India’s Big Government

by Vivek Kaul

  This has become very clear with the way things have evolved in India. Despite the prevailing labour laws, which go against them, the number of contract workers has only increased over the years. Also, abolishing or prohibiting contract workers would only go against the aims of the Make in India programme. If the government wants foreign as well as Indian companies to make in India, and not just import and sell goods in India, it needs to let companies work with a flexible labour recruitment system.

  And what are the chances of something like that happening? The fact that governments have an inherent need to control and that the politicians running governments have to be re-elected every few years make me a tad sceptical about whether any government will go about legalising contract labour so that companies employing contract workers can operate in a transparent sort of way, which is not the way things currently are. Nevertheless, unless changes are brought in on this front, the chances of the Make in India programme taking off in a big way remain rather dim.

  In June 2015, a newsreport in the Business Standard suggested that the Labour Ministry was looking to amend the Industrial Employment (Standing Orders) Act and allow companies to hire workers on fixed-term contracts and “terminate their services once the project was completed without having to give any notice”.424

  Nevertheless, the current Labour Minister, Bandaru Dattatreya, told the same newspaper in September 2015: “We might not regularise contract workers.”425

  In the same interview, Dattatreya talked about the poor attitude of the trade unions and how it should change and be in the interests of the workers. The minister also talked about the fact that the labour laws of India were made a long time ago and were not in line with the way business is conducted in this day and age. He also asked: “If you don’t want any change today, what does it indicate?”426

  After this, there has been no mention of fixed-term employment. The irony is that the government employs more contract workers as a proportion of its total workers in comparison to the private sector. Nearly 32 per cent of the workforce in the public sector is on contract. The figure for the private sector stands at 30 per cent.427

  Despite this negative attitude towards reforming the labour laws, the Modi government did end up pushing through some labour reforms in the textiles sector. On June 22, 2016, the Modi government made a small but very important change in the labour laws that govern the textiles sector in India.

  As the press release put out by the Ministry of Textiles pointed out: “Looking to the seasonal nature of the industry, fixed-term employment shall be introduced for the garments sector. A fixed-term workman will be considered at par with a permanent workman in terms of working hours, wages, allowances and other statutory dues.”

  This is a step in the right direction and will help textile manufacturers to hire and fire workers depending on their demand. It will also ensure that contract workers are not taken for a ride and that they get paid the same amount of money as a permanent worker doing the same job.

  The textiles sector has the ability to create many low-skilled jobs, and that gives it tremendous ability to align itself with India’s natural competitive advantage, i.e., low-skilled labour. In fact, every unit of investment in this sector generates 12 times as many jobs as in the automobile sector and 30 times as many jobs as in the steel sector.428

  Furthermore, Indian textile firms are too small and, given this, they lack the economies of scale needed to compete globally. An estimated 78 per cent of the textile firms employ less than 50 workers. Only 10 per cent of the firms employ more than 500 workers. For China, these numbers stand at 15 per cent and 28 per cent, respectively.429

  One of the reasons that the Indian companies cannot compete globally is because they can’t hire and fire workers according to the demand for their products.

  The government has now introduced the concept of the fixed-term contract, which allows garment manufacturing companies to hire workers for a fixed period instead of offering permanent employment. Until now, companies had been hiring contract workers, who in many cases are not paid as much as permanent workers even though the work being done is exactly the same. The fixed-term contracts will also allow companies the flexibility to hire according to their demand. Furthermore, they won’t have to keep workers on their rolls when they don’t actually need them.

  In fact, this is one factor which has led to many textile companies not taking on more business in the past, because once they hired workers, they weren’t able to let them go.

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  One reason why labour reforms have never happened in India is because of the reluctance of successive governments to take on the trade unions. An excellent example of this is when the Atal Bihari Vajpayee government tried, in 2002, to change the Industrial Disputes Act. It tried to increase the limit, from 100 to 1,000 workers, beyond which a firm looking to retrench or lay off workers had to approach the government for permission. At the same time, it proposed to increase the severance package, from the prevailing 15 days to 45 days of salary for each year worked.430 The trade unions opposed this, and it never made its way through.

  The Trade Unions Act of 1926 originally allowed seven workers in a firm to form a trade union. This led to a large number of trade unions in firms. This was modified only in 2001. After the amendment, in order to form a new union, 10 per cent of the workforce or 100 workers, whichever is lower, is required.

  But even this amendment did not help, and the number of trade unions attached to large firms continued to be high. The Neyveli Lignite Corporation has as many as 50 trade unions and associations.431 This creates massive problems.

  The employers can play one union against the other.432 At the same time, there is no obligation on the part of the employer to recognise a registered trade union. In fact, this hurts the entire process of collective bargaining. Settlements can be made by employers with unrecognised unions. Nevertheless, these settlements are binding only on the participating unions. Hence, other unions can raise a dispute over the same issue.433

  Furthermore, every political party worth its salt has a trade union of its own. Party affiliations also hamper the unity of unions and, at the same time, hamper the process of collective bargaining. What helps political parties is the fact that, currently, outsiders are allowed to be office bearers of unions.

