Successive governments have agreed labor reform is critical to
absorb 200 million Indians reaching working age over the next two
decades, but fears of an ugly union-led backlash and partisan
politics have prevented changes to free up labor markets.
Now, with the benefit of a single party majority in the lower house
of parliament for the first time in 30 years, laws that date back to
just after the end of British rule are set for an overhaul.
Officials at the labor ministry say this is a top priority in the
government's first 100 days in office.
India has a forest of labor laws, including anachronisms such as
providing spittoons in the work place, and are so complex that most
firms choose to stay small. In 2009, 84 percent of India's
manufacturers employed fewer than 50 workers, compared to 25 percent
in China, according to a study this year by consultancy firm
McKinsey & Co.
The World Bank said in a 2014 report that India has one of the most
rigid labor markets in the world and "although the regulations are
meant to enhance the welfare of workers, they often have the
opposite effect by encouraging firms to stay small and thus
circumvent labor laws".
Business leaders hope Modi, who advocates smaller government and
private enterprise, will be a liberalizer in the mould of Margaret
Thatcher or Ronald Reagan. Perhaps the most important change, they
say, is to rules making it hard to dismiss workers.
First up, though, to win public support, his Bharatiya Janata Party
(BJP) government is looking to make changes that benefit workers,
three senior officials at the labor ministry said. Among the
changes: making more workers eligible for minimum wages, increasing
overtime hours and allowing women to do night shifts.
"We are trying to provide a hassle free environment that helps both
workers and industry," a senior labor ministry official involved in
the deliberations said. "It is a priority for us."
Next on the reform agenda will be the most sensitive issue of
loosening strict hire and fire rules. Officials said they have begun
preliminary talks with concerned groups about slowly implementing
"There is a definite push ... you will see more measures," said
another official at the ministry who is privy to the discussions
within the government.
REFORMS KEY TO MANUFACTURING JOBS
India's 20-year streak of fast economic expansion is often derided
as "jobless growth" since the service sector-led model has been
capital rather than labor intensive.
India does not produce reliable, regular jobless data, but long-term
surveys by the statistics department show the country only created 5
million manufacturing jobs between 2004/5 and 2011/12. In the same
period some 33 million people left farms looking for better paid
work. The majority were absorbed into low productivity and irregular
work on construction sites.
Moreover, research suggests India needs 12 million new jobs every
year to absorb the largest youth bulge the world has ever seen. It
has fallen far behind that target.
Companies complain that current laws requiring rarely granted
government permission for layoffs make it impossible to respond to
business downturns, and blame the laws for the country's relatively
small manufacturing sector.
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Manufacturing contributes just 15 percent to India's nearly $2
trillion economy. New Delhi says it wants to lift that share to 25
percent within a decade to help create 100 million jobs.
Comparatively, manufacturing accounted for 45 percent of China's GDP
"If business cycles are volatile, the ability to downsize and upsize
should be freely available," said R. Shankar Raman, chief financial
officer at Larsen & Toubro, one of India's biggest conglomerates.
In what is seen as a test for Modi's labor reform agenda and is
intended to inspire other states, Rajasthan this month proposed
amendments to the federal law to allow firms in the northern state
to lay off up to 300 workers without government permission.
Currently, clearance is required to fire more than 100 workers and
this is rarely granted.
LABOR MILITANCY DECLINES
Labor unions cutting across party affiliations have opposed the
state government's move and have asked Modi to intervene. The BJP's
own union has called a meeting of its officials early next month to
chalk out a strategy to protest what it said was a lack of
consultation over the shake up in Rajasthan.
Since almost all the unions in India have political affiliations,
their opposition to reforms has a risk of turning into a full-scale
political agitation. But the risk that the reforms could also bring
full-blown street protests similar to that seen in Thatcher's
Britain are unlikely.
Labor militancy has declined in India, although sporadic violent
protests like one at a Maruti Suzuki <<MRTI.NS> factory in 2012
which resulted in a death of a company official are enough to make
policymakers wary on the pace of reform.
The labor ministry has asked for public comments by early July on
the changes it plans to the Minimum Wages Act, which sets minimum
wages for skilled and unskilled labours, and the Factory Act, which
governs health and safety.
The proposed changes would standardize minimum wages nationally
while increasing the frequency of salary revisions based on consumer
prices. Although potentially inflationary, the move could bring
millions of workers into the formal economy.
The ministry also wants to extend the amount of overtime workers can
clock and scrap a 1948 rule that prohibits women working at night in
factories, suggestions that have been welcomed by both labor groups
(Additional reporting by Manoj Kumar and Tommy Wilkes in NEW DELHI;
Editing by Frank Jack Daniel and Jeremy Laurence)
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