A Fair Deal: Four New Codes Will Simplify Labour Laws and Promote Growth

 THE NOTIFICATION OF the four labour codes that consolidate a plethora of laws, rules, regulations and a load of red tape into a coherent set of instructions marks a major reform promise that has been delivered by the Narendra Modi government. It was probably the toughest factor market reform to carry out. That it was carried out without a political blowback from one of the most organised and militant constituencies is a testament to the government’s politi­cal acumen. With these codes being activated, a flexible labour market, the essential requirement for a modern economy, is now more likely than it ever has been since 1947.

After Independence, the number of laws regulating labour continued to proliferate. Before their codification into four sepa­rate codes, India had 29 separate labour laws, 1,436 rules, 181 forms and 84 registers. All of them had to be obeyed and maintained by business and industrial establishments across India. These were just Central laws. States have their own laws as labour is a subject on the Concurrent List of the Constitution. This is apart from state-specific exceptions carved for states in Central laws. Overall, it was an extremely complicated system that imposed an onerous compliance burden on companies.

Compliance burden is a misnomer to describe the conse­quences of this system. These labour laws, which included some dating to the colonial period (such as The Trade Unions Act, 1926), stunted the structure of industry in India. It became impossible for small firms to graduate to the ranks of large com­panies. The labour laws were so out of sync with realities of busi­ness cycles that companies chose to remain small to circumvent these laws. India could never reap economies of scale in industry even as the world progressed. It is safe to say that these labour laws were the driving force behind India remaining an indus­trial midget in a world populated by giants.

All that is history now.

The four labour codes, that were notified on November 21, had been passed by Parliament in 2019 and 2020. It took five years for the government to iron out political issues by deliberations with unions, states and other stakeholders to finally implement these codes. The four codes, 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 have a significant overlap with existing laws—as was to be expected—but have also removed and added provisions across the codes keeping in mind India’s experience in dealing with a plethora of labour and industrial issues since Independence.

The four codes are a judicious compromise between the rights of labour and the need to ensure that India’s industrial growth is not compromised by one-sided labour laws. On the labour side of the ledger, in the Code on Wages, for example, minimum wage payment has been made a statutory right, a right that was previously available only to workers in select industries. This right now includes all workers. All workers will now get provident fund, coverage under the Employees’ State Insurance Corporation (ESIC) across India and other social security benefits. These provisions were earlier only available to a partial set of workers. Mandatory appointment letters, an­nual health check-ups for workers above 40 years of age and timely payment of wages will now be ensured through the code. This is part of the government’s deal with labour to ensure that it is not short­changed in the name of reforms. This was essential to secure a ‘buy in’ from labour for these reforms.

The centerpiece of the four codes is the Industrial Relations (IR) Code, 2020. This is the part that does the heavy-lifting of labour reforms and one that was essential if India had to make any headway in becoming an industrial power. The chapters of the IR Code dealing with the recog­nition of trade unions and the provi­sions to lay-off workers have seen particularly important changes.

Under Section 77 of the IR Code, companies can now fire up to 299 workers without seeking govern­ment approval. Earlier, this limit was much smaller and set at 100 workers. This is one of the most im­portant changes to be made in the labour laws since Independence. A flexible labour market with ‘hire and fire’ provisions is essential for the creation as well as exit of firms depending on business conditions. This has been the demand of indus­try for more than half-a-century. Finally, this has been codified.

Labour militancy, responsible  in no small measure for deindustrialisa­tion across many states in India, could never be checked as these worst features of trade unionism had legal protection and no political party or government could summon the courage to do what was needed. These problems have been recognised and the IR Code addresses them to a great degree. Section 14 of the code deals with the recognition of trade unions and Section 62 (on strikes) checks this menace.

Section 14 deals with the recognition of trade unions and provides for the for­mation of negotiating unions and coun­cils. In case there is more than one trade union, then the one that has 51 per cent of workers or more on the muster roll of the establishment shall be recognised as the sole negotiating union. If there is more than one trade union in an establishment and no such union has 51 per cent or more of workers, then the employer shall establish a negotiating council for negotiations with the employer.

