Undertaking reforms in India is hard. We have often seen this story play out – a desperately required structural reform is introduced, a powerful minority of interest groups vehemently protest the reform, and the government buckles under pressure and rolls back on the reform. This is how the farm laws saga panned out, for instance, and is now repeating with labour law reforms in Tamil Nadu.
The Tamil Nadu assembly passed the Factories (Amendment) Act, 2023, earlier in April, which provides flexible working hours for employees in factories in certain sectors across the state. Essentially, workers would have an option to work twelve hours a day instead of eight and since the mandated total number of working hours in a week remains unchanged at 48, this translates to an extra leave day. Protests by trade unions and the opposition parties forced MK Stalin’s administration to roll back the reforms.
The Need For Labour Reforms
India needs to create roughly 20 million jobs each year for the foreseeable future to cover for 12 million people entering the workforce each year. There is a dire need to provide productive jobs to the disguised unemployed in agriculture, and to provide jobs to the stock of unemployed. From the start of the millennium, despite achieving impressive GDP growth rates, India’s employment growth has been dismal. While services have high value-add, the ability to create mass employment is possible only in the manufacturing sector, which has stagnated in India.
Amongst many factors, one particularly sore sticking point in India’s manufacturing story is the existence of rigid, archaic, convoluted, and onerous labour laws. Businesses have traditionally found it difficult to comply with and navigate through the quagmire of labour laws in India. Firm-level surveys reveal that employers find labour laws in India to be more restrictive for their growth than in other countries. Other indices (rigidity of employment) find labour laws to be more rigid in India than other developing countries.
This has undesirable effects where firms either stay small or in the informal sector such that the rules don’t apply to them, or employ higher capital than labour evidenced by the fact that India mainly exports capital and skill-intensive goods despite being a labour-abundant country.
The economic literature on the negative impact of rigid labour laws on output, productivity, investment, and wages are quite clear. Developing countries with rigid employment laws tend to have larger informal sectors and higher unemployment, especially among young workers and have lower output in the registered manufacturing sector. Differences in labour regulations also explain the large productivity gaps between different regions in India.
It’s Not Business Vs Labour
With this context, the Union government reformed the labour laws by simplifying and unifying the 29 different laws into four codes on labour. However, as labour is in the Concurrent List, it is up to the states to make further changes to the labour laws. Karnataka has already taken the lead by introducing 12-hour work shifts and night shifts for women. During the pandemic, many states relaxed the most onerous parts of labour laws to attract new investments.
Unfortunately, much of the discourse on labour regulation is often framed as a zero-sum game – business versus labour – and that only one can win at the expense of the other. However, these need not be antagonistic. Labour reforms help draw in larger investments, which leads to higher employment, productivity, and wages. Further, evidence shows that as countries develop, the average working hours reduce over time.
Flexible working hours help industries run back-to-back shifts and increase capacity utilisation. However, this is only the first minor step in reforming labour laws. There are multiple other areas that require reforms: From severe regulations such as the hiring and firing constraints, which requires state approval before firing employees, to more bizarre rules requiring factories to mandatorily provide spittoons in convenient locations for employees.
TN Law Deserved A Chance
In the Tamil Nadu amendment, it is up to the employees to choose 8 or 12 hours of work per day based on their preferences. The amendment is opposed entirely based on the assumption that the choice will not be respected, which leads to exploitation of workers. This argument wears thin for three reasons.
One, it is the same authorities that currently govern the 8-hours shifts and 48-hour week that will oversee the new regime. If they managed to enforce the previous regulations, there’s no reason to believe this will change in the new regime. If not, the problem lies in strengthening the enforcing agencies.
Two, these labour laws apply to only a small fraction of the labour force in the state and country. Most of the labour is employed outside the formal sector, which has very little protections. In fact, by loosening the rigid laws, there can be a formalisation of companies and labour. Unfortunately, labour unions that purportedly protect the interest of a small minority of workers are the biggest deterrent in labour reforms that can extend protection to a large set of workers outside the ambit of these laws.
Third, remember that services such as software that are scantily covered by labour laws have seen the highest growth in investment, labour productivity, and wages without necessarily resorting to worker exploitation.
India is in a unique position to expand its manufacturing base with global tailwinds. Countries are diversifying their supply chains and are reconsidering their over reliance on China for manufacturing. While Vietnam has attracted a bulk of companies leaving China, India can still salvage the situation by undertaking bold reforms. The arrival of Foxconn and Apple in India and the expansion of Samsung’s investment can perhaps herald a new manufacturing wave. However, instead of cowering and rolling back the reforms, Tamil Nadu and India need to double down on pushing through reforms in land and labour.
Anupam Manur is a professor of economics at the Takshashila Institution, an independent think tank and school of public policy. Views are personal, and do not represent the stand of this publication.