A step forward

There is no substitute for an overall change in labour laws

The Union Cabinet last week gave its assent to the Industrial Relations Code Bill, 2019, which will now be laid before Parliament for deliberation. The Bill is partly a product of a years-long effort at the Union labour ministry to codify and simplify the maze of relevant regulations across many laws, several antiquated, governing the treatment of workers in India. Three other codes are planned; one, on wages and pensions, has been passed into law, while another, on working conditions is being discussed in Parliament. The fourth will be on social security, and will be closely watched for its fiscal implications. But this particular code, on industrial relations, has been among the most anticipated. It has been a long standing demand of both employers and economists that the laws be amended to allow for greater flexibility in the labour market. India has among the most restrictive regulations regarding retrenchment in the world, which has been argued to be a significant disincentive against capital investment in manufacturing. The hope was that the new code would go some way towards rectifying this situation. 

In the end, the Bill falls short in certain significant respects. It is, in fact, a restatement of the status quo. The central question of whether “hire and fire” is to be made easier for large employers has not been directly addressed. Companies with over 100 employees can still not lay off regular workers without government permission. However, the code permits this threshold, of 100 workers, to be changed by notification. This is in keeping with the current approach, which is to allow states to make piecemeal changes to the labour law that are then given presidential assent. However, there is no real substitute for an overall, national-level change to the labour law that will significantly raise the ease of doing business over India. 

One consequence of the difficulty in laying off regular workers is the rise of contract labour. In many factories in India, regular employees work alongside contract employees doing the same work — but the latter have far fewer benefits and privileges. This situation persists in spite of court judgments against the practice. The Code has regularised the use of contract labour, as long as these employees are also given statutory benefits like insurance and leave encashment. This will raise the relative cost of employing contract labour. The question is whether the producer response will be to reduce overall employment or increase the number of employees who are regularised. Importantly, companies will be able to hire these employees themselves directly, removing the need for a go-between or contractor. 

One outstanding issue is the question of compensation for retrenchment. It is only just that if there is greater flexibility in the labour market, it be matched by higher compensation for workers who are laid off. In this respect, the new Code falls short. But, in spite of its flaws, it is an important step forward. It is to be hoped that, given that once the Bill is passed, changing the threshold at which government permission is required for retrenchment can be done at the stroke of a pen, and the executive will swiftly make the requisite all-India changes.