay under the labour laws radar, most Indian companies stay small — even if it means operating fragmented units to bypass tedious paperwork and labour inspections. Over 98 per cent of establishments employed less than 10 workers, according to the Sixth Economic Census 2013-14.
The government’s proposed labour codes will rationalise labour law provisions, with common definitions for wages, workers and establishments, but it will continue to rely on thresholds. Even appointment letters would be mandated only for firms hiring at least 10 workers. Given that the codes may take some time to materialise since they require Parliamentary scrutiny, the Centre is pushing states to bring in small factories major labour laws. This approach may not work well for the long term. It’s time we go back to basics — make labour laws that are simple, incentivise companies to grow and genuinely protect workers’ rights and entitlements.