Unbundle labour reform

It is a healthy sign that most of the states have reacted favourably to the labour ministry's reform proposals, which have focused on amending the Industrial Disputes Act (IDA) and the Contract Labour Regulation Act (CLRA), and on ending the "inspector raj". It is too early to say whether this signifies a change in the political acceptability of contentious labour market reforms, especially since consultations with the trade unions are still pending. It is therefore unclear whether the proposed reforms will go through or not. To repeat an oft-stated argument, organised labour markets are rigid in India and discourage employment of labour. In seeking to retain the rigidity, the trade unions try to protect existing employment, without regard to the need for creation of new jobs. Conversely, 92 per cent of the labour force is in the unorganised sector and is for all practical purposes bereft of both protective legislation and social security. Reform of the labour market will eventually break down the dichotomy between the organised and unorganised sectors, and this is desirable.

It is inconceivable that the trade unions will go along with all the proposals. However, there is little opposition to the idea of eliminating the inspector raj, and in this context the need to reduce the transaction costs of doing business has been sufficiently documented. It is thus a moot point whether the more contentious reform proposals, relating to the IDA and CLRA, should be separated from the inspector raj issue, and indeed whether the changes in the IDA and CLRA should also be de-linked. This will make sure that the most contentious proposal among all the proposed changes do not block even the least objectionable changes. Thus, even the trade unions are not opposed to streamlining inspections. Among the states that have responded to the labour ministry's proposals, only Madhya Pradesh has opposed streamlining inspections""but on the argument that MP has already done the needful. This could quickly be enacted if it is de-linked from the other issues.

Amending the law on contract labour is a more ticklish issue. Jammu & Kashmir and MP have reportedly opposed changes in the existing law. However, the reason for such opposition is not clear. As for the IDA, the labour ministry's note flags Chapter V-B, although there are other problematic sections in the IDA as well. Although Yashwant Sinha as finance minister in the NDA government had promised to raise the threshold of labour strength beyond which companies seeking to retrench would have to get government permission, this change was never carried through. Even today, many states oppose raising the threshold from the existing 100 to 300 workers, although in fairness some states support increasing it to 1,000, with substantial increases in the mandated retrenchment packages""which industry is happy to accept.

One way out would be to leave it to the states to decide on this particular section, since this is Constitutionally possible. While this has the flip side of accentuating divergences across states in terms of attracting investments, perhaps this is the only way the states will be persuaded to reform. Finally, Chapter V-B covers layoffs, retrenchment, and closure. The first two are primarily about the exit of labour, while the third is often also about the exit of capital. Should one therefore unbundle still further and push for easier closure, rather than lay-offs or retrenchment, since that is likely to be more feasible politically? The simple point is that the long-delayed labour market reforms represent a heterogeneous bag and, tactically, it is a mistake to address all issues simultaneously.