south asia watch on trade, economics and environment

India’s attempts to alter the labour code: Reforms or retreat?

Avinash Chandra Gupta

Over 120 million workers have been thrown out of work since India imposed the lockdown on 24 March 2020 to contain spread of COVID-19. Survey of workers receiving relief from NGOs indicate that nearly two-thirds of the workers have lost jobs. The lockdown has been a humanitarian disaster as well, as hundreds of thousands of workers are having to walk back to their homes, in a process in which hundreds have died. Although various forms of support measures, such as cash handouts, subsidized food, have been implemented, surveys show that 31 percent of urban poor are yet to receive food relief while 70 percent have not received cash. There is an urgent need for effective relief measures as well as robust revival in economic activity to prevent deprivation and morbidity. On the economic revival front, India’s state governments are attempting sweeping deregulation of their labour markets. While the stated policy 2 position is that the deregulation and flexibilization of work assists in restarting the economic activity, there is significant evidence that flexibilization may not kick-start the economy and in fact hurt economic prospects. More crucially, the wholesale deregulation, in its current form, worsens condition of work and workers. In this sense, the attempt is hardly a reform that it claims to be. The move hardly guarantees revival and may, in fact, end up hurting the working classes.

Indian states like Madhya Pradesh (MP) and Uttar Pradesh (UP) have, in recent weeks, attempted sweeping deregulation of their labour markets. For instance, workhours per day has been increased from the existing 8 to 10-12 hours per day while trade union activity stands restricted. The ordinance passed by UP—Uttar Pradesh Temporary Exemption from Certain Labour Laws Ordinance 2020—exempts new as well as old firms from complying with all but five laws for the next three years. The ordinance requires assent from the President to become law, labour being a concurrent subject. The ordinance has attempted to do away with laws relating to equal remuneration, 8-hour workdays, trade unions, industrial disputes, shops and establishment (regulating work in shops; work hours, wages, holidays etc), occupational safety and working conditions. The UP government’s position is that the deregulation aids quick revival of economic activities, greater investment as well as job creation. UP’s economic advisor, for instance, has argued that although the state’s comparative advantage lies in cheap labour, distortionary labour laws inflate the cost of labour. The economic advisor cited flexible labour laws—and hence low labour costs--in Vietnam and Bangladesh as the reason for the countries’ rapid industrialization and mass job creation. UP government has suggested that with the move, it could attract corporations that are looking to relocate from China. Some sections from the industry associations have been supportive of the ordinance and point out that measures like 12-hour workdays and restriction of trade unions will help overcome the present crisis.

It has been suggested that, owing to onerous regulations, firms have chosen to remain small (since most regulations apply to firms employing 100 or more workers) and that this has resulted in India’s massive informality (between 80 to 90 percent workers are in the informal sector). Proponents of deregulation argue that labour regulations inflate labour costs and hence disincentivize investment while the industry keeps switching to capital intensive operations. Furthermore, it is argued that the vast majority of unorganized sector workers have never had regulatory protection anyway and hence deregulation should be pursued as it offers greater opportunities towards reduction in informality. Notwithstanding the government’s fiery rhetoric that the wholesale flexibilization is aimed at creating jobs for the returning migrant workers, UP’s ordinance is driven by rather problematic and sweeping assumptions. To be sure, India’s existing labour regulations—with over 40 federal laws and over 200 state-enacted laws and amendments—are considered complex and wanting of reforms. Wholesale deregulation and flexibilization, however, are barely the required initiatives.

