Labour Market: Economic Surveys, Budget Legitimise Short-Term Illusory Gains

The government’s strategy regarding labour welfare in general and jobs in particular quite clearly projects that temporary jobs and current higher income are good enough.

The biggest challenge the NDA government faces is the fulfilment of its poll promise of huge employment growth.

In the absence of a credible comprehensive database on employment, it is difficult to argue success or failure, though micro-level stories and the general sense is that employment generation has been a policy failure. Further, it is rather curious that the Economic Surveys for both 2016-17 and 2017-18 provided data on employment in the organised sector only up to 2012 (Tables below). The data deficits on employment are disturbing.

However, the government’s strategy regarding labour welfare in general and jobs in particular – as can be gauged from the pronouncements relating to labour in the Union Budget 2018, the thinking projected in the Economic Surveys of the last two years and the recent labour market reforms of the government – quite clearly project its myopic approach to the labour market, i.e. that temporary jobs and current higher income are good enough.

Source: Economic Survey 2016-17

Source: Economic Survey 2017-18

Economic Surveys and government thinking

The policy measures in this and the earlier Budget should be seen in the context of the policy resolves of the government as demonstrated in the Economic Surveys. For example, the issue of tinkering with employees’ provident fund (EPF) has always been there ever since the NDA government came to power – recall the spontaneous violent acts by garment workers in Bengaluru in response to announcements regarding PF withdrawals. In its chapter on ‘Clothes and Shoes: Can India Reclaim Low Skill Manufacturing?’, the Economic Survey 2016-17 came up with a proposal to subsidise employers’ pay-roll taxes in textiles and apparel firms to “generate employment”.

It argued that “formal employment” could increase by providing choices to workers with regard to their PF contributions and their parking and contribution to health insurance. Its assumption is that workers would act as rational economic agents and would make informed choices with regard to current take-home pay, health insurance provider and investment of PF money. It is immediately clear that these assumptions are fantastic and constitute a clear attack on conventional labour institutions like government-assured-safe-social-security. All these utterances are made even when stock markets are known to be volatile and there is the history of collapse of well-established fund players.

The Economic Survey 2017-18, following the claims made in the earlier Economic Survey, blames stringent labour laws in India ­– as opposed to our competitors like Bangladesh, Vietnam and Ethiopia – for not capturing the void created by China’s exit from the garment sector. It is again difficult to understand the choice of comparator countries, all of which fare quite poorly in terms of labour standards. In order to address some of these constraints, including stringent labour laws, the government has introduced pay-roll tax sops, fixed term employment and rise in overtime (consistent with International Labour Organisation norms) for the apparel sector. The primary justifications for all these exercises are the inefficiency of government social security institutions (which cannot be denied), facilitating market institutions, and employment generation.

In line with the aforementioned perspective, the government floated the Pradhan Mantri Paridhan Rozgar Protsahan Yojana (PMPRPY) and Pradhan Mantri Rozgar Protsahan Yojana (PMRPY) Schemes, under which the government subsidises the 12% EPF contribution for establishments for new employees (joining after April 1, 2016) earning less than Rs 15,000 (which is the coverage threshold under the EPF scheme) for three years in apparel and other made-up sectors.

Through a notification in October 2016, the government also introduced a fixed term employment (FTE) facility to provide numerical flexibility to establishments in the apparel sector. According to the notification, the FT workers will be engaged for a given tenure and the terms and conditions of employment for them will be equal to those for permanent workers and they will be eligible for social security benefits proportionate to their tenure even if their tenure does not satisfy the eligibility tenure under the relevant law.

It may be relevant to know that earlier attempts in 2003 by the same NDA government to introduce FTE did not succeed. Hence, in the guise of inducing investment, promoting export revenue and employment generation, the government introduced FTE along with other sops to textile and other made-up sectors. This is clearly consistent with the central government’s strategy on labour law reforms, i.e. introduction of a “hard” reform (i.e. having direct implications of quality of employment) in a “partial” manner, i.e. in a sector or in a special economic zone and then seeking to universalise the same and also in a less visible manner, i.e. through government notifications rather than through amendments to a labour law. On January 8, 2018, the government notified its intent to amend the Industrial Employment (Standing Orders) Act, 1946, to legalise the introduction of FTE not only in the apparel sector (as earlier notified) but across all sectors.

