Need for a shared understanding

SEMINARIST

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IT is conventional wisdom that India’s labour laws are complex, inhibit the growth of large-scale industry and encourage employers to minimize the number of permanent employees on their rolls. Avoidable capital intensity in the choice of technology and stunted organized sector employment have widely been attributed to rigidities arising from poorly conceived labour laws. Proposals to reform the laws also abound, although attempts at meaningful reform have been few and far between. Employers and trade unions representing employees do not see eye-to-eye on the changes that are required. Forcing changes in labour laws against the wishes of workers and their trade unions would be electorally counter productive in India’s competitive democracy. So, political parties and the governments they run seek to propitiate workers by not changing laws perceived to favour them and please employers by turning a blind eye to blatant violation of the laws that govern the workplace.

This paper argues that the primary hurdle to be overcome in rationalizing labour laws is forging a common understanding of the political economy of contemporary growth, shared by industry and workers. Conceptual clarity on the changes to be made in specific laws is a secondary problem which can be solved by trial and error, if not by logical coherence ab initio, once a shared understanding is reached on political economy.

India’s laws on the workplace have always been pro-worker right from the colonial times. This is for two reasons. One is the overarching ideology of British colonialism in India, which justified its presence and actions in terms of discharging the white man’s burden, to reform and bring order and justice to the subject population. This meant that laws in India had to resonate the spirit of laws back home in the mother country. If workers in Britain obtained legal limits on their exploitation, the ideology of extending patriarchal protection to colonial subjects meant that similar laws in India could not permit far greater exploitation of workers in India.

 

The other reason why colonial laws were pro-labour is that industry in Britain put pressure on the Crown to not allow the emerging competition in the colony to have an unfair advantage by way of severely exploitative work conditions for its factory workers. So, right from the 1881 Indian Factory Act onwards, the law in India laid down a minimum standard of working conditions and worker benefits. In the subsequent iterations of the law, which incorporated the recommendations of periodic Factory Commissions, these worker benefits kept expanding.

During the freedom movement, workers and their unions were an important constituency to be mobilized by the leaders of the movement. After Independence, many laws carried over from colonial times. New laws reflected labour legislation in industrial countries, where the vast majority of the workforce was already engaged in organized industry and legislators did not have to worry about statutory benefits for labour creating a tiny labour aristocracy, additions to which from the unorganized sector were fiercely resisted by employers. In any case, the ruling ideology was some shade or the other of socialism, which meant that all legislation was strongly pro-labour in the narrow sense of favouring those who were lucky enough to already be part of the organized workforce.

This penchant to portray the guiding philosophy of the Indian state as socialist found full expression in the 42nd Amendment to the Constitution enacted during the Emergency, which introduced the word Socialist in the Preamble to describe a defining character of the nation. While what this meant has always remained imprecise, it has not troubled any political party or civil society organization. A political party such as the Bharatiya Janata Party, a member of the family of organizations controlled by the Rashtriya Swayamsevak Sangh, an organization as far removed from socialism as any in the world, qualifies itself as socialist, albeit Gandhian. Subliminally, the message contained by this overarching affinity of the political class to nominal socialism is that India’s policies and laws are opposed to capitalism.

 

And this is the crux of the political economy problem in labour reform. Economic policies pursued since the reforms of 1991 implicitly articulate the logic of capitalism in its current phase of globalization. Yet, the political rhetoric continues to be socialistic. Trade unions and other civil society organizations continue to use normative socialistic goals and the laws that embody them to resist changes in labour regulation that would align laws and rules in tune with the reality of globalized capitalism and its logic that calls for flexibility, constant pressure to upgrade skills and raise productivity in conjunction with ever expanding deployment of greater levels of technology in the production process.

All the major trade union confederations profess anathema to market forces, so much so that they commonly prevent, in their capacity as representative trustees on the board of the Employees’ Provident Fund Organization, to invest even a sliver of 5% of the investable corpus in the stock market, forgoing higher returns. They stoutly oppose globalization, and will not entertain any suggestion that workers would gain from reconfiguring labour laws to reflect the dynamics of globalized production.

