‘Flexicurity’ in the Indian labour market

‘Flexicurity’ in the Indian labour market

Shrestha enlightens us on an emerging concept that can herald labour law reforms in India, and create a win-win situation for both the employers and employees.

Shrestha N.

IInd Year, PGDM

The past few decades has been a witness to many a debate regarding the adequacy of Indian labour laws. It is widely opined that the labour laws in India are very stringent for the employer and extremely employee-friendly. It results in discouraging domestic as well as foreign investment, growth of capital intensive industries and decreasing the employability in the industries. One of the outcomes of this is what has been observed as ‘jobless growth’ of the economy.

The urgency of amending employment laws in India has grown manifold in the current age of global economic slowdown, where the companies require the flexibility to hire the most worthy of the candidates and fire the unproductive employees. It has been especially felt in export-oriented sectors like textiles, the burgeoning Indian software industry and other outsourcing service providers. It is said that the Indian textile industry will lose the opportunity of picking up seasonal high-volume demands in other countries. It is because this industry requires intense labour sporadically, after which retrenchment of the hired employees is not possible in India, when the demand drops. This affects the competitiveness of the domestic industry, in comparison to other countries like China.

Archaic Labour Laws

The provisions of the Industrial Disputes Act (1947), the Contract Labour Act (1970) and the Trade Union Act (1926) are the most debated. As per the Industrial Disputes Act (ID Act), if an industrial establishment employs more than 100 workmen, it may not retrench, i.e. terminate the services of any workman who has been in continuous service for not less than one year unless the (i) workman has been given three months notice in writing, indicating the reason for retrenchment and the period of notice; and (ii) the prior permission of the concerned state government has been obtained for the retrenchment (section 25N of the ID Act).

The software industry is not considered as an ‘industrial establishment’. Thus it follows the comparatively flexible hire-and-fire policy, in which an employee can be retrenched on a one month notice with a prescribed compensation and with no prior permission of the government.

The Contract Labour Act (1970) allows flexibility and permits outsourcing to the employers. A judgement of the honourable apex court has put limit on this flexibility by establishing that if the work of a contract labour is ‘core’ to an industry, contract labour should be abolished in that industry. The employers argue that only the ‘core’ activities should be done by permanent employees and ‘peripheral’ activities should be allowed to be outsourced. On the other hand, employees argue that it will allow the employers to employ only contract workers and sack all regular workers.

Trade unions in India have been another source of worry for employers. They strongly bargain with the management using various measures like strikes and lock-outs, which adversely affect the production. But an important fact in favour of the employers is that there is no nation-wide law that recognises trade unions. Even though employees have right to form associations and unions, the organisation is not bound to recognise it. For the past few years, trade union activities have reduced drastically mainly because of service sector gaining prominence in the Indian economy.

Reforms in Labour Laws – A new dawn rising?

The government is considering various changes in the employment laws. In March 2009, the International Labour Organisation (ILO) recommended India to implement the model of ‘Flexicurity’, following the Danish employment model. Flexicurity is derived by combining the two words, ‘Flexibility’ and ‘Security’. The Government of Denmark views flexicurity as entailing a ‘golden triangle’ with a three-sided mix of (1) flexibility in the labour market combined with (2) social security and (3) an active labour market policy with rights and obligations for the unemployed. The model establishes tripartite agreements amongst employers, workers and the State.

The model provides the employer flexibility to hire and fire the employees as and when required; it also provides social security to the employees in terms of high benefits to the unemployed. The argument behind this is that the model allows the free labour market operations to decide the demand and supply of the labour. This allows them to increase the competitiveness of the economy. Having talked about the ‘flexi’ part, let’s see what the ‘curity’ part means which comes from ‘security’. The model emphasises on the skill enhancement of the employee. The employees get unemployment allowance for two years. Thus, they get a chance to re-skill themselves and employers fund their re-skilling.

