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Home / Analysis / Unless operational constraints for firms are removed, amending labour laws won’t work

Unless operational constraints for firms are removed, amending labour laws won’t work

India needs to address high costs of starting up and formalising businesses, enforcement of contracts and concerns with land-related issues

analysis Updated: May 26, 2020 17:52 IST
Ritam Chaurey and Gaurav Chiplunkar
Ritam Chaurey and Gaurav Chiplunkar
As multinationals become more vigilant and demand high labour standards, lack of appropriate worker protection policies, coupled with existing inefficiencies of entering the Indian market might further discourage foreign investment that seeks less reliance on China
As multinationals become more vigilant and demand high labour standards, lack of appropriate worker protection policies, coupled with existing inefficiencies of entering the Indian market might further discourage foreign investment that seeks less reliance on China(PTI)

The impact of the coronavirus disease (Covid-19) and the associated lockdown in India on firms, workers and employment has been devastating in many ways. From migrants desperately trying to get back home to small businesses and their workers struggling to keep afloat, the true economic effects of the pandemic are only starting to materialise. As policymakers weigh their options on reviving the economy after the lockdown, they face crucial questions on how to stimulate employment and encourage new business creation. Along these lines, several state governments (for example, Uttar Pradesh, Madhya Pradesh and Gujarat) have already announced amendments to the application of their labour laws over the last month.

The amendments include exempting businesses from the purview of most labour law provisions for the next three years, flexibility to increase working hours, and exemptions from labour department inspections. Labour laws have always been a contentious issue in the Indian context, with over 200 state laws and around 50 central laws governing various aspects of the employee-employer relationship, ranging from closing establishments and hiring/firing workers to payment of minimum wages and ensuring safe working conditions for workers.

While these amendments come with the prospect of stimulating labour demand, one needs to be cautious that such a drastic dismantling of labour laws does not turn counterproductive. There are conflicting views among economists on the effects of easing labour regulations in India, on job creation and growth. On the one hand, while some research suggests that relaxing these laws (especially in the early 1990s) did lead to more employment and output, others have argued that, in fact, labour laws have not changed much on paper, but their enforcement has been substantially relaxed in practice.

What does the latest data have to say on this? According to the World Bank Enterprise Survey for India 2014, less than 5% of surveyed firms actually reported labour regulations as being the biggest obstacle for their business. In comparison, a larger proportion of firms reported corruption (19.9%), availability of electricity (15.3%), tax rates (13%), and access to finance (11.7%) as important obstacles. These also echo the opinions of leading Indian industrialists (such as Rajiv Bajaj, Azim Premji and others) who argue that these “draconian” labour laws are actually not the constraints that are holding back firms. Therefore, relaxing these laws especially after a lockdown might, in fact, further exploit the already vulnerable migrant and temporary contract workers. Moreover, with growing research evidence (from J-PAL, Good Business Lab and others) that links increased worker welfare to improved hiring and job retention, these amendments might negatively affect firm profitability in general over the long-run.

It is also unclear whether these labour law exemptions for the next two-to-three years would encourage new business creation. First, in contrast to the labour-related issues, the costs of starting up and formalising businesses in India are very high. The World Bank’s ease of doing business 2020 report ranks India at 136 out of 190 countries in the ease of starting a business and 154/190 in registering property. Consequently, businesses remain undocumented and informal, making it even harder for current and future policies to benefit them. Second, the courts are extremely congested and slow, with India currently ranking 163/190 in enforcing contracts. Finally, land-related issues have remained another major impediment for the entry of large firms, with many recent cases such as Saudi Aramco facing delays in acquisition. Streamlining and expediting these processes should be prioritised first to encourage new business creation.

More important, demands for better working conditions will only increase in a post-Covid-19 world where worker safety and social distancing measures become the norm. As multinationals become more vigilant and demand high labour standards, lack of appropriate worker protection policies, coupled with existing inefficiencies of entering the Indian market might further discourage foreign investment that seeks less reliance on China.

To sum up, temporary changes to labour laws and those that impact worker safety, protection and well-being in particular, can at best result in short-term benefits to firms. Without resolving the actual constraints faced by firms, both entrepreneurs and workers stand to lose in the long-run. The lockdown has presented unprecedented challenges to policymakers in tackling the disruption of labour markets. In order to have long-run effects, researches from across the world suggest that labour market reforms must be developed in consultation with both firms and workers. As governments decide on policies to revive the economy, striking a balance between protecting the vulnerable workforce, while mitigating actual operational constraints for firms, should be the way forward.

Ritam Chaurey is assistant professor, Johns Hopkins SAIS, and Gaurav Chiplunkar is assistant professor, Darden Business School, University of Virginia

The views expressed are personal

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