Can the new IR Code be a game-changer?

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Amid criticism and protests by Opposition parties and trade unions, Parliament recently passed The Industrial Relations Code, 2020 (IR code). The trade unions have billed the code as “anti-worker” since it contains specific provisions that are considered against workers’ interests. The government and industry have termed the code as “historic” and transformative.

An underlying philosophy of labour policies evolved in the post-Independent India was to treat the worker as a weaker partner vis-à-vis industry. Legislative provisions were enacted to safeguard the interests of the industrial workers.

However, after the Indian economy was liberalised in 1991, it has been realised that specific provisions in the Indian labour laws are not in sync with the demands of the globalised world, thereby hampering industrial growth.

Two provisions in the Industrial Disputes Act, 1947 (IDA) were considered market-distorting. First is Section 9A, which requires the employer to issue three weeks’ written notice to workers of any change in their working conditions, such as changes in work shift and department. Second is Chapter V-B, which makes it mandatory for the industries employing 100 or more workers to obtain government permission for layoff and retrenchment of workers and closure of their business, and issue notice and compensation to laid-off and retrenched workers.

Contrasting views

According to industry, these provisions have hampered its interests by denying it the freedom to adjust the deployment and size of the workforce and exit the business. The other consequences are the stunted size of firms as staying below the size of 100 workers drops firms off the radar of Chapter V-B, increased use of machinery and subcontracting leading to loss of formal jobs, replacement of regular workers with contract labourers, and low level of foreign investment in the manufacturing sector.

On the other hand, trade unions argue that stringent labour laws are socially necessary. Since workers in India do not have adequate social security, it is not desirable to allow the industry to follow a “free hire and fire” labour policy as it would rob off the “right to livelihood” from those who lose employment.

The other grounds on which the unions oppose a free hand to the industry are the flexibility enjoyed by the industry in practice due to increased use of contract labour and sub-contracting; declining trade union strength and labour strikes; and absence of strong evidence for a positive employment effect of flexible labour laws.

Notably, the empirical evidence on the impact of labour market regulations on industrial performance and employment in India and elsewhere has been inconclusive. The conflicting evidence underscores the dilemma facing the government in resolving the issue.

However, OECD Economic Surveys: India 2007 reported that the provision to obtain government permission for layoff and retrenchment of workers makes India’s labour law unusual compared with global practice. In its absence, the stringency of India’s labour laws applicable for regular workers would fall to the OECD and China average.

Currently, India is the only country in the emerging group of 20 countries requiring employers to obtain prior government permission for workforce reductions.

The IR code

The IR Code has attempted to address this lacuna by applying the provision of prior government permission for lay-off, retrenchment, and closure only to industries employing 300 or more workers against the present threshold of 100 or more workers. The code has also allowed the government to raise the threshold to above 300 by notification.

However, the requirements for issuing notice and paying compensation to the laid-off and retrenched workers have been retained at the present level of firms employing 100 or more workers. This reform measure implies that industrial establishments using less than 300 workers need not have to obtain prior government permission for layoff and retrenchment of workers and closure of their establishment. As a result, more firms are expected to get the freedom to hire and fire workers and exit the business.

However, an analysis of the Annual Survey of Industries, 2017-18 data on the distribution of factories in operation by the size of employment and workers reveals that raising the size threshold for government permission will not have a far-reaching impact on workers and industry.

With the increase in the threshold to 300 or more workers, the percentage of factories requiring to obtain prior government permission for lay-off, retrenchment, and closure would reduce from the present level of 19.07 per cent to roughly around 10.87 per cent. This implies that even without the changes proposed in the IR code, the percentage of factories requiring prior government permission for lay-off, retrenchment, and closure would remain low at 20 per cent. The workers who are protected from the threat of hire and fire will reduce from 77.75 per cent of the factory workers to roughly around 64.89 per cent, implying that due to reforms, only about 13 per cent of the workers will lose protection from the threat of lay-off, retrenchment, and closure. Around 65 per cent of the factory workforce still enjoy protection.

The reason is that roughly 65 per cent of factory workers are employed in factories with an employment size of above 300 though such factories constitute only around 11 per cent of the total number of factories.

More importantly, about 77 per cent of the gross industrial value added (GVA) originates in factories employing more than 300 workers. These facts reveal a heavy concentration of workers and GVA in a relatively low number of factories with an employment size of over 300. This lends credence to the argument that Chapter V-B of the IDA has not allowed more industrial firms to grow and exploit economies of scale.

Also, since the changes proposed in the IR code regarding the hire-and-fire rules do not apply to industrial establishments employing more than 300 workers, the overall gains to the industry and the pain inflicted on the workers will be only marginal compared to the present situation.

The writer is Professor of Economics, IIM, Kozhikode

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