Unless this refusal to accept the reality of still vibrant capitalist production, organized around the rubric of globalization, is altered, even the most sensible suggestions to reform India’s labour laws will fall on deaf Union ears.

 

India has 44 central laws on labour and upward of 150 state level laws. Of the 44 central laws, 12 are to be enforced by the Centre, 16 by both the Centre and the states and 16 more, by the states. Of these, the Industrial Disputes Act, 1948 is one of the most contentious. Under the law, any establishment with more than 100 workers requires the government’s permission to lay off or retrench workers. Governments are loath to give such permission, fearful of the political damage this could do. The end result is inability of an enterprise to shed workers even when that is imperative. The incentive that arises from this constraint is to try and not add workers on the muster roll in the first place.

Under the law, a worker must have worked for 240 days to qualify as a worker whose severance calls for full compensation. Employers contrive arrangements in which workers do not cross that time threshold. Another threshold that brings an employer under the purview of the law is in terms of the number of workers. It now stands at 100, having been brought down from the original 300. Some employers would choose to keep formal employment below 100 to escape the rigidity of the law and keep its workforce flexible. One way to do that is to keep the enterprise small, by creating multiple small units. This hinders the enterprise from realizing economies of scale. The other is to employ contract labour. Contract workers are normally paid a wage that is much lower than the wage paid to a regular employee carrying out similar work.

 

Employment of contract labour for extended periods and their demand to be regularized as normal workers has repeatedly come up as a cause for friction between management and workers, often violent. While the practice of employing some workers on contract to perform exactly the same work as is done by regular workers on the rolls ends up saving the employer large amounts, this violates the provisions of the 1970 law on contract labour. The law prohibits deployment of contract labour in core and perennial work.

However, another kind of contract labour costs the employer far more than regular workers would. This is in the case of low-skilled workers of the kind who are employed in cleaning/sweeping office premises or serving as security guards. These are, indeed, non-core activities of the kind in which the law permits deployment of contract workers. For these skill levels, the market wage is typically lower than the minimum wage prescribed under the law. A law-abiding company would have to pay the minimum wage of these workers to the contractor, plus a 10% mark-up as the contractor’s fees and a 14% service tax on top of that. The contractor, typically, pays the workers only the market wage and pockets the difference between the market wage, typically lower than the statutory minimum wage, and the minimum wage paid by the company, plus his legally stipulated 10% fee.

In this case, the employer would have been financially better off were it to hire the workers in question directly and put them on its rolls. The company ends up paying a substantial premium for the benefit of not having a certain number of permanent workers on its rolls, whose retrenchment would be extremely difficult and whose unionization is almost certain.

Clearly, the current legal framework benefits neither workers nor employers. Given its propensity to create strife over different workers being paid different wages for the same work and over the demand to convert lowly paid contract workers into regular workers, it ill serves industrial peace as well.

An advocacy project by the Shiv Nadar University’s Centre for Public Affairs and Critical Theory represents an intelligent attempt to reform labour laws to make them threshold-agnostic while offering workers financial security.

 

The principal components of the proposal are as follows:

1. All workers will be on the permanent rolls of some company or the other. An enterprise should be free to hire up to a maximum of 5% of its regular workforce for carrying out ancillary, non-core functions, on contract. But such workers should be hired from a contractor alone, and would be on the rolls of the contractor. These provisions apply to all companies, regardless of how many workers they employ, provided that number is greater than 20. This would put an end to informalization of work, as all workers would be on the rolls of some company or the other, and be entitled to wages, provident fund, health benefits, gratuity and leave encashment.

2. Companies will have the freedom to restructure or close down companies without notifying the government. But they would pay workers being laid off, making no distinction between lay-off and retrenchment, in addition to the normal benefits: severance pay equivalent to 45 days wages for every year of employment. They would also need to give six months notice for restructuring/closure exercises.

3. Every company with at least twenty workers will have one workers’ council to represent their interests before the management. Any number of unions are free to contest elections on the basis of secret, universal ballot to become office bearers of the council, but the management should negotiate only with this one elected council. Unions are free to have external mentors and affiliations, but the council will comprise only workers on the rolls of the company. Companies with fewer than 20 members should have a workers’ sabha of all the workers.

