It’s a Wage, Not Labour Crisis

The Economic Times     14th September 2020     Save    

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.