Following the model in the last fiscal year, the government of Denmark spent 4.5% of its Gross Domestic Product (GDP) for the payment of unemployment allowance. In Denmark, the model has been highly successful; Denmark witnessed a drop in its unemployment figure by 2.8% in 2008.

Various countries like Germany, Belgium, The Netherlands (continental Europe), etc. already have welfare systems in place, developed based on the relationship between social needs and merit or work performance. It is funded from employer and employee contributions to social or national insurance schemes and some direct taxation. Southern European countries like Spain and Italy have less developed welfare systems based largely on family and voluntary systems of support and limited state involvement. In the recent members of the EU, like Lithuania, the social security systems are still in the transitional period and can hardly ensure the minimum standard of livingS. The European Union is seriously considering moulding their employment laws to follow the path of flexicurity.

The Road Ahead

The model sounds good as it provides necessary flexibility to the employer while taking care of the rights of the employee. This is just one of the various options before the government, which it could consider as a part of labour law reforms in India. When it comes to the application of such models in India, the biggest challenge is to draw a fine balance between the hire and fire policy of the employer and the rights of the workmen; as there is a very thin line between the two weighing measures.

The biggest concern of the employees is the loss of social security because of pro-employer changes in the labour laws of the country. To an extent, this concern is valid, as even though the proposed changes promise adequate compensation and security to the employee, in our country the problem is not the laws per se but its proper implementation. Currently most of the industries (especially IT companies) prefer to violate the so-called stringent provisions of the ID Act, 1947 while dismissing an employee and pay the imposed fine; instead of waiting to get the nearly impossible government approval.

The existing social security provisions are in itself inadequate in terms of proper planning, coverage and enforcement. These are guaranteed to only 8% of the employees who are working in the organised sector; while the rest 92% of the employees (including self-employed individuals) are not entitled to any sort of social security from the employment perspective.

Today, many importing countries consider the labour practices of the exporting country and check if the domestic labour laws are being followed. If the laws themselves are inappropriate or irrational to follow, the manufacturer prefers to breach them; and thus it adversely affects the exports, albeit indirectly. It is better to change the laws so that the labour practices are in line with the demands of the market.

The rising global competition, rapid changes in the economic conditions and technology and the need of continuous enhancement in the skills of the employees have left the government in dilemma; as most of the employment laws and social security provisions are highly employee-friendly. Any change in favour of employers may destroy the whole objective if the laws are not implemented efficiently.

Before taking any step further in this direction certain things need to be considered. Firstly, we should consider whether the existing stringent laws hinder the growth of the industry; as these are applicable only to 8% of the population working in the organised sector. This argument has lead many people to conclude straight away that this model won’t work in India. They believe that such an attempt would apply only to a meagre of the total workforce, and thus, ignores the employees in the rural and informal sector. Most of the existing beneficial schemes which are meant for the unorganised sector like National Rural Employment Guarantee Scheme (NREGS) are not providing them any relief because of its poor implementation. Mere change of laws or introduction of more and more benefit programmes will not help either the employer or the employees.

Secondly, whether providing the flexibility of hiring and firing to the employer guarantees growth in employment. Thirdly, we need to look at changes in perspective. Even if the change in labour laws helps increase the employment, we should analyse whether it will be sustainable or whether it will yield short-term results and fizzle out in the long-term. Any unemployment allowance cannot be a long-term support, as this requires the enhancement of life-long learning and skill development along with the changing market requirements. Companies with the government support should be stimulated to invest in the training of the employees for future growth.

Fourth factor is that different industries have different levels of flexibility and social security requirements, based on market fluctuations and risks associated with the work. Changes in labour laws must factor this. ‘One-size-fits-all’ approach will not work anymore. Fifth and the most important is that the changes should ensure decent work practices along with proper implementation of the social security provisions. There is no doubt that we need ‘flexicurity’ in the Indian labour market, but the government needs to ensure that the change happens in an structured and planned manner to bring long-term benefits without affecting the employee morale negatively.