It’s a Wage, Not Labour Crisis

CONTEXT: India’s labour laws sabotage formal job creation, hurt the people they are meant to protect, and murder manufacturing employment. 

Historical Problems in Indian Labour Market

• Huge informal employment is a big drawback for the economy as well as the workforce.

• Chapter 5B of the Industrial Disputes Act makes factory employment like marriage without divorce.

• Employed poverty: Jobs are not as deficient as the inadequacy of the pay being received.

• Regulatory wage distortions due to mandatory wage increases lead to reduced differentials.

• Gross vs net: mandatory payroll confiscation of 45% for low-wage employees far exceeds their potential savings rates)
• Discretion in basic wage definition (inspector corruption thrives at EPFO and ESIC on the threat of multi-year backdating of including allowances in calculations)
• National minimum wages (a single number can never capture India’s diversity across geographies, sectors, industries and skills)

• Labour laws are too strict, with many loopholes.

• About half of the labour laws prescribe jail, eventually leading to corruption.
• Retard investment opportunities. 

Urgency to Reform Labour Laws

• Massive transmission losses between how labour laws are written, interpreted, practised and enforced.

• Breeding toxic combination of politicization of trade unions and criminalization of politics.

• Informality costs are higher than the formality benefits.

• Only 20% of enterprises are GST-registered, and only 10% pay GST. 

• Labour compliance complexity compounds with geography, scale and headcount, given the multiple and conflicting definitions.

• Employers can’t comply with 100% of India’s labour laws without violating 10% of them.

Labour Reforms needed

• Compliance

• A 90-day labour compliance commission is needed that:

• Cuts 75% of compliances and filings
• Formalizes a Universal Enterprise Number
• Digitises all interfaces into one system.

• Criminalization

• Eliminate 25% of current criminal penal provisions and convert 50% of them to civil, penal ones.

• Social security

• An effective safety net would be to give an option to employees between Employee’s Provident Fund (EPF) and National Pension Scheme (NPS) through:

• Making EPF voluntary.
• Merging the Employees’ State Insurance Corporation (ESIC) with Ayushman Bharat.
• Shifting the subsidy bill to direct benefit transfer (DBT).

• Employment contract
• Expanding non-farm formal jobs to 75% of the labour force, taking the burden of employment away from agriculture.
• Minimum Wage
• Must reduce payroll confiscation, calculate social security only on basic wages, and decentralize minimum wage setting.

Conclusion: Labour law reform must be balanced. It doesn’t mean no labour laws. It means changing our minds on perusing this evidence and taking bold action.