State of labour reforms: States would do well to follow Rajasthan’s example on labour reforms

However, before this, some states have already carried out significant reforms post-2014.

By Bibek Debroy & Aditya Sinha

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Empirical evidence suggests states with relatively inflexible labour regulations experienced slower growth in labour-intensive industries and employment. Labour reforms in Bangladesh have shown how addressing rigidities can foster industrial growth and employment generation in labour-intensive sectors such as textiles. In the case of India, studies (https://bit.ly/3jJCF4z) show that the textile and apparel sector has not grown to the optimum potential because the firm size distribution is skewed towards small firms. The authors attribute this to “India’s labour regulations and the associated enforcement regime are important policy drivers of Indian firms’ tendency to avoid placing too many workers under one roof.”

Since labour falls under the Concurrent List of the Constitution, both the Union and state governments can legislate. The Union labour ministry has recently consolidated the 40 labour laws administered by the ministry into four codes. While Parliament has enacted these codes, the rules are yet to be notified. However, before this, some states have already carried out significant reforms post-2014.

Usually, when one talks about labour reforms, ostensibly s/he thinks of (a) easing restrictions on retrenchments and closures (chapter V-B Industrial Disputes Act, 1947); (b) changing the definition of factories under the Factories Act, 1948; or (c) the threshold of the number of contract workers employed for the applicability of the Contract Labour (Regulation and Abolition) Act, 1970.

Rajasthan was a pioneer in bringing out major labour reforms in 2014. It didn’t take long for states like Madhya Pradesh, Maharashtra, Gujarat and Haryana to follow suit. Earlier, IDA, 1947, covered those establishments which employ 100 or more workers. Rajasthan, Haryana, Gujarat, Maharashtra, Uttar Pradesh, etc, have amended the threshold to 300 or more workers. This means that no prior permission from competent authority is needed by establishments for lay-off, retrenchment and closure. Thus, this step liberalised the exit of unviable firms.

Similarly, several states have also amended the Factories Act, 1948. This Act is applicable to only those establishments that employ 20 or more workers (using power) and 40 or more workers (not using power). The threshold has been relaxed from the earlier threshold of 10 or more workers (using power) and 20 or more workers (not using power). Rajasthan, Haryana, Maharashtra, etc, have increased the threshold of applicability of Contract Labour Act to more than 50 workers.

Notably, these reforms are not just restricted to amending (a), (b) and (c). For instance, Madhya Pradesh amended eight labour laws, including Inter-State Migrant Workers Act, Motor Transport Workers Act and Building & Other Construction Workers Act (1996). Gujarat passed Labour Laws (Gujarat Amendment) Bill, 2015, through which it amended 11 existing Acts, including the Unorganised Workers Social Security Act, 2008.

Apart from addressing the labour market rigidities, some states have eased the regulatory compliance regime. The labour ministry terms this as ‘governance reforms’. Some of its examples are auto-renewal of various licences and clearances, central inspection system, deemed clearance in a stipulated time-frame, and self-certification. Andhra Pradesh enacted the Andhra Pradesh (Issuance of Integrated Registration and Furnishing of Combined Returns under various Labour Laws by certain Establishment) Act, 2015. Maharashtra, Madhya Pradesh, Karnataka, Rajasthan, Haryana and Uttar Pradesh have also introduced these provisions.

These reforms are not restricted to the manufacturing sector. Maharashtra and Karnataka amended their respective Shops and Establishments Acts in 2017 to allow shops and establishments to remain open 24×7 across the state. This Act is applicable to all the commercial establishments (business centres, offices, warehouses, stores, hotels, eateries, amusement parks, theatres, etc) not governed by the Factories Act. Therefore, such amendments recognise the artificial nature of the distinction between manufacturing and services, at least for MSMEs.

A recent study (https://bit.ly/3AkSt4s) has found that the labour reforms carried out in Rajasthan had a “positive impact on Gross Value Added and productivity.” These reforms by Rajasthan led to an increase in number of workers employed by the manufacturing units. Therefore, there is a message for all states to follow.

Debroy is chairman and Sinha is additional PS (Research), EAC-PM. Views are personal