Context: A few days of joblessness due to lockdowns and the ensuing despair has exposed the vulnerability of the system related to thresholds in the Industrial disputes act.
About thresholds in Industrial Disputes Act
There are three thresholds that are absolutely pivotal:
- If more than 99 workers are hired industries will have to notify the government before they can fire any one of them.
- If more than 20 workers are hired, industries open themselves up to provident fund commitments and bonus payments.
- If workers are not kept continuously employed for more than 240 days they can be denied severance pay.
- It is an amount paid to an employee on the early termination of a contract.
Industrial Disputes Act, 1947
- It regulates the Indian labour law so far as that concerns trade unions as well as individual workmen employed in any industry in the Indian mainland.
- The act was drafted to make provision for the investigation and settlement of industrial disputes and to secure industrial peace and harmony by providing mechanism and procedure for the investigation and settlement of industrial disputes by conciliation, arbitration and adjudication which is provided under the statute.
Implications of these thresholds
- They disincentivize the long-term commitment of workers to entrepreneurs and vice versa.
- The majority of employers are naturally tempted to observe these thresholds and duck under the radar.
- These thresholds have only encouraged the informal sector, where both unregistered labor and unregistered entrepreneurs dominate.
- Upskilling constraints:
- Since there are constraints on both the workforce size and duration of employment due to the above thresholds, upskilling and R&D naturally become early casualties.
- It also kept firms informal and unwilling to invest in human capital.
- India spends only 0.7 percent of its GDP in R&D, one of the lowest in the world, while South Korea spends 4.2 percent.
- It has encouraged short-term employment, low skills, and zero security.
- Consequent problems in terms of MSMEs
- In the first 15 years of this century itself, over half the increase in total employment has been that of contract workers.
- This has also led to a phenomenal rise in MSMEs as these thresholds have spooked entrepreneurs from harbouring any ambitions to grow big and formal.
- The MSMEs have increased in number from 3.6 crore units in 2012 to about six crore today as results of this policy.
- However, over 94 per cent of MSMEs are in the micro sector and their contribution to GDP is just not measuring up.
- In 2012, MSMEs produced 37.54 per cent of our GDP, but this number fell to 30.7 per cent in 2015, and in 2019 it decreased further to 29.7 per cent.
What will the removal of these thresholds mean?
- Every worker regardless of factory size will be entitled to the same rights. Likewise, every employer, regardless of factory size, can hire and fire workers.
- There is greater freedom on both sides of the employer and employee, but this freedom comes with a price that does not discourage either size or skills in an enterprise.
- The worker can now be fired without notifying the government, but must be compensated with severance wages, regardless of the size of the firm.
- Here unlike the IDA, all the firms need to have a formal dispute resolution board.
- Now that the enterprises have been freed of the size threshold, entrepreneurs get no advantage in dwarfing their firms.
- Other associated reforms can soon follow, such as allowing for workers’ representation in a firm’s supervisory board. This is seen in the case of Germany.
- Measures such as these create trust between employees and employers, and also remove the threatening spectre of a working-class strike.
- India needs to carefully assess the provisions related to workers before the next epidemic strikes, else the migrant workers will again face the brunt of the crisis again.
- The IDA thresholds must go and not be merely fiddled with, as some states have done.