  In fact, before an amendment was made in 2001, Section 22 of the Trade Unions Act allowed half of the office bearers of a union to be outsiders. After the amendment was made, one-third or five office bearers in a trade union, whichever is less, can be outsiders. Outsiders are essentially individuals who do not work in the same industry as the firm. Even with the amendment, outsiders can corner the most important posts in a trade union. Having done that, their stand on any issue is, more often than not, likely to be coloured by their political affiliation. This can actually marginalise the workers and the real issues that impact them.434

  Also, what does not help is the fact that the trade union law, in most cases, does not call for a secret ballot, either to elect office bearers or for the approval of industrial actions, such as strikes. The only state which works differently on this front is Maharashtra. The Maharashtra Recognition of Trade Unions and Unfair Labour Practices Act of 1970 essentially calls on trade unions to prove their majority through a secret ballot process supervised by the Labour Department. The trade union which wins earns the right to be the collective bargaining agent for the workmen. This does not allow firms to follow the divide-and-rule policy, which they can in the case of multiple trade unions. On the flip side, it also makes unions militant.435

  Nevertheless, the secret ballot process works much better than no secret ballot at all. It brings down the transaction costs of having to deal with multiple trade unions. Interestingly, in the recent past, the state of Rajasthan has tried to tackle the problem of many trade unions operating within the same firm by raising the norm on the minimum number of workers required to form a union to at least 30 per cent. In the days to c
ome, other states may also have to work towards this in order to promote manufacturing.436

  In fact, there is a thing or two that we can pick up from how trade unions operate in countries which are more economically successful than India is. Take the case of South Korea. From 2011 onwards, the labour laws of South Korea have allowed multiple unions to exist. Nevertheless, when more than one union exists, the unions must cooperate to present a unified bargaining position so that a single agreement can be reached with the management. Furthermore, industrial action cannot be resorted to without a secret ballot being held.437

  In Malaysia, trade unions cannot go on strike without obtaining the consent of at least two-thirds of its members through a secret ballot. Also, anyone who wants to become an office bearer should have been a worker for at least one year in the firm or industry with which the trade union is connected.438

  In India, we have professional trade union leaders who have never worked in either the industry or the sector whose workers they choose to represent. The law, the way it is currently structured, essentially helps political parties to infiltrate trade unions. Parties use trade unions to infiltrate a particular industry or a particular sector and, in the process, manage to create a vote bank. In other cases, they are primarily catering to a vote bank. Hence, it is in the interests of political parties that the situation continue to remain as it is.

  Despite several minor tweaks being made to the labour laws over the years, the basic problem of too many labour laws still remains. For more than a year now, the Modi government has been talking about merging the 44 central government labour laws into four codes, respectively dealing with wages, industrial relations, social security, and the safety and welfare of workers.439

  For example, the labour code on wages would bring together features of the Minimum Wages Act of 1948, the Payment of Wages Act of 1936, the Payment of Bonus Act of 1965, and the Equal Remuneration Act of 1976.440

  There will be tremendous pressure from the trade unions on the government to not push this through. Furthermore, other political parties will also oppose it. In this scenario, it remains to be seen whether the Modi government will actually be able to push through labour law reforms. Having said that, the Big Government that prevails over India’s labour laws needs to go if the country has to reach anywhere with its Make in India programme.

  In late May 2016, Prime Minister Modi gave an interview to The Wall Street Journal in which he said that labour reform should not just imply the interests of business. It should also take into account the interests of the labourer. As we have seen through this chapter, the labour laws, the way they are currently structured, are essentially in the interests of workers who already have regular/permanent jobs at manufacturing firms. The laws go against labour in general. And this must change.

  These laws protect only around 7-8 per cent of the workers, those who have regular jobs in the organised sector. This happens at the cost of the remaining workers, who work in the unorganised sector or who work as contract workers in the organised sector. In fact, the other major problem with these laws is that they more or less treat the small and medium enterprises at par with large firms. This needs to change. There needs to be a separate and simpler set of labour laws for the small and medium enterprises, with less than 50 employees.441

  In fact, there should be just one labour law governing small and medium enterprises. This, for one, would incentivise the many small and medium enterprises that currently operate in India to grow a little bigger than they currently are. And this should help in creating many jobs.

  In his interview with The Wall Street Journal, Modi also said something which he shouldn’t have. He said that some states in India do not have industry and that they are primarily agricultural. Hence, these states do not need labour reforms. Only states which have a “substantial manufacturing sector” need labour reforms, according to Modi.

  This approach is clearly not the right one. One of the biggest problems in India is that the country has way too many people operating in agriculture. This number needs to come down, and this can only happen if people are moved out of agriculture into other areas. For this to happen, almost every state needs some level of industrial activity, and that is not going to happen unless the labour laws are simplified both at the central as well as the state levels. The sooner the Modi government understands this, the better it will be for the country.