Unlike in the previous Economic Surveys, the judicial aspects of governance with respect to contract enforcement have received significant policy attention in this Economic Survey. In order to improve India’s global ranking on the Ease of Doing Business Index, the NDA government has initiated substantial reforms to improve judicial indicators such as the pendency, case disposal and the settlement rates. However, the reform efforts have only been taken with regard to the Supreme Court and high court levels, without paying any attention to the performance of the labour judiciary created under several labour laws. A high pendency rate and slow disposal rate at labour courts across India have aggravated the suffering of the industrial working class and made it difficult for them to secure their legal entitlements. For example, the handbook of the government of Maharashtra for 2009-2011 (a rare statistical compilation in India) showed that though the total number of pending cases declined during 2006 to 2010, on December 31, 2010, the total number of pending cases were 41, 447.

In the Mumbai labour courts as on date, 1.5% of cases have been pending for over ten years, 36% have been pending for between five and ten years, 31.1% have been pending for two to five years and less than one-third of cases (31.33%) are pending for less than two years. The poor ratio of one labour court for 11.90 million non-agricultural workers for 2004-05 shows the poor judicial governance relating to industrial disputes. The patent failure of timely and quick justice delivery to workers should top the agenda of reforms concerning labour market governance.

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Instead, the government continues to revel in taking so-called reform measures which have little relevance to justice-seeking workers. During July 2017, the labour ministry announced that it is proposing an electronic process which will enable workers to raise an industrial dispute on line and the status of their complaints would be communicated through SMS alerts. This is at best cosmetic and at worse an utterly insensitive measure as workers should have the facility or knowledge to do so.

Pro-reformers miss no opportunity to attack Chapter V-B of the Industrial Disputes Act or the pay-roll tax burden or the Labour Inspector-Raj as weakening the ‘ease of doing business’ and hence employment. Scarcely do the issues of extraordinary and inordinate delays in justice dispensation or the violations of labour laws get discussed with equal zeal if not with social concern. Judicial reforms should start from the lower levels and also embrace the labour judiciary and industrial disputes. It is in these contexts and the schemes made flowing from these that we need to assess the Budget in relation to labour.

Union Budget 2018

Through this Union Budget the government has now extended its earlier sector specific policy of short term pay-roll tax sops and the FTE to all sectors. The universalisation of two schemes is expected to create jobs. There are problems with these measures. One, it assumes that pay-roll tax subsidy will lead to significant employment generation. Up to February 5, 2018, 29,055 and 599 establishments have joined PMRPY and PMPRPY (for textile sector) and cover beneficiaries 21,79,024 and 1,78,492 respectively. To put these numbers in perspective, according to the Annual Report of EPF Organisation for 2015-16 as on March 31, 2016, there were 17.14 crore members (i.e. a member having PF balance in his/her PF account) and 6.70 crore UANs (universal account numbers) have been allotted to members in respect of whom at least one contribution has been received since January 2014. There were on an average 3.76 crore contributing members (i.e. those for whom contributions are regularly remitted by the establishments).

Two, the government should find money to subsidise far more numbers of establishments seeking exemptions under the pay-roll tax sops schemes which means some tax or cess burden on others. In other words, tax burden will be shifted from one to another or printing of more money. Fiscal problematics cannot be wished away. Three, the punitive action on employers erring in implementing the pay-roll tax subsidy scheme is ex-post which will not benefit the workers removed prematurely from service. Four, in the case of any FTEs there can be disengagement (escape) clause before the expiry of prescribed tenure. These will increase costs to the government.

The new regulations on FTE make it mandatory on the part of the employers seeking to hire workers on fixed term contracts to provide equal terms and conditions of employment and make proportionate social security contributions, even if the tenure is not commensurate with those prescribed for cover under law. The FTE provision will in fact formalise all forms of securities save employment security and hence will add to the cost to company (CTC) and as a result will discourage hiring. In the earlier regime of “un-regulated informality” “employment numbers” could have been much higher as the terms and conditions of employment were left to individual bargaining or unilateral determination which reduced the CTC to the company. In the current “regulated informality”, the CTC is higher. Hence, employment generation will not be as high as it was earlier.

