New labour codes could boost employment, consumption, social welfare, but implementation is key: Experts

The Union Government recently notified four new comprehensive Labour Codes, consolidating 29 existing labour laws. The four labour codes include the Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020 and the Occupational Safety, Health and Working Conditions Code, 2020.

As per the government, the reform will streamline compliance, modernise outdated provisions, and create a simplified, efficient framework that promotes ease of doing business while safeguarding workers’ rights and welfare.

The Code establishes a statutory right to minimum wages for all employees across organised and unorganised sectors. Earlier, the Minimum Wages Act applied to only scheduled employments, covering 30 per cent of workers. Appropriate governments will determine minimum wages considering workers’ skill levels. Appointment letters specifying job details, wages and social security will have to be given. Women can work in all types of establishments and also at night.

A national database is to be developed for unorganised workers to help them get jobs, map their skills and provide social security benefits. The government has also formalised recognition norms for trade unions and established rules for quicker dispute resolution. Also, for lay-off, retrenchment or closure, the approval limit has been raised from 100 to 300 workers, and states may enhance the limit further.

Economists say implementation of the codes could boost India’s economic growth, reduce unemployment and also increase the share of formalisation in the labour force.

Soumya Kanti Ghosh, the group chief economic adviser at State Bank of India, pointed out that in India, around 44 crore people are working in the unorganised sector, of which close to 31 crore unorganised workers are registered under the e-shram portal. Even if one would assume 20 per cent would shift from informal payroll to formal payroll, he says India’s social security coverage may reach 80-85 per cent in the next 2-3 years.

“India’s new labour codes, after a short transition phase, could reduce unemployment by up to 1.3 per cent over the medium term, depending on reform implementation, firm-level adjustment costs, and complementary state-level rules. This would imply additional employment generation of 77 lakh people based on the current labour force participation rate (15 years plus) at 60.1 per cent and average working age population at 70.7 per cent across rural and urban workforce,” Ghosh pointed out.

With a savings rate of about 30 per cent, the implementation can result in a consumption boost of Rs 75,000 crore, he opined.

Medium-term impact

UBS Economist Tanvee Gupta Jain said that the recent reform push by the government, including GST rate rationalisation, deregulation and now labour reforms, reinforces the groundwork for sustainable economic growth that could help drive increased productivity and help firms scale up globally over the medium term.

A simpler compliance regime would help in attracting new foreign direct investment, particularly in the manufacturing sector, said Jain.

“India’s macroeconomic stability, regulatory easing and lower cost of capital would also create conducive conditions for broad-based private corporate capex recovery,” she added.

Effective implementation needed

Jain, however, noted that the successful rollout of the new laws depends on how effectively states adopt them. The minimum wage threshold also needs to be addressed, she pointed out.

“Earlier in February 2019, an expert committee on determining the methodology for minimum wages had suggested a uniform minimum wage of Rs 375 a day or five regional wages ranging from Rs 342 to Rs 447 a day. Our analysis suggests that while there would not be many issues with the prevailing on-the-ground wages in the organised sector, we think there is still potential for higher wages, especially in the unorganised sector,” said Jain.

Nevertheless, she also feels that these requirements will enhance the welfare of workers, boost consumption and improve social security coverage for the informal workforce, leading to higher labour productivity.

According to Sonal Varma, Nomura’s chief economist for India and Asia (ex-Japan), the government’s decision to implement these tough reforms is an important signal that it is keen to ease doing business in India, attract more FDI and integrate into global value chains.

 “Regulatory burden due to archaic labour laws has encouraged manufacturing firms to stay small, thereby negating the benefits from economies of scale. As such, the increase in worker threshold limit for retrenchment/ closure should encourage firms to build larger-scale factories, boosting the manufacturing sector, and expanding employment opportunities over time,” said Varma.

For firms, these reforms should ease compliance burden, although the cost of hiring labour may rise, and in the short term, businesses may need hand-holding to comply with these new laws. The government will also need to navigate the political pressure from trade unions opposed to this revamp, she added.

Rahul Mehta, chief mentor, Clothing Manufacturers Association of India, said the new Labour Codes will have a “mixed impact” on the garment industry, which largely comprises small units.

“It will be beneficial to these units, typically employing less than 300 workers, as they will not need prior government permission for lay-offs and retrenchments. On the other hand, restriction of using contract labour for core activities will affect these units as most employ labour on contract or piece rate basis, especially for stitching, checking and finishing,” said Mehta.