4. The workers should elect one representative to the board of the company, to facilitate workers’ participation in decision making, so that two-way communication of the management’s and the workers’ interests is realized. A conciliation board with equal number of representative of workers and managements, and a chairman appointed by the government as conciliation officer, will take up issues that cannot be resolved at the level of the board or the council. If this also fails, the matter should go to the Labour Tribunal whose finding will be binding. All these should function in a time-bound fashion.

5. The proposal also provides for fixed term contracts in the case of seasonal work and construction. If the term of employment exceeds 180 days, the workers must be on the muster of the company, their principal employer, and paid their legitimate dues. When their employment term is shorter than 180 days, the workers must be hired from a contractor on whose muster they will be.

These are eminently reasonable proposals. But to make them work, workers and managements must share a common set of assumptions about how both stand to gain from harmonious working of the enterprise. But workers’ unions and managements continue to behave as if they are playing a zero-sum game, that one party’s gain can only be at the other’s expense. In fact, this is implicit in the political economy framework in which India’s unions operate. Changing this framework is the key challenge.

The elements of a new political economy that would enable smooth functioning at the workplace and realize the well-being of both employers and workers would be on the following lines. One, employers must appreciate that paying workers well and affording them a reasonable time for leisure is in their collective interest. One enterprise’s wage cost represents purchasing power for industry as a whole. When that enterprise’s management seeks to minimize this element of its cost, seeking to maximize its profit in this fashion, it shrinks the market for industry’s produce. If every enterprise succeeded in keeping its wage bill as repressed as possible, collective demand for the economy’s output would also be repressed.

 

India today has a thriving service industry that relies on consumption of leisure. TV programming, sports, books, movies, music, online entertainment and eating out depend on consumers having not just money to spend on these things but also on having the time to spend on these offerings. If all workers worked 14 hours a day and earned meagre amounts, the result would be to throttle demand across the board.

Changing economic structure has lowered the share of the workforce engaged in agriculture below 50%. It was 49% in 2011, according to findings of the National Sample Survey Organization’s 68th Round. As ever larger proportions of the workforce leave agriculture and join the workplace of a manufacturing or a services enterprise, the greater the scope for Indian industry to prosper on the strength of ever rising internal demand for its produce.

 

Two, industry must accept, in addition, that unions are the instrumentality to bridge the disconnect between rationality at the enterprise level and rationality at the macro level. If macro-level rationality requires that all direct producers earn well and have adequate leisure, what can overcome the enterprise-level rationality of keeping costs down to realize the collective good is the power of the union. Unions might seem like an irritant, but can be creatively used to not just pursue macro goals but also enterprise level innovations on the shop floor.

Three, in order for the workers to be engaged to pool their talent and resources to improve productivity on an ongoing basis, employers must have ambition and faith in the potential for sustained prosperity. Only if the possibility of long-term prosperity is real does it make sense to pare margins on unit sales – the result of allowing costs to go up – in exchange for larger volumes, so that the cumulative narrow margins add up to significantly larger aggregate profits for industry. Only ambition can drive them to target defect rates of less than 25 parts per million. Only high quality work can get India a place at the high table of global manufacturing. And such quality work cannot be produced by sullen workers performing a chore for a measly living. Only by creating a work environment where people feel creatively engaged at the workplace can such true ambition be realized.

Four, labour standards are increasingly turning global. Consumer campaigns are more potent in driving up the standards of working conditions than any international commitment under a trade deal. Employers must learn to see high labour standards as an opportunity for India to show off its edge over other countries and welcome them, instead of lobbying the government to resist labour standards in trade agreements. In India, perversely enough, the stiffest opposition to labour standards comes from leftist trade unions, who see in them an imperialist ploy to destroy domestic industry.

 

Five, all the four points above are possible if and only if globalization is a viable proposition. The left in India has traditionally seen capitalism as a system of organizing production that is tottering on its last legs, lurching from crisis to crisis and therefore amenable to organized overthrow by the working class. Globalization is, in their book, a neo-liberal conspiracy against the poor nations of the world. This world view precludes workers cooperating with employers to increase output and raise productivity. Workers have to shed this dogma and see the evidence all around them.