In China, if the fixed term employment contracts are renewed for more than two times, such workers should be deemed to have employed on a permanent basis. This law there recognises that the employer cannot continue to hire workers on incessant short tenures for jobs which are perennial and thus cannot continue to enjoy undue rents. In India we are formalising the move away from open ended jobs to short term tenured jobs. In fact, recently the government has proposed to amend the Contract Labour (Regulation and abolition) Act, 1970 among others to prohibit contract labour in “core” jobs in lieu of the present regulation of “perennial” jobs as the former will reduce the scope for prohibition of contract labour employment as opposed to the latter.

The government seeks to reduce the provident fund contribution of and for a woman employee to 8% irrespective of the stipulated 10-12% under the EPF scheme. However the employer’s contribution with respect to female employees remains unchanged. In other words, matching contribution concept is thrown out of the window. The idea is to leave more money in the pockets of women employees which is expected to incentivise women to enter the labour market.

But this is surely a wrong strategy to do that. Given the fact that short-changing women employees is legalised through this Budget now it won’t be surprising if the employers also short-change women’s future. For example, employers can provide marginal rise in the components of income (like basic and dearness allowance) which attract pay-roll tax burden on the employer and grant impressive increases in other components which means that workers will be left with more money in their purses now. This is a kind of “wage theft” as not only the wage rates decline but also workers’ future income stream is short-charged.

The Union Budget legitimises the illusory gain and the long-term disaster. If a female and a male worker has worked for, say, 20 years for the same employer performing same work and retired at the same time, the female employee be left with less current (because fixed component is less and there is no guarantee variable pay will be more as female employees are less likely to work overtime or be in a position to put in more effort-time thanks to multiple commitments) as well as retiral money, all things remaining equal. Should not a woman worker provide for her own future as adequately as a male worker?

The critical assumption behind reduction in corporate income tax for MSMEs  (medium, small and micro enterprises) is that other things being equal it was the major impediment to investment and reduction in it will result in additional investments and hence additional jobs. But other factors are not equal, i.e. there are far more severe irritants in ‘ease of doing business’ than tax burdens, like energy deficit or poor access to credit in the case of MSMEs.

Reduction in tax revenue due to this measure could lead to higher fiscal deficit which would affect interest rate and hence will raise the cost of borrowing. Thus, what is given by one hand is sought be taken back by another. Again, it is assumed that the firms will reinvest net gains and also share the higher spoils with employees in the form of higher wages; both are questionable.

The Budget has generally disappointed the salaried class by offering too little on the platter, i.e. allowing a standard deduction of Rs 40,000 in lieu of the present exemption in respect of transport allowance and reimbursement of miscellaneous medical expenses. This means effective relief will be much less. Further, government employees sector has been waiting for some policy statement with respect to their demand for enhancing the floor minimum wages to Rs 18,000 and the Budget is silent on this.

The trade union movement has conducted several national-level agitations, mass dharna in front of parliament for three days in November 2017, for example, and their demands comprise stopping of disinvestment drive, raising the minimum wage, calling a halt to the pro-business labour law reforms, stopping of precarious employment programmes, among others.

The Bharatiya Mazdoor Sangh (BMS) held a rally on November 2017 and the finance minister as a chairman of the Ministerial Panel of Labour Law Reforms is said to have assured it that he would “look into” their demands which included income tax exemption up to Rs 5 lakh and minimum monthly pension of Rs 3,000, nomination of representatives of labour and farmers on NITI Aayog and stopping privatisation and disinvestment of public sector undertakings, among others. But these are exactly what the government is proposing to do or not do. So BMS has stepped up its agitation and even threatened to boycott the forthcoming Indian Labour Conference on February 26-27 if its views are not considered before February 25.

K.R. Shyam Sundar is Professor, HRM Area, XLRI, Xavier School of Management and Rahul Suresh Sapkal is Assistant Professor, Maharashtra National Law University, Mumbai.