This section is particularly important given the uptick in la­bour militancy, often at the behest of politically-driven unions in India. The companies that are most affected by such activities are foreign multinationals. This puts governments, both at the Centre and in states, in a piquant situation. On the one hand, all govern­ments, irrespective of their political complexion—barring one or two cases—are seeking foreign investments and on the other hand, any ‘labour politics’ vitiates those attempts.

THE CASE OF Samsung in India, specifically the on-goings at its Sriperumbudur plant, is directly relevant to what Sec­tion 14 in the IR Code seeks to ameliorate. Samsung has had a long presence in Tamil Nadu, for 17 years by 2024 when it faced industrial action at its plant there. In these many years, it had seen no major labour problem. But that year, a set of politi­cally mobilised workers demanded the registration followed by the recognition of their union. Their actions were backed by the Centre of Indian Trade Unions (CITU), a front of the Communist Party of India (Marxist). In June last year, the workers moved an application for registration of the union. The state government, rightly concerned about the effect of such militancy on attract­ing foreign investment, did not take an immediate decision. In September, 1,500 workers at the plant went on a strike. In the meantime, a smaller group of employees decided to form their own union and it was recognised by the company.

The strike was called off in October last year but unrest contin­ued and there were flare-ups this year as well. After more than two dozen rounds of negotiations between the company, the union and the state government, a three-year wage agreement was struck in May this year.

Samsung in Tamil Nadu is not the only example. Haryana (Suzuki) and Karnataka have seen vio­lence at the hands of workers in establish­ments of foreign companies. In Haryana, especially in the Manesar-Gurugram industrial belt, union recognition is only a prelude to further ‘bargaining’ at the hands of recalcitrant workers. Companies, used to far more civil working conditions in a diverse set of countries, are loath to recognise unions and justly so.

Labour militancy today is a far cry from the 1960s and 1970s when it was routine to see industrial actions. It was pretty normal to see tens of millions of man-days being lost to strikes and lock-outs. In 1968, for example, 17.28 million man-days were lost due to these actions. This number went up to 19.05 million man-days in 1969 and 17.07 million man-days in 1970. Since 2014, strikes and lock-outs have come down significantly. In 2014, there were 168 lock-outs and by 2022—the last year for which official statistics are available—they had fallen to six. The number of strikes in 2014 stood at 119 and came down to 35 in 2022.

There is, however, a vital difference between those tumultu­ous decades of the 20th century and the present day. India was an incomparably smaller economy in those years. Any strike today is likely to lead to a much greater loss of output in eco­nomic terms than it did in the past. That is one reason why even the relatively smaller number of strikes is unacceptable for the progress of the country.

This is the context and backdrop against which provisions of Section 14 of the IR Code ought to be seen. It is not a simple ‘union-busting’ device but a provision that is necessary for an era in which attracting foreign investment and progress in manufacturing pose multiple challenges. On the one hand, there is a constant refrain that India is unable to increase manufacturing as a per­centage of its GDP and, on the other hand, gold-plated ‘workers’ protection’ is another refrain among activists, NGOs and certain political parties.

Section 62 requires giving of a 60-day notice before carrying out a strike. This period has been increased from six in the Industrial Disputes Act, 1947. A symmetric provision exists for giving notice to workers before closing down any establishment. This set of provisions is also necessary to ensure industrial peace.

The reality of formal employment in India is that only 21.7 per cent of Indian workers were salaried in 2023-24 (Periodic Labour Force Survey or PLFS, 2024), a figure that has remained almost static since 2021-22, when 21.5 per cent of workers were salaried. Of these workers, less than half have written contracts. These grim statistics obtain when India is the fourth-largest economy in the world and is on its way to becoming the third-largest one. Industrial employment statistics make for even more depressing reading. The four labour codes provide a way out of this morass. But timing is of the essence. These changes have to be adopted soon if they are to have any meaning.