Last week, the Government of India notified 4 new labour market codes covering Social Security, Wages, Industrial Relations and Workplace Safety. These had been enacted pre-Covid but delays in implementation at the state level slowed enforcement. These codes will now replace the 29 existing central labour laws.
This reform is significant for the following reasons.
First, this will increase formalisation of the labour market. Currently approximately 75% of jobs in India are in the informal sector and these workers have poor job security. With the new codes, workers will have increased job security through formal appointment letters, timely payment of remuneration and will benefit from a floor on wages, which may vary slightly by region. The workday has been defined at 8 hours/day and overtime wages have also been stipulated to be at least double the regular wage.
Second, going forward, as formalisation increases workers will have better access to lending from banks and their cost of borrowing will decline sharply. This has huge benefits in terms of the ability of such workers to secure housing for example. Overall consumption in the economy will also get a fillip.
Third, as these workers will qualify for social security coverage, they will have access to better healthcare and their savings will also increase through Provident Fund contributions. Flows into the equity market will also rise as a result of PF contributions. Free annual medical examinations for workers, ESIC coverage on a pan-India basis and the inclusion of gig workers in the scope of those covered are further important elements of this reform.
Fourth, the regulatory burden on companies has been lightened and the ease of doing business has improved. Multiple compliances which had to be filed earlier have been streamlined and in some cases replaced by simplified electronic filings. Labour license requirements too have been rationalised and trade union representation thresholds have been increased, now requiring at least 51% of membership to be recognised.
Fifth and most importantly, these changes incentivise companies to cure themselves of the “Peter Pan” syndrome and promote scale. Manufacturing constitutes only roughly 15% of our GDP which compares unfavourably to other emerging market peers such as Indonesia (20%) or Thailand (27%). A key reason is companies not wanting to expand, in order to avoid crossing the threshold where cumbersome labour laws become applicable. Today, less than 1% of companies in India employ more than 100 workers due to unfriendly laws on lay offs for example. With the new codes, the limit for government approval for layoffs has now been increased to 300 factory workers from 100 workers previously, and individual States are empowered to raise it further.
Research has shown that only approximately 20% of a country’s workforce is needed to meets its domestic manufacturing needs, which is broadly the level in India currently. Beyond this stage, the workforce employed in manufacturing should primarily cater to export markets. Till date, India has been a more domestically oriented economy but given our demographic profile and the progressive shift away from agriculture, our economy needs to create at least 80 million jobs over the next decade as per the 2024 Economic Survey. At a time when global supply chains are shifting, the timing of this reform couldn’t be better to help boost the attractiveness of India as a manufacturing hub. This reform is a major step towards creating the conditions to meet these employment goals and convincing global companies to Make in India. Modi 3.0 has shown us yet again that when the going gets tough the tough get going.
Disclaimer
Views expressed above are the author’s own.
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