Factory reset: Making labour codes effective is a big step forward

The Union government last week brought into effect four labour codes aimed at modernising India’s labour-market regulation. As reported by this newspaper, the Codes have become effective for standalone provisions where further rule-making is not needed. Since the draft rules were framed a few years ago, the government will make the necessary changes to reflect new realities. It is expected to come up with revised draft rules for consultation. The Codes will be fully operational once the revised rules are notified. The bringing in of the Codes — the Code on Wages (2019), Industrial Relations Code (2020), Code on Social Security (2020), and Occupational Safety, Health and Working Conditions Code (2020) — will be one of the biggest reforms in recent years. Outdated labour laws and regulations are believed to be one of the biggest impediments to sustained higher growth, particularly in the manufacturing sector.

 

From companies’ perspective, the Codes are expected to reduce the compliance cost significantly and enhance flexibility in hiring with thresholds for layoffs/retrenchment/closure increased from 100 earlier to 300 workers, with the provision for states to enhance the limit. The labour market will also become more formal. For instance, appointment letters need to be given to all workers. A written contract will make things more transparent. Under the Code on Wages, 2019, all workers will have the right to a minimum wage, and enterprises are expected to pay wages in a timely manner. In this regard, it will be important that the minimum wage is decided taking into account the requirements of both the labour and businesses. One of the most significant wins is for gig and platform workers because, for the first time, they have been legally recognised under the Social Security Code. Further, workers will have Aadhaar-linked universal account numbers, which will give portable benefits across states, a crucial feature in a country where internal migration is increasing.

 

While the Centre is expected to publish the draft rules and notify them in due course, state governments have made significant moves. A recent analysis shows that 16 state governments this year implemented 38 reforms, and labour reforms constituted 37 per cent of these, such as allowing women to work night shift, raising daily work limits to 10-12 hours, expanding overtime caps, or reducing documentation for small establishments. With the Codes coming in, states will be able to frame more favourable rules to attract investment. However, the reform is not without costs, especially for micro, small, and medium enterprises (MSMEs). The extension of social-security coverage and other mandatory requirements will increase the outgo for MSMEs and may be particularly difficult for those operating on low margins. However, on balance, experts have argued that the Codes will benefit MSMEs with a sharp reduction in compliance costs. Costs may also rise for delivery platforms even as most of them are running in losses.    

At a broader policy level, the recently proposed national labour and employment policy, Shram Shakti Niti, underscored the same goals of social security, formalisation, and inclusive growth. However, the system will need continuous refinement, especially in response to rapid changes in the nature of work. This will require governments, state and central, to continuously engage with businesses and the labour market. The Indian labour market has remained largely informal, partly because rigid labour laws discouraged firms from hiring, preventing them from achieving economies of scale and competing effectively in global markets. The Codes should help reduce impediments to economic growth and employment generation.