Towards sound labour market governance

The aspiration of every society should be increase the size of the formal sector over time and across space. Informality imposes costs on the economy in terms of loss of revenue for the exchequer

The globalisation debate has brought informality on board and the ILO in a series of policy innovations has proceeded to construct a paradigm of the world of work which involves respect for fundamental rights, decent work, sound labour market governance and a gradual progression to a formal and decent workplace. 
 
Informality arguably imposes costs to the economy in terms of loss of revenue for the exchequer and lower income among other more severe forms of insecurities relating to health and employment. The aspiration of every society should be increase the size of formality over time and across spaces. One major indicator of formality is the legal coverage of firms and coverage in terms of labour regulations. In many countries including China labour laws cover all workers and have no threshold bars. However in India there is a clamour for “uncovering” establishments from labour laws. In this context, we need to assess the labour law and governance reforms that have been taking place arguably with these “ends” in sight.
 
The major reforms that have taken place recently can be summarised as follows. One, the dominant pattern of reforms is to raise the threshold of Chapter V-B of the Industrial Disputes Act (ID Act) from 100 to 300. Two, the thresholds of the Factories Act and Contract Labour (Regulation and Abolition) Act have been increased. Three, state governments have introduced risk-based and computer-driven and randomised labour inspection systems. Four, electronification of labour law coverage (registration and licence) and compliance has been introduced.
 
We need to question the relevance of these reforms in the institutional and economic context. First, the Sixth Economic Census (2016) has shown that nearly 99 percent of establishments employing at least one worker in the non-agricultural sector employ less than 10 workers. Two, the legal distance that these establishments need to travel to be covered under most of the so-called stringent legal conditions is huge and this process may take decades. Three, according to the late TS Papola’s estimation (using NSSO 1999-2000 figures), most labour laws cover barely 5-6 per cent of the workforce while the Minimum Wages Act (MW Act) has the highest coverage (since it covers agriculture as well) of 38.1 percent — these figures would have worsened with the liberalisation of thresholds! It is another matter that the MW Act is the most violated one and most difficult to implement. Four, reduction in the threshold under any law simply means more firms and more workers are removed from legal protection. Despite well-documented evidence on violations by contractors, state governments have exempted small contractors from legal coverage — small-sized contractors are more prone to violate the law thanks to their poor financial capacity. We need big players in the temping zone with credible financial backing. Five, Chapter V-B of the ID Act concerns only 0.17 per cent of total establishments in the manufacturing and mining sectors, yet this reform demand roars in the public domain! Six, around half of the total workforce according to NSSO data is self-employed and are not covered by any labour law. Seven, most workers do not enjoy retiral security — the EPFO has less than one million establishments under its purview. Defaults under the PF Act are also extremely high. Eight, the Social Security for Unorganised Workers, 2008 has limited significance. Nine, most establishments in India are small and may lack the wherewithal to turn to aggressively advertised digital modes. 
 
Risk classificatory systems across states lack uniformity and are constructed with little information. How can the states have information when returns under most labour laws are not submitted and the enforcement machinery is hugely inadequate? Some state governments such as Goa or West Bengal have categorised establishments employing 100 or more workers as high-risk ones and smaller ones as medium or low-risk, which runs contrary to common sense. As firm size increases, the probability of trade union presence is higher and big firms have the resources for better compliance systems and are socially more visible. Computerised and randomised inspection systems must be based on software which can be designed only if the information base is strong, and the latter is not the case. The rise in industrial accidents and the greater probability of contract workers being unsafe should prick the conscience of policy-makers. Lastly, where are the legal regulations for workers in the construction, agricultural and informal service sectors?
 
The labour law and governance reforms introduced so far reveal that the reform agenda has been hijacked by big players who are a minority and it has minimal relevance for most players, be they firms or workers or sectors. Further, informality on both the enterprise and labour side was already huge, and labour law and inspection reforms have intensified informality. The government is far too keen to send big players signals rather than bothering about small and vulnerable players. The policy-makers are labouring under false notions that labour laws create rigidities. It is rigidities in the credit market, marketing network and the energy sector that afflict the supply side while insecurities create impoverished yet employed vulnerable workers. Will the government listen to the voices of small players when sophistry by big players is at work?  

K R Shyam Sundar is Professor, XLRI, Jamshedpur; Rakul Suresh Sapkal is Assistant Professor, National Law School, Mumbai