Labour Law Relaxations in the Time of Covid-19: Boon or Bane?

– Isha Sen

Introduction

Various states, like Uttar Pradesh (through an ordinance) and Madhya Pradesh (through amendments to the labour laws), have introduced certain reforms in their labour laws, in an attempt to boost the manufacturing industries in their respective states purportedly by forcing labourers to work harder and spending lesser on their welfare (thus attempting to get greater working hours at lower costs in order to increase profits).

Labour is a subject in the Concurrent List, which implies that states may enact legislation with respect to it, subject to the absence of a Central law. Thus, it is within the purview of the states to repeal or modify those legislations enacted by them, as they deem fit. This article will not look into the Constitutional validity of the changes, but will analyze the amendments to determine whether it could give an impetus to the economy of the states.

What must be kept in mind is that, for an economy to grow, a simple boost to supply would not be effective, especially when there has been a massive demand shock  in the economy, reducing overall levels of demand. It is a common principle of economic theory that supply, without adequate demand, would crash prices in the economy. At such a juncture, in order to meet its aim of boosting the economy, a successful policy must ensure a simultaneous push to demand and supply. Based on this premise, the author argues, through the course of this article, that the labour law amendments, which might help in increasing supply, would have an adverse or no effect on demand. Therefore, it would ultimately not be successful, unless there is a corresponding increase in demand.

Possible Benefits of Relaxation of Labour Laws

The positive relationship between restrictive labour laws and reduction of supply is well illustrated in a paper titled “Can Labour Regulation Hinder Economic Performance? Evidence from India”. It presents data that shows how India, compared to its Asian neighbours, in the period between 1960-1995, had a far slower growth rate in its manufacturing sector. This coincided with the implementation of state amendments to the Industrial Disputes Act which gave the labourers greater bargaining power against their employers and therefore, resulted in greater labour rights. An example pointed out by them is that of the state of West Bengal, whose manufacturing output per capita reduced during 1958-1992, the same duration over which massive labour reforms in favour of the labourers were enacted in the state.

The relationship between easing of labour laws and increase in production and output is simple. These laws, by giving greater rights to labour, ensure that they have lesser working hours, greater remuneration, adequate working conditions, paid leaves and a multitude of other rights that would result in a financial burden on their employers. Lesser working hours imply lesser amount of goods produced; higher pay implies that the industry owner cannot afford to employ others who could work in shifts to compensate for the less working hours. For the employer, profits would be reduced due to welfare payments that he would be required by law to make to the labourers. This in itself harms the economy. In addition, lesser profits lead to an adverse impact on the investment climate of the economy. No investor, Indian or foreign, would be incentivized to invest in a business that is not returning profits. Greater investments are crucial for businesses, to expand their operations and earn profits. This is especially crucial in the Covid-19 era where investors would be on the lookout for investment opportunities that could be more lucrative, preferably in countries that have the luxury of availability of cheap labour along with a more relaxed labour rights regime. Investments would be a crucial component for economic growth (as evidenced by the government’s Foreign Direct Investment relaxation policyin several sectors). Therefore, overall, it appears that the economy would witness restricted growth when labour rights regulations are implemented.

Inadequacy of Labour Law Relaxations in the Covid-19 Period

However, the current labour law relaxations must be looked at holistically, specifically the economic scenario and background in which they have been implemented, i.e., in the middle of the Covid-19 crisis, when individuals, especially the labourers, are short on money and food due to unemployment or non-payment of wages. This implies lower demand for goods in the economy, since individuals are not being able to pay for the same. Thus, it must be noted, irrespective of the new labour law relaxations, demand has contracted in the economy.

The new labour law relaxations would contribute to decreasing this demand further. The amendments propose to reduce the standard of working conditions that an employer is required to provide. This is hazardous even in non-Covid situations, the impact being aggravated by the basic hygiene requirements that the fight against Covid-19 requires. By removing such restrictions, the workers are prone to succumb to illnesses and discontentments due to the surrounding conditions, which result in reduction in efficiency, as confirmed by studies conducted. Therefore, all of this might then lead to them being replaced (another major reform is the removal of several restrictions on retrenchment), which implies removing their income-source and reducing their purchasing power. Some states have proposed refusal of access to Courtsfor aggrieved workers, by enacting provisions of the Disaster Management Act. This would result in the voices of these labourers to go completely unheard. This would further result in the worsening of their conditions and efficiency. An increase in working hours without corresponding increase in wages has no impact on the purchasing power of the labourer who would have to work almost double the hours in order to earn the same amount of money, thus having an adverse impact on the motivation and incentive to work. Reduction in efficiency due to the working conditions would ultimately have an adverse effect on supply as well.

Measures Required to Bridge the Demand-Supply Gap

Due to the current situation, it is true that factories in India have been shut for months. It is the author’s opinion that the proposed labour relaxations may motivate factories to reopen, but they would not be incentivized to continue functioning until and unless there is demand for the goods produced. Therefore, the government cannot hope to rectify the situation simply by introducing measures to increase supply. Even if the government is successful in its purported aim of introducing labour reforms – increase in production and ergo an increase in supply – the economy will not get the boost that it immediately requires.

The author argues that apart from labour regulations, the government needs to introduce policies that would increase individuals’ purchasing power, thereby increasing demand , which would motivate factories to continue functioning. A combination of supply and demand targeting measures could be adopted to achieve this – say widespread cash transfers in the hands of the people along with providing increased employment under the MGNREGA Scheme and simultaneous loans to the businesses (which the government has introduced, as part of its Rs. 20 lakh crore economic package). This becomes all the more important because the plethora of labour laws existing in India, naturally, cover only the organized sector, which is miniscule compared to the unorganised sector that remains beyond the purview of regulations. The requirements of the unorganized sector, if not focused upon, will lead to a further contraction in the economy.

The above point might lead to the argument that if labour regulations impact such a small proportion of the population, it might not have an overall impact on demand. However, the author contends that the actions of the government in the organized sector is likely to create a ripple effect, leading to impacts in the unorganized one. If there is organized exploitation of labour in businesses and industries, this would lead to further exploitation in the unorganized sector, over and above what they face regularly. A government backed exploitation of labour in one sector, will almost certainly lead to exploitation in a sector where there is no government regulation. Thus, the adverse effects on the workers of the latter sectors reduce their efficiency and ability to purchase. A majority of Indians belong to this sector and an adverse effect on demand here, would have a disastrous effect for the industries and businesses. Thus, the gains they had set out to achieve would see a 180 degree reversal.

Conclusion

Therefore, the author concludes that the labour law relaxations, apart from having several social implications, may not be beneficial for the economy and may not provide the much-needed boost. This, however, is not to say that India’s labour laws are perfect as they were before the states amended them. However, what the author is emphasizing upon is that these may not be ideal to get the economy to recover due to impact of the novel coronavirus. Increasing supply is only one prong of a two-pronged approach that must be undertaken. Thus, a more comprehensive approach is the need of the hour.

This article has been authored by Isha Sen. Isha is a student of law at National Law University, Jodhpur.