 

Since capitalism has become historically obsolete, the Indian left identified its political goal as mobilizing the people against capitalism, bring about the downfall of the post-Independence state trying to build capitalism, compromised with imperialism and/feudalism or otherwise, and start building a non-capitalist alternative.

This premise has been wrong. Far from being obsolete, capitalism has been and remains a vibrant form of organizing production, revolutionizing technology and the ways of carrying out production, creating new income and wealth on historically unprecedented scale, delivering millions of people out of poverty around the world, particularly in developing Asia. Especially in the years after World War II, when the Communists, dazzled by the success of the Soviet Union in rebuilding its war-ravaged economy and blazing new trails in human achievement in space, pronounced capitalism obsolete, the capitalist economy thrived as never before. It continued the revolutionization of production which Marx and Engels had described with exuberance in the Communist Manifesto and reinvented itself in ways not imagined before.

 

Capitalism, which had enabled primitive countries of Europe to catch up with and overtake China and India, the economic giants of the pre-industrial age, and made them the foremost leaders in science and learning, military power and dominance of the world, worked its enriching magic in country after country of Asia. Initially, small countries such as Hong Kong, Singapore, Taiwan and South Korea, and later, the entire South-East Asian nations and China made rapid advance, with the benefits of growth reaching down to the bottom layers of society and delivering millions out of poverty. Indeed, the continued dominance of the United States of the world’s politics and economics has been underpinned by its remarkable economic performance. Yet, there has been a remarkable degree of catch-up that fast growing Asian economies have achieved vis-a-vis the United States, as Table 1 brings out.

TABLE 1

Growth Performance of Select Asian Countries and the US, 1960-2010

   

1960

1990

2000

2010

China

GDP PPP $ million

39954

991930

3085199

10807289

GDP per capita $PPP

64.74

873.18

2491.34

8449.45

Openness

9.31

28.38

44.45

49.21

Per capita income relative to the US*

2.12

3.79

7.1

18.14

Hong Kong

GDP PPP $ million

1727.6

99220.09

172466.3

297273.08

GDP per capita $ PPP

631.93

17268.34

25612.41

41464.56

Openness

183.68

252.61

282.08

440.31

Per capita income relative to US*

19.4

75.67

73.83

90.04

India

GDP PPP $ million

59998.62

878352

1728144

4687277.84

GDP per capita $ PPP

137.71

1073..29

1771.49

4147.52

Openness

10.87

15.04

27.49

46.22

Per capita income relative to US*

4.65

4.55

4.9

8.91

Indonesia

GDP PPP $ million

9484.68

293916.8

545086.5

1047702.03

GDP per capita $ PPP

98.62

1719.46

2662.23

4831.28

Openness

26.01

42.77

70.77

47.64

Per capita income relative to US*

3.27

7.01

7.27

9.26

Japan

GDP PPP $ million

100168.3

2602853

3386321

4394412.49

GDP per capita $ PPP

1104.88

20847.79

26653

34656.95

Openness

20.56

19.77

20.52

29.26

Per capita income relative to US*

36.76

91.39

76.17

74.42

S. Korea

GDP PPP $ million

7214.12

395400.4

805985.3

1399173.26

GDP per capita $ PPP

290.53

9072.94

17017.71

28384.81

Openness

15.38

56.05

74.17

102.31

Per capita income relative to US*

10.05

40.01

49.05

61.78

Malaysia

GDP PPP $ million

2414.57

71125.58

183296.8

395635.27

GDP per capita $ PPP

294.9

3930.99

7826.06

13874.52

Openness

82.62

140.34

220.41

176.8

Per capita income relative to US*

9.89

17.25

22.57

30.05

Singapore

GDP PPP $ million

1289.1

53031.21

132436

280255.35

GDP per capita $ PPP

932.39

17264.58

32610.6

59870.74

Openness

354.72

344.77

376.28

392.09

Per capita income relative to US*

27.03

75.49

93.52

128.56

Taiwan

GDP PPP $ million

3889.06

223446.6

485604.6

743569.27

GDP per capita $ PPP

350.86

10979.23

21894.18

32529.92

Openness

29.93

87.1

103.69

139.98

Per capita income relative to US*

11.98

47.8

62.4

69.35

US

GDP PPP $ million

521280

5754800

9898700

1447100

GDP per capita $ PPP

2896.34

23053.98

35080.38

46568.57

Openness

9.46

20.54

25.95

29.05

Per capita income relative to the US*

100

100

100

100

Source: Computed from Penn World Tables http://pwt.econ.upenn.edu/php_site/pwt71/pwt71_form.php; * figures in percentage.

