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Labour law reforms: Enough to attract China-refugees?.

Date: 05-10-2020
Subject: Labour law reforms: Enough to attract China-refugees?
Attractive tax rates and fixed-term contracts good for firms that wish to relocate; but a lot of red-tape remains, as does bad policy.

Perhaps the best thing about the Opposition’s campaign against the three agricultural Bills passed by Parliament is that this muted the opposition to the four labour Codes that were also passed. Journalists tend to focus primarily on the hire-and-fire clauses and, to that extent, the changes are incremental; after all, allowing firms with up to 300 workers—it is 100 at present— to fire them without getting government permission is something Yashwant Sinha had proposed around two decades ago.

But evocative as it is, hire-and-fire is just one of the problems employers face given India has, believe it or not, 463 Acts on labour across the Centre and states which involve 32,542 compliances—the permissible level of glare from the lighting, the gap between machines and even the quantity of drinking water in a factory are specified by the government!—and 3,048 filings in a year. A single factory in one state doesn’t have to do all 3,048 filings, this applies to a company that has a factory in each state or Union territory; a single factory with up to 500 workers has to do 120+ filings in a year, so just compliance costs—without including the waste of top management time for smaller firms—could add up to 7-8% of turnover.

The biggest change, of course, is allowing fixed-term contracts for all jobs in the future. In the past, a firm may not have wanted to fulfil, say, a 2-mn jeans order from Walmart since, once the order was fulfilled, the owner would be stuck with the thousands of people he hired. In the post-reforms’ world, he will just give a fixed-term contract to the workers and, so, doesn’t need to fear expanding his business. In a sense, just as Vajpayee’s government did with government pensions—all new entrants were moved to the New Pension Scheme—the existing benefits have been grandfathered; this mutes opposition, but for new firms, all employees can be on fixed-term contracts where the 300+ rule does not apply. Along with the sharp cuts in corporate tax rates, India suddenly looks a lot more attractive for those looking to relocate from China; indeed, Apple and several others in the mobile-manufacturing space are getting even more benefits.

Of the 1,536 Acts that govern all economic activity in the country (see graphic), 30% pertain to just labour; in terms of the compliances and periodic filings, 46-47% pertain to labour, going by a compilation by Avantis Regtech, a TeamLease company that deals with compliances (www.teamleasecompliance.com). So, any simplification here is a boon for industry/services. In the case of the 44 central Acts that had 1,458 sections, 937 compliances and 135 filings in a year, there has been a dramatic change; all the Acts have been subsumed into four Codes with, and this is the operative part, just 480 sections (that’s a reduction of 67%).

The Code on wages, for instance, subsumes the Payment of Wages, the Minimum Wages, the Payment of Bonus and the Equal Remuneration Acts and, instead of maintaining 12 registers for them, the law cuts this to a third; Avantis believes this can be cut to just one with some rejigging, as has been done in Karnataka already. While the central Act now specifies 52 minimum wages, keep in mind the Karnataka law has 1,440 minimum wages! The social security Code subsumes nine Acts—like the ones on maternity benefits, gratuity, and provident fund—and the registers that need to be maintained are down from over 20 to just one or two, and the number of returns in a year are down from 36 to just one.

But, and there is always a but when it comes to Indian reforms, less than a tenth of the labour laws are those of the central government; 3-4% in the case of compliances and filings. So, for a factory owner to really breathe easy, the central labour reforms have to be carried over to the states. The good news here is that, starting now, none of the changes the states propose—say, raising the 300 limit to 1,000—require the approval of either their own legislatures or the central government; it can just be done by a notification. Indeed, after taking central permission, fixed-term employment has already been allowed by 12-13 states, the 300-threshold is already the rule in 16 states.

While most states are expected to change their laws over the next year or two—23 have already allowed some level of self-certification of compliance and online filing as opposed to the paper-based era—what is important is to, almost every day, cut red-tape. Though the central government continues to boast about the jump in the easily-gamed Ease of Doing Business (EoDB) rankings, 70% of the 1,536 central and state Acts have not even been touched; if businesses still need to make 3,570 filings in a year—other than labour—it is difficult to see how any credible claim of EoDB can even be made.

And, for the China-refugees, important as it is, it is not just the compliance burden that is the issue, it is the bad—and unreliable—policy environment that needs to be fixed. If the central and state governments owe businesses Rs 10+ lakh crore, that can hardly be good news for investors such as in the power sector, nor can the MEIS export benefits suddenly getting curtailed, or import consignments from China getting delayed, or the fact that the government refuses to even honour international arbitration awards, the different rules for Indian and foreign e-commerce players, the hounding of seed-tech firms like Monsanto, the mess in India’s telecom or oil policies … the list is a long one. It is no one’s case that reforms get done overnight and, to that extent, the labour-law reforms are welcome, especially when seen along with the reforms in agriculture marketing and contract farming. But it took the present government six years to get the labour and agriculture reforms; that is a glacial pace when you look at how India’s competitors, including China, continue to power ahead.


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