Editorial

Sweeping labour deregulations will not spur investment

| Updated on May 11, 2020 Published on May 11, 2020

India needs to invest in social capital to reap its demographic advantage, rather than view its 400 million workforce as some sort of cannon fodder

The governments of Uttar Pradesh, Gujarat, Rajasthan, Assam, Punjab and Madhya Pradesh have proposed, through ordinances and notifications, the suspension of a number of provisions of the Industrial Disputes Act and the Factories Act, to a point where workers have been stripped of essential rights. The proposals — which variously include exemption from the provisions of the Factories Act for three years, including those pertaining to safety; resolution of disputes without the intervention of labour courts; extension of the working day to 12 hours without curbs on overtime; and the dilution of rights pertaining to maternity benefits and trade union recognition — are extraordinary in scope. The unprecedented crisis in the economy may be cited as a legal defence in the days to come.

Besides being disagreeable, it is doubtful whether a race to the bottom in labour regulations can spur investment. If that were indeed the case, India’s northern States, with their lower wage levels, would have received as much investment as their Peninsular counterparts. What attracts investment is a larger set of deliverables, such as reliable infrastructure (ports, power and roads), law and order stability, contract enforcement and dispute settlement, and social infrastructure. It is in the quality of governance that southern States have scored over the northern ones. The maturity of civil society institutions plays a role in shaping the right ecosystem for economic activity. Industrial success cannot, in the long run, be sustained by merely creating sweatshops, as even the Chinese have realised while moving up the technology chain and becoming more environmentally responsible. Japan and South Korea understood this earlier. India needs to invest in social capital to reap its demographic advantage, rather than view its 400 million workforce as some sort of cannon fodder. As for support to small enterprises, they need a line of credit support and wage subsidy (like the UK has announced), besides a fiscal stimulus that lifts demand in the economy at large. If this crisis is comparable to the Great Depression, it should also be appreciated that a fiscal stimulus alone will work, while squeezing wages will worsen matters in a demand-constrained economy.

However, there can be no denying that labour reforms are needed, or that red tapism needs to be shredded. The Business Reforms Action Plan prepared by the Centre, which details areas where administrative efficiency can be beefed up, forms a viable checklist for States. India’s march in the ‘ease of doing business’ rankings is not matched by progress in ease of registering property, paying taxes, securing an electricity connection and enforcing contracts. The role of labour militancy in driving investment out of States such as Kerala and West Bengal cannot be denied. ‘Inspector raj’ has not disappeared altogether. However, a pendulum swing to the other extreme of total deregulation is no solution. Industry and the State need to fashion a new social contract to create a skilled, productive workforce.

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Published on May 11, 2020
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