Written by Pravakar Sahoo.

China’s relatively flexible and business-friendly labour laws have ensured continued investment in the manufacturing sector. By contrast, investors find labour laws in India restrictive. India, a democracy, has also found it harder than China to undertake labour and wage reforms.

Rapid globalization challenged China’s leaders to design market-friendly labour laws and policies. They responded by issuing over 160 labour regulations and rules between 1979 and 1994 that promoted greater labour market flexibility while simultaneously safeguarding workers’ welfare. Labour reforms in China ended three rigid labour provisions—lifetime employment, centrally administered wages, and state-controlled appointment and promotion of managerial staff—and sought to end permanent employment, to give managers room to adjust to market needs. In 1986, the State Council issued “Temporary Regulations on the Use of Labour Contracts in State-Run Enterprises”. These regulations let employers hire temporary workers on short- or long-term contracts, and raised the share of contract workers in total employment from 4% in 1985 to 39% in 1995. By 1997, 100 million employees had labour contracts. However, until the late 1990s, the government restricted the dismissal of workers at will.

In 1992, China let enterprises set internal wage structures, and required them only to submit wage proposals to the government for approval. In 1994, the promulgation of the Labour Law established and institutionalized the labour contract system and a new, pro-business rhetoric, by using market terms such as contract employment, hiring and firing, freedom to choose career, minimum wage, and collective contract. The New Labour Contract Law, promulgated in 2007 and put into effect in 2008, sought to reconcile labour and capital by establishing proper standards for labour contracts, regulating the use of temporary workers and mandating employers to make severance payments. These labour market measures have contributed to China’s emergence as an international mass manufacturing hub.

The Indian labour force has been more disciplined and cooperative during the post-reform period than before. This is manifest in fewer strikes, lockouts, and work days lost. But the many labour rules—around 250 labour rules at the central and state level govern the labour market—and the process of enforcement by inspectors, at least on paper, deters investors. Further, rigid labour laws discourage firms from introducing new technologies that might require retrenching workers. The Industrial Disputes Act (1947) mandates compulsory, prior government approval for layoffs, retrenchment, or closure of industrial establishments employing over 100 workers. The Contract Labour Act (1970) requires 21 days’ notice and employee consent if a employee’s job content or nature of work needs to be changed. While the right of workers to associate is important, the Trade Union Act (1926) allows for trade unions where even outsiders can bear office.

To undo this malady, the Cabinet has cleared some restrictive provisions of all these acts and proposed amendments, which are set to be tabled in Parliament. To provide flexibility to managers and employers, the amendment to the Factories Act includes doubling the provision of overtime from 50 hours a quarter to 100 hours in some cases, and from 75 hours to 125 hours in work of public interest. Worker productivity is low in India, which is probably why working hours have been increased. However, while productivity issues should be addressed in part by bringing in quality FDI, it is important to prevent worker exploitation by enforcing maximum-hour protection. The norms of female participation have been relaxed in certain industry segments. An important pro-labour step taken is a reduction in the number of days that an employee needs to work to be eligible for benefits like leave with pay—from 240 to 90.

Amendments to the Labour Laws Act, 1988 will let companies hire more employees without having to fulfil weighty requirements. The finance minister under the new regime encourages states to make appropriate labour reforms (like Chinese provinces that promulgate labour reforms to suit their needs). Reforms will make it easier for firms to adopt hire-and-fire policies. To attract FDI in manufacturing and create jobs in China, the 1994 Labour Law allowed hiring and firing and, in 1999, the state explicitly granted foreign firms the right to hire and fire based on merit alone.

The Rajasthan government has gone the Chinese way and made manifold labour reforms. Industrial establishments that employ up to 300 workmen can now retrench employees without the government’s permission. To reduce delays in scores of small units by bureaucratic and paper work, the Factories Act now applies to firms that employ 20 workers (in electricity-powered factories, raised from 10) and 40 (in factories without power, raised from 20). Finally, to stop productivity loss from politically motivated petty strikes, a union must now show membership of 30 per cent (up from 15 per cent) of the total workforce to be recognized.

Under the new government led by Prime Minister Modi, India is focusing on the manufacturing sector to create employment opportunities for millions of young Indians and improve growth. Policymakers understand that labour laws must be made flexible to boost mass manufacturing. On 16th October 2014, PM Modi announced two key labour reforms: ‘unified labour and industrial portal’ and ‘labour inspection scheme’. These will make labour inspection criteria objective and processes more transparent, and help small and medium enterprises (SME), which are allegedly discriminated against by labour inspectors. Introducing a Labour Identification Number (LIN) and putting inspection on a unified portal will make the use of labour rules transparent. The PM’s efforts to raise the minimum wage—to ensure vulnerable groups’ access to the pension system and the Employment Provident Fund (EPF)—is a laudable, if meagre, step. Overall, it is the first big step towards more reforms in one of the most complicated and debatable issues in the post reforms era at the central level.

Pravakar Sahoo is Associate Professor at the Institute of Economic Growth (IEG), Delhi University. He is also a CPI blog Regular Contributor. Image credit: CC by World Bank Photo Collection/Flickr.