The argument that labour laws raise cost of doing business and end up disincentivizing investment, jobcreation and economic growth and that merely doing away with such regulations will result in investment and growth, is problematic. In any case, the labour laws are being bypassed flagrantly and this has been well documented. For instance, those charged with inspections (around safety or workhours) are being easily bribed to look the other way including by highly resourced export-oriented firms that have resources to comply with regulations. When minimum wage regulations require depositing of wages into bank accounts, employers ask workers to hand back the excess wage in cash. Surveys show that none of the contract workers got recently amended minimum wages even in regions like Delhi. Indeed, slapdash enforcement has been a norm and such order has harmed workers more. While the quest still is to look for cheap labour it is pertinent to highlight that not only have wages stagnated since the 1980s, tacit business-state collusion, again a well-documented phenomenon when it comes to labour regulations, has meant that collective action programs have been increasingly difficult to carry out in India. Indicative of the declining bargaining power of labour, can wages further be reduced and would not this mean outright exploitation waiting for social conflicts is a pertinent question. Costless hiring and firing, a key component in the deregulation drive and a professed driver of efficiency, is already a reality in India. Although proponents of deregulation highlight labour legislation as among the principal irritants in investment and job-creation (Economic Survey 2019 made such argument), easy bypassing of the labour laws mean that such regulations hardly feature as among the top challenges for businesses particularly. Predictably, 2017 study finds that recent deregulation attempts in certain states have produced minimal if any additional investment, employment or growth. In fact, units under the purview of labour laws saw more 3 employment generation. It is important to highlight here that while the UP government claims to reduce informality and enhance wellbeing of workers via its deregulation efforts, the intent of India’s state governments is questionable when it comes to ameliorating the plight of informal workers. In 2008, India’s federal government has passed the Unorganized Workers Social Security Act but till date, states are yet to frame rules to implement the law.

A key contention in the deregulation attempt (and by proponents of deregulation) has been that the labour laws do not cover a vast majority of workers. To be sure, there are nuances in this. Trade union movements (around workhours or safety) have benefitted informal sector workers indirectly whether it is work hours and workplace safety. Furthermore, and as a consequence of the movement, even unorganized workers in recent years have formed trade unions despite resistance. Suspension of legislations whether it is working hours (increasing work hours from 8 to 11-12), trade unions or occupational safety, hence, is clearly detrimental to health, motivation and efficiency of workers. In fact, noncompliance to it is in contravention of ILO conventions.

It is argued that with deregulation comes greater growth and structural transformation and that this instead, reduces informality. Besley and Burgess, for instance, argues that when regulations are heavier and are pro-worker—contrary to pro-business—this leads to high levels of informality, low labour force participation and high unemployment. While we have seen elsewhere in the article that recent deregulation attempts by Indian states have not positively impacted investment, employment and economic growth, it is important to emphasize that deregulation and flexibilization can in fact hurt economic prospects owing to precarity and wage moderation that they bring about. A 2019 paper by Davanzati and Giangrande, deploying Kaldorian-Marxist perspectives, sheds some light into these intricate mechanisms. The paper finds that labour market deregulation and the attendant precariousness among workers dent aggregate demand and has a negative effect on economic growth, investment and employment. The structure of and variation in aggregate demand shapes growth of output as well as labour productivity. Such policies, in fact, may result in long-term economic stagnation. This happens as labour share in national incomes decline resulting in greater inequality. Owing to deregulation-induced wage moderation, and hence workforce’s reduced motivation and quality, growth in labour productivity, as well as output, suffers significantly. Studying Italy, the study finds flexibilization policies such as nonindexed wages, restricted collective bargaining and instant hire and fire have reduced worker protection levels by over 40 percent. Despite greater hours worked, Italians produce less GDP per hour worked than peers. An important observation of the study is that a large number of small firms that cannot upgrade lobby to moderate wages—a strategy that results in reduced costs but ends up denting not only aggregate demand but also social cohesion.

Although the labour regulations are wanting of reforms, wholesale abandonment of labour laws including those specifying 8-hour workdays, occupational safety and collective bargaining are a retreat and no reform as such. Such regressive shifts not only hurt worker wellbeing and productivity but also economic prospects.


Mr. Gupta is Research Officer at SAWTEE. This was published in SAWTEE’s eNewsletter Trade, Climate Change and Development Monitor, Volume 17, Issue 5, May 2020.