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labour reforms in India: Why Indian economy needs swift and robust labour reforms


By Ravi Shankar Jha

Last week, the government of Uttar Pradesh announced the suspension of some of labour laws to facilitate industry that has practically come to a standstill because of Covid-19-instigated lockdown. The states of Madhya Pradesh and Gujarat have also opted for this extraordinary measure. This bold move, implemented as it has been in the time of crisis, has been long in coming.

The reforms of 1991, a major milestone that they are in India’s post-Independence history, primarily focused on the demand side of the economy. GoI had basically let go of what should be produced and in what quantity. But it continued to retain control of almost everything that went into the process of production. GoI exercised major control over land, labour and material resources, and nowhere was it more throttling as in the laws and policies governing labour.

The sheer complexity of India’s labour law regime, which comprises more than 150 legislations with conflicting provisions in different statutes and archaic obligations flowing from them, was unfathomable.

Full compliance was virtually impossible. No other major economy had such a legal regime in place, all in the name of protecting weaker sections of the working force. It was these laws that made India miss the ‘manufacturing bus’ of the 1980s.

Circumstances have presented India with another chance where it can capitalise on the flight of companies from China that is underway because of the Covid-19 crisis. The continued presence of restrictive labour laws, however, continues to make India an unfavourable destination for manufacturing as compared to Southeast Asian economies like Vietnam. However, this latest reform is also significant from the broader perspective of India’s prevailing political economy.

Before the Covid-19 crisis hit India, the economy was already experiencing a demand shrinkage while the twin-balance-sheet problem continued to fester. This forced companies to deleverage themselves in a major way and credit growth plummeted. Even as India was wrangling out of this structural stranglehold, it was given a deadly blow in Covid-19 that only exacerbated the prevailing situation.

In such a scenario, GoI has little option but to step in and spend on a massive scale to push demand in the market. This spending could be made in several ways, and policy options suggested range from a huge stimulus package to the use of ‘helicopter money’ — printing large sums of new money and distributing it among the public. But the truth is that India does not have that kind of fiscal legroom, especially in the light of expected decline in tax receipts.

Any attempt at monetising the deficit is a risky proposition, as India’s credit rating is precariously placed just a notch above junk. Worsening this could wreak havoc, as investors can lose confidence, sending the economy in a rapid tailspin. Faced with this Hobson’s choice, GoI has little option but to let its deficit grow to create room for required spending and, at the same time, assure investors and rating agencies that this is just a one-time affair, and that the deficit will be reined in in the medium and long term.

It is in this context that the announcements of labour law reform in UP, MP and Gujarat assumes critical importance. These laws have single-handedly destroyed several industrial towns in UP, Bihar and other states. One of the starkest examples is Kanpur. ‘Manchester of the East’ was once an industrial hub. But most of its industries now lie in ruins.

This is also one of the most sensitive — and, thus, politically difficult —reforms, as it is likely to incite major opposition from the powerful labour unions, not to mention opposition parties. Given these realities, the execution of such a reform sends a strong message to the global investor community as well as rating agencies that India has the appetite for big-bang and difficult reforms. It is likely to go a long way in assuaging the concerns of economic catastrophe that is generally associated with high deficits incurred by governments.

These labour law reforms not only give India a fighting chance to be a possible destination for global manufacturing, but they also provide GoI with a mast to sail through the fiscal headwinds during these times of crisis. It is, therefore, important that other states also follow suit, so that the message going out of India is consistent across political parties and its effect multiplied.

The writer is senior investment specialist, Invest India, ministry of commerce, GoI

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