Unless operating restrictions for companies are removed, amending labor laws won’t work: analysis
The impact of coronavirus disease (Covid-19) and the associated blockade in India on business, workers and employment has been devastating in many ways. From migrants desperately trying to return home to small businesses and their workers struggling to stay afloat, the true economic effects of the pandemic are only just beginning to materialize. As policymakers weigh their options to revive the economy after the shutdown, they face crucial questions about how to stimulate employment and encourage new business creation. In this regard, several state governments (for example, Uttar Pradesh, Madhya Pradesh and Gujarat) have already announced amendments to the application of their labor laws in the past month.
The amendments include exempting companies from the scope of most labor law provisions for the next three years, flexibility to increase hours of work, and exemptions from labor department inspections. Labor laws have always been a contentious issue in the Indian context, with more than 200 state laws and around 50 core laws governing various aspects of the employee-employer relationship, ranging from closing establishments and hiring / firing workers to pay. minimum wages and guarantee safety working conditions for workers.
While these amendments come with the prospect of stimulating labor demand, care must be taken that such a drastic dismantling of labor laws does not backfire. There are conflicting views among economists about the effects of easing labor regulations in India on job creation and growth. On the one hand, although some research suggests that relaxing these laws (especially in the early 1990s) led to more employment and production, others have argued that, in fact, labor laws have not changed much on paper, but its application has been substantially relaxed in practice.
What do the latest data say about this? According to the 2014 World Bank Business Survey for India, less than 5% of surveyed companies reported that labor regulations are the biggest obstacle to their business. In comparison, a higher proportion of companies reported that corruption (19.9%), electricity availability (15.3%), tax rates (13%) and access to finance (11.7%) are major obstacles. This also echoes the views of major Indian industrialists (such as Rajiv Bajaj, Azim Premji, and others) who argue that these “draconian” labor laws are not really the restrictions that are holding companies back. Therefore, relaxing these laws, especially after a lockout, could, in fact, further exploit already vulnerable migrant and temporary workers. Additionally, with mounting research evidence (from J-PAL, Good Business Lab, and others) linking increased worker wellness with better job hiring and retention, these amendments could negatively impact overall company profitability. long-term.
It is also unclear whether these exemptions from labor law for the next two to three years would encourage the creation of new companies. First, in contrast to labor problems, the costs of starting and formalizing business in India are very high. The World Bank’s Ease of Doing 2020 report ranks India at 136 out of 190 countries in Ease of Starting a Business and 154/190 in Property Registration. Consequently, companies remain undocumented and informal, making it even more difficult for current and future policies to benefit them. Second, the courts are extremely congested and slow, with India currently ranked 163/190 in contract enforcement. Finally, land-related problems have continued to be another major impediment to the entry of large companies, and many recent cases such as Saudi Aramco face delays in acquisition. Streamlining and streamlining these processes should be prioritized first to encourage the creation of new businesses.
More importantly, demands for better working conditions will only increase in a post-Covid-19 world where worker safety and social distancing measures become the norm. As multinationals become more vigilant and demand high labor standards, the lack of adequate worker protection policies, coupled with existing inefficiencies to enter the Indian market, could further discourage foreign investment seeking less dependence on China.
In summary, temporary changes in labor laws and those that affect the safety, protection and well-being of workers in particular, can at best generate short-term benefits for companies. Without solving the real limitations that companies face, both employers and workers can lose in the long term. The embargo has presented unprecedented challenges for policymakers in addressing disruption of labor markets. To have long-term effects, research from around the world suggests that labor market reforms should be developed in consultation with companies and workers. As governments decide on policies to revive the economy, striking a balance between protecting the vulnerable workforce and mitigating real operating restrictions for companies should be the way to go.
Ritam Chaurey is an assistant professor, Johns Hopkins SAIS, and Gaurav Chiplunkar is an assistant professor, Darden Business School, University of Virginia.
The opinions expressed are personal.