  Despite what Modi had said in the 2016 interview, some realisation had already set in on this front. In October 2014, he had announced the creation of a new online portal. This portal would allow nearly 6 lakh firms to self-certify their compliance with sixteen different labour laws. Under the system as it had existed, each law allowed labour inspectors to harass firms and seeks bribes. Under the new system, the inspector raj will not completely disappear. Random audits will be carried out in order to check if the firms are actually complying with the laws.442 While this does not do away with the many labour laws which are holding back the expansion of these firms, it is, nonetheless, a small step in the right direction.

  xiv The 2009 and 2010 Indian Labour Year Books were the latest that I could find.

  8.A FOUR-LETTER WORD CALLED LAND

  Land acquisition is no longer a holy cow but a fallen ox. Everyone is a butcher when the axe falls.

  – JUSTICE SH KHAN, ALLAHABAD HIGH COURT443

  Until I moved to Pune to do my MBA, I had stayed at the CMPDI Colony in Ranchi. CMPDI, or the Central Mine Planning and Design Institute, is one of the subsidiaries of Coal India Ltd.

  Like CMPDI, Ranchi had several other CPSEs. These included the Central Coalfields Ltd. (another subsidiary of Coal India), the Steel Authority of India Ltd., and MECON Ltd. (formerly Metallurgical and Engineering Consultants (India) Ltd.).

  But the biggest of them all was the Heavy Engineering Corporation (HEC). When I say biggest, I mean in terms of the land occupied, and not the total sales or net profit. Based on the outskirts of Ranchi, HEC was a town in itself. It had a huge area of land. Many years later, now that I think of it, the actual operations of HEC (i.e., its offices and its production facilities) occupied only a very small portion of the total land that the company had.

  This is true about many central public sector enterprises operating all across the country. They have huge areas of land and a lot of it has not been put to any use. In fact, take the case of Japan. The country has around 351 people per square kilometre of land. In comparison, India has around 420 people per square kilometre of land.

  Japan uses around 1.9 million hectares of land for residential as well as industrial use. This is only around 5 per cent of the land that the country has. The industrial output of Japan is three times that of India. Furthermore, India has 22 million hectares of non-agricultural land. What does this mean? That Japan uses less than 10 per cent of the non-agricultural land that India has to produce an industrial output which is two times greater.444

  The major reason for this has been the easy availability of land for both the private companies as well as the public sector companies in India. This easy availability of land ensures that, whenever land is being acquired, excess land is acquired. As Sebastian Morris and Ajay Pandey write in a research paper titled ‘Towards Reform of the Land Acquisition Framework in India’: “Projects based on compulsory acquisition typically acquire excess land that remains unutilised for years – public sector units, educational institutions, universities, other institutions have all exhibited this phenomenon…. Equally importantly, when the land cost is not endogenous to the budget of the project as a whole, there is a tendency to ask for excess land, especially on the part of PSUs and autonomous institutions.”445

  As we go through this chapter, the meaning of the above paragraph shall become obvious. The question is: How did we reach this stage? Until 2013, land acquisition in India was governed by the Land Acquisition Act of 1894. This Act gave almost unparalleled powers to the government to acquire almost any land and almost as much land as it w
anted to and at any point of time.

  Now why did an Act passed by the British more than fifty years before India’s Independence manage to last, with a few tweaks, for close to 66 years after Independence? Before I get into answering this question, it is important to go back into history and understand why the British came up with a land acquisition law in the first place.

  The first land acquisition law was Regulation I of the Bengal Act of 1824. The law enabled the government to acquire land for public purpose at a fair and reasonable price. By Act I of 1850, the first seven sections of Regulation I were extended to all land within the town of Calcutta (now Kolkata). This included a rule which essentially said that a declaration by the Governor of Bengal that the land being acquired by the government was needed for a public purpose was enough to establish public purpose. This was followed by Act XX of 1852 and Amending Act I of 1854. Both the Acts maintained that the government had absolute authority to determine public purpose.446

  In 1857, after the First War of Independence, the British Crown took over the administration of India from the East India Company. Act VI of 1857 repealed all the existing land acquisition laws and laid out a new policy for land acquisition in British India. Act XXII of 1863, for the first time, made a provision for the government to acquire land on behalf of private companies or individuals. Act X of 1870 came up with detailed rules for the assessment of compensation.447

  In between, there were many other Acts dealing with land acquisition.448 All these Acts finally led to the Land Acquisition Act of 1894. This Act provided a definitive framework for the conditions under which land could be acquired by the government, along with a methodology for compensating the landowners for the acquisition.

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  Before going any further, it is important to understand the concept of ‘eminent domain’. The origins of this term can be traced to the Dutch jurist Hugo Grotius, who, in 1625, wrote a legal treatise and described eminent domain using the term dominium eminens (Latin for ‘supreme lordship’) as follows: “The property of subjects is under the eminent domain of the state, so that the state or he who acts for it may use and even alienate and destroy such property, not only in the case of extreme necessity, in which even private persons have a right over the property of others, but for ends of public utility, to which ends those who founded civil society must be supposed to have intended that private ends should give way. But it is to be added that, when this is done, the state is bound to make good the loss to those who lose their property.”449