Indian labour law reform

Emerging Markets

Indian labour law reform

Government reforms aimed at addressing widespread underemployment could be key to unlocking future growth.


The background

At first glance, labour law would seem to be a bit esoteric for most people, even diligent investors. However, it is one of the structural levers that can be instrumental in boosting economic growth.

Demographics has consistently been offered as one of the structural reasons for optimism on investing in India. The country has a population of 1.3 billion, median age of 29 and growing at 1.14% per year. Allowing for infant mortality rates of around 30/1000 (according to the World Bank) that means around 14 million new citizens born every year. The country produces around 2.6 million1 STEM2 graduates (second only to China), which is clearly a significant positive. However, around 13 million3 young people join the working age population every year and only 3 million or so find a job.

The Countries With The Most STEM Graduates

Recent graduates in Science, Technology, Engineering & Mathematics (2016)

Source: World Economic Forum.

In the next five years, the rate of increase of working age population in India will be bigger than the equivalent in the rest of Asia Pacific, the US and the EU combined. For the country to grow its economy, it is critically important to address the prevailing underemployment.

The implications

Companies hesitate to employ permanent employees because they cannot down-size if business conditions weaken. Further, at the federal level, if a company employs more than 100 people, it needs government permission to let someone go. This has led to a situation where manufacturing facilities are kept illogically small due to this requirement.

Absent any movement on a “hire and fire” law at the central level, various state governments took the lead and amended their labour laws to increase that threshold to 300 workers. States that moved forward on this are Andhra Pradesh, Assam, Haryana, Jharkhand, Madhya Pradesh, Rajasthan, Uttarakhand, and Uttar Pradesh.

The government has provided contractual labour as a more politically palatable alternative to ‘regular’ labour. Contractual labour is fixed term and has less rights, and employers are not incentivized to invest in training, meaning these contracts tend to be short and workers have no benefits and little visibility. Furthermore, contract workers tend to be paid around half the wages of regular workers.

The reforms

The government is seeking to consolidate 44 labour laws into 4 labour codes: wages; industrial relations; social security; and safety, health and working conditions. Of the four, the code on wages has been passed by parliament, and the law for implementing will come after framing the rules under the code. The other three have been sent to the Parliamentary Standing Committee on Labour for scrutiny before they will be introduced into parliament.

The three codes are likely to be introduced in this upcoming session. The budget session of parliament runs from 31 Jan – 11 February, and then again from 2 March – 3 April.

Of these, perhaps the code on industrial relations is the most controversial. The government has shied away from a “hire and fire” law, given that there will be significant political opposition to that, including from the RSS, the ideological parent to the BJP. Rather, instead of lifting the threshold to 300 across the board, the code on industrial relations will give either the state or central government power to reduce or increase the threshold via notification rather than via parliamentary action.


Footnotes:

1 Statista and World Economic Forum, 2016

2 Science, Technology, Engineering and Mathematics

3 UBS Q-series India, January 2018

Definitions:

The Bharatiya Janata Party (BJP) is one of the two major parties in the Indian political system, along with the Indian National Congress. As of 2014, it is the country's largest political party in terms of representation in the national parliament and state assemblies.

Rashtriya Swayamsevak Sangh, abbreviated as RSS is India’s leading Hindu nationalist organization.

The World Bank provides financial and technical assistance to developing countries around the world. Established in 1944, it is based in Washington, DC.

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