Nor has this remarkable progress in raising average incomes been achieved by a process of growth that benefited only the rich. Growth in Asia has been accompanied by growing inequality, no doubt, but also helped deliver millions of people out of abject poverty. This has been an achievement that has no precedent in history. It is rapid, globalized growth that has wrought this miracle of mass emancipation of the poor and steady growth in average incomes.

Indian communists refuse to engage with this reality, sticking with the notion that capitalism is not a viable option for newly decolonized countries and arguing growth only brings misery for the working people. Table 2 shows the reduction in poverty achieved as a result of globalized growth.

TABLE 2

Absolute Poverty Measures for $1.25 per day by Region 1981-2008

Region

1981

1990

1993

1996

1999

2002

2005

2008

% of population below $1.25 a day in 2005 PPP

East Asia and Pacific

77.2

56.2

50.7

35.9

35.6

27.6

17.1

14.3

China

84

60.2

53.7

36.4

35.6

28.4

16.3

13.1

East Europe and Central Asia

1.9

1.9

2.9

3.9

3.8

2.3

1.3

0.5

Lat Am and Caribbean

11.9

12.2

11.4

11.1

11.9

11.9

8.7

6.5

Mid East and N Africa

9.6

5.8

4.8

4.8

5

4.2

3.5

2.7

South Asia

61.1

53.8

51.7

48.6

45.1

44.3

39.4

36

Sub-Saharan Africa

51.5

56.5

59.4

58.1

58

55.7

52.3

47.5

Total

52.2

43.1

40.9

34.8

34.1

30.8

25.1

22.4

Total Excl China

40.5

37.2

36.6

34.3

33.6

31.5

27.8

25.2

No of people in million below $1.25a day in 2005 PPP

East Asia and Pacific

1096.5

926.4

870.8

639.7

655.6

523.1

332.1

284.4

China

835.1

683.2

632.7

442.8

446.3

363.1

211.9

173

East Europe and Central Asia

8.2

8.9

16.7

18.2

17.8

10.6

6.3

2.2

Lat Am and Caribbean

43.3

53.4

52.5

53.6

60.1

62.7

47.6

36.8

Mid East and N Africa

16.5

13

11.5

12.3

13.6

12

10.5

8.6

South Asia

568.4

617.3

631.9

630

619.5

640.5

598.3

570.9

Sub-Saharan Africa

204.9

289.7

330

349.4

376.8

390.4

394.9

386

Total

1937.8

1908.6

1910.3

1704

1743.4

1639.3

1389.6

1289

Total Excl China

1102.8

1225.5

1277.6

1261.2

1297

1276.2

1177.7

1116

Source: Shaohua Chen and Martin Ravallion, More Relatively Poor People in a Less Absolutely Poor World. World Bank, 2012.

The left has got lost in irrelevant debates over the relative roles of the state and the market. The state played a big role in the industrialization of Korea, Taiwan, Singapore, Malaysia and post-War Japan. Is it anyone’s case that these economies are any less capitalist on account of this? The relations of production, characterized by labour being a commodity, determines the essential nature of a capitalist system of organizing production. On this count, just because the state in China is run by a party that calls itself communist, the Chinese economy does not become anything other than capitalist.

 

The state sector is no more socialistic than the private sector. An efficient private sector serves to achieve social goals better than an inefficient state sector does. A state-owned firm that employs wage labour is no less capitalist than a private enterprise that hires wage labour. How fairly the employer treats its workers, it is true, is more predictable in the case of state enterprises.

If workers understand that globalized growth remains a vibrant form of organizing production and they collaborate with industry in boosting production on the basis of a new paradigm of shared prosperity, labour law reform can take place on the lines discussed above and wages and living standards can go up across the board.

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