The labour conundrum

A labour ministry presentation to the parliamentary standing committee on labour on making labour markets more flexible has now been placed in the public domain for debate.

Understandably, the left is already up in arms. The labour ministry flags the Contract Labour (Regulation and Abolition) Act (CLRA), Industrial Disputes Act (IDA) and the inspector raj.

To this, one should perhaps add the Shops and Establishments Act (SEA), since IT and business process outsourcing are covered not by the Factories Act, but by the SEA. Notwithstanding the West Bengal chief minister's known position, the CPI(M) politburo wishes to extend rigid labour laws to the SEA also.

The organised sector, which accounts for only 7.3 per cent of the workforce, is characterised by rigid labour laws, while there is complete absence of protective legislation or social security in the unorganised sector. Reforms seek to break down this dichotomy and bring the organised and unorganised labour markets closer.

This will require flexible labour laws in the organised sector, which reformers want and the left (including the left within the Congress) opposes. Such reforms are essential to exploit India's labour cost advantage and create new jobs.

In their absence, there is an incentive to use capital-intensive techniques. Private organised sector employment has actually declined since 1997. This can be due to various reasons, but circumstantial evidence suggests increased outsourcing and use of contract labour. This is prompted not just by cheaper access to capital but also rigid organised sector labour laws.

Reformers, however, rarely flag the other part of bridging the gulf between the organised and unorganised sectors""bringing protective legislation and social security to the unorganised sector""although it figures in the recommendations of the Second National Labour Commission (2002).

The second agenda is not merely a question of extending legislation. There is an enforcement issue, since even the Minimum Wages Act is rarely enforced. On rigid labour laws in the organised sector, there are laws on industrial relations (CLRA, IDA, Trade Unions Act) and there are other laws and orders, the latter requiring unification and harmonisation under heads like wages, social security and safety.

Easing the inspector raj, responsible for high transaction costs, is conditional on such rationalisation. The controversy is really about reforming industrial relations laws; there is no great dispute about the others. There is in fact a specific sentence in the National Common Minimum Programme about reforming other labour laws.

Given the left's importance, a strategic question arises. Should one club changes in industrial relations laws with other issues, as the labour ministry also does in its note? Because of resistance to the former, the latter can also get ignored, as has been the case since 1991. The labour ministry note is however right on the CLRA.

Scrapping the CLRA is not the answer, it is Section 10 which needs reworking. Setting right the IDA is more complicated. It is not simply a matter of increasing the threshold from 100 employees to 300 (or even 1,000 as the NDA once proposed) or increasing the retrenchment package to 90 (or 45) days.

The IDA needs complete overhaul. But as that will in all probability have to wait, in the interim the answer may lie in allowing the states to tinker with the other laws, as they are within their rights to do. That way some progress can be made.