Interview: Why removing labour laws won’t directly help Uttar Pradesh attract investors

The states of Uttar Pradesh and Madhya Pradesh have introduced drastic proposals to do away with a large number of labour laws. Uttar Pradesh has sought to remove all but three labour laws through an ordinance. And Madhya Pradesh has made drastic cuts to safety standards.

Scroll.in spoke to Amit Basole, a labour market researcher at the Azim Premji University in Bengaluru to understand what has happened, whether this will spur investment as claimed and how India’s complicated laws often made things worse even as they meant to do good on paper.

What MP and UP have done is quite drastic. Madhya Pradesh has done away with safety laws, UP has done away with unions altogether. How do you characterise the scope of these two changes given the past history of India’s labour regulations?
It’s fairly drastic. The Union government was anyway trying to rationalise the labour laws through four codes. So they have had it on the agenda for a while. Things like changing the firm size threshold at which laws will apply has already been tried in places like Madhya Pradesh and Rajasthan. So this has been building up. Now what they are doing is using the lockdown to get through very large changes which presumably they will justify using the depressed economic condition. They will argue that extreme times need extreme measures.

So you think they are taking advantage of the lockdown?
We keep saying never let a good crisis go to waste and so forth. And I think this really shows who is capable of not letting a crisis go to waste. What is not clear is whether these laws are actually constraints in any big way. For example, how much do real employers care about these regulations is something that gets lost in this very high decibel debate.

The lockdown is the crucial context we need to look at. There is already acute worker distress. And top of it, these moves dismantle 70 years, even Raj-era, worker welfare laws. What repercussions will this have on politics? Do you think it will spur on labour movements, impact the next vote?
That is a tricky question. The one thing we have learnt from the past two general elections as well as several state elections that they are difficult to predict. For example, the UP election that happened after demonetisation – I certainly did not expect the move to have as little effect as it did. So the whole lockdown is a very big unknown politically.

In my opinion, the Union government has drastically mishandled the whole issue. To me, it would suggest there should be electoral repercussions going forward. Of course, no idea whether it will happen or not.

The labour movement will be taking this up in a big way, for sure. But the question is whether that has any purchase in electoral politics these days. And I don’t think that union or labour politics has much to do with electoral outcomes these days in India.

But to repeat the point: these reforms are very drastic. In fact, you can’t even call them reforms. Radical changes, let’s say. So maybe this will tip something.

On the other hand, there is always the caveat: a very large proportion of the working population sees no change as a result of any of these laws. Over half the workplace has nothing to do with labour laws. Even people with regular wage jobs, who should legally fall under labour laws, in reality enjoy none of its benefits.

So how many people will this change affect at all?

In some circles in India, it is almost “common sense” that the labour laws have done more harm than good. They have stymied industrial growth and even harmed workers. At the end of the day, if there is no industry, the worker will lose out, the argument goes. Where do you stand on this?
This is a difficult issue for sure. My understanding of this, like many other regulations in India, the political economy of labour regulation enables rent seeking and harassment when needed. These laws act as potential avenues to extract for those who you are able to extract from. So this makes life quite difficult for a lot of entrepreneurs. That cannot be denied. This includes tax laws as well as labour laws. The Indian state has a tendency to harass and punish people where it should be fostering and encouraging them. And where it should oversee, it doesn’t since it has been paid off. So, for example, take big garment exporters in Bengaluru. They have the wherewithal to comply. But they don’t since they already have the understanding that they don’t need to comply.

On the other hand, your 30 or 50 workers guy, who now falls under certain laws, has to do all this even when his resources might be quite scarce. And there the government could then harass and extort from him. This is from where a lot of small entrepreneurs derive their anger against labour laws.

And what adds a further layer of complication: these laws are for the welfare of the most vulnerable. So you can’t easily make the arguments, look let’s make life easier for small entrepreneurs and lessen the load on them because we know that the working conditions in small factories and workshops is very bad.

My position on this has been that we do have too many complicated laws that work at cross purposes. What we need is a solid, manageable enforceable flow that makes sense and which the government can credibly enforce. There’s no point in having intentions which are so high and noble that they will never be met. That’s the situation now. Labour inspectors don’t exist, resources don’t exist to make sure people are compliant. So why not create a better flow? We set a minimum standard of non-negotiable labour conditions in the country. And we commit to defending these. Other regulations are frankly a luxury which we can’t afford. And I would be willing to say that, even if people criticise me, since the reality is that India is resource poor and labour surplus. Which means that employers will always have power on their side. The law will always be broken since there will always be workers ready to work without protection. And that is not going to change any time soon.

So instead of pretending we can actually enforce these laws for everyone and in reality enforcing them for a minuscule proportion of the workforce, why not have laws you can enforce for 100% of the workforce?

In Delhi, for example, the minimum wage is Rs 540. According to data from the Periodic Labour Force Surveys, 100% of casual labourers get less than that. And even 60% of regular wage workers get less than that. So these regulations simply don’t apply to a very large part of the workforce.

We should ideally have everything. But if you announce it and are unable to enforce it, then there’s no point, it’s just bad signaling. Employers know how it will work. They know if they have the money they can escape it or it will be used to harass them.

If so many workers in India are informal, what role do stringent labour laws play in their life? Does it hurt them?
Yes, it leads industries to turn towards more and more contractual work. Because the compliance is not enforced very well, what happens is that you get a two-tiered workforce in every workplace. Say, 30 workers who are regular and 70 are contract. Then what is happening is that we are creating an unequal workforce. Some workers are getting a lot of protection and some are getting nothing. Of course, logically everyone should get it.

So we need to be realistic about what we can give [in terms of protection]. And give that to everyone. Instead about being unrealistic about this and end up giving it only to 30%.

Uttar Pradesh has claimed this will help India attract companies leaving China. Is there such a direct correlation between labour laws and increasing investment. Or does it depend on things which are far more structural and long term?
No, there is no direct relationship. As they would say in economics, all other things being equal, maybe simpler labour laws will help. But those other things are certainly not equal. We have major structural problems to do with infrastructural bottlenecks, governance, clarity of laws, etc. These are far bigger considerations for industry than labour laws. And there’s always the SEZ [Special Economic Zone] model, where you can create small zones where the laws are different. But doing it in an entire state and giving free reign to every Indian employer to do whatever they want just to attract a few foreign investors, that makes no sense at all.

Is there any thinking on how these labour laws play out between states. Does this change make UP a better investment destination for an Indian entrepreneur than other states?
That’s a good question. A 2004 paper by Beslye and Berges is about that. But as you know that has also been challenged and debunked several times. What happens is that a very militant type of labour unions can have a negative impact on industry. From there to extend the argument to say that a state with laxer labour laws will flourish – that doesn’t happen. There are many other factors at play: what is the state’s attitude in terms of infrastructure, history of doing business, etc.

In a state like Uttar Pradesh, there are massive problems. I am very familiar with the Benaras silk weaver industry. I can see first hand what has horribly gone wrong there. And it’s definitely not labour laws. The entire history is home-based and informal. It has never been acknowledged that this is a vital part of the economy or been given the facilities that it needs, including most importantly roads and formal credit.