If you are a global investor and looking at India as a destination in a rapidly changing world, both economically and geopolitically, then what has transpired last week is what you may have been waiting for all these years.
India’s archaic labour laws, which have frustrated many investors and wealth creators have finally been reformed. Yes, you heard that right. India has finally reformed its labour laws!
Why is this a big deal? Because even since the economic reforms started in India in 1991, the labour laws have been one stumbling block that have defied all attempts at reforms. Five Prime Ministers before the current one have tried to address the issue but have had to back-off. That is why what Prime Minister Narendra Modi has achieved in one fell swoop is extraordinary. Here is what has happened.
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There were 44 central labour laws and attendant compliance burdens that any entrepreneur had to earlier deal with. 12 of them have now been outrightly repealed. 29 of them have then been merged in 4 different codes. So, in effect, 44 labour laws and codes have become just 4. These codes are the Code on Wages, the Industrial Relations Code, The Occupational Safety, Health and Working Conditions Code and finally the Code on Social Security.
The Code on Wages subsumes four acts into 1. The big takeaway is the simplification of a maze of 542 different kinds of minimum wage rates that were applicable to now just 12. Easier to understand, easier to implement.
India’s principal selling points to a potential global investor have existed for some time — a large and expanding middle-class base, rule of law, fair and free judiciary, a vibrant media, well developed capital markets, quality human capital, elite engineering and management schools and above all a functional and vibrant democracy
The Industrial Relations Codes merges 3 acts into 1. Hire and fire without prior government approval was earlier limited to companies with just 100 workers or less. Apart from creating other problems, this created a perverse incentive structure where many MSMEs did not want to grow beyond a certain capacity for fear of coming into the web of labour inspectors. This limit has now been raised to 300. Above this limit as well, a deemed approval exists if relevant regulators do no act. Nonetheless, local governments have not just been given the powers to raise this limit further but also exempt new establishments altogether from such limits. Many reformist local governments are already moving in that direction.
Flexibility to enterprises
Flash strikes have been virtually knocked out with now a minimum 14-day notice period made mandatory in all establishments before a legal strike can be called. Fixed term employment route, earlier barred, is now open for all establishments and this way they can now directly hire workers without going through a contractor route. This not only gives flexibility to enterprises in terms of hiring practices but also reduces transaction costs.
The Occupational Safety, Health and Working Conditions Code subsumes 13 acts into 1 and comes with some of the biggest reforms. From 6 registrations needed earlier, it will now be just 1; there will now be just be one license needed instead of 4 and there will just be 1 return needed to be filed for compliance instead of earlier 21. The employee strength after which these laws start applying has been doubled and again flexibility has been given to local governments to exempt new establishments from these provisions altogether.
Earlier a new license was needed for hiring a contract worker for every new work-order! Now a single, all India valid, 5-year license will be issued which will cover every kind of work-order.
Social security provisions for workers
The Code on Social Security subsumes 9 acts into 1 and simplifies the applicability as well as assessment of social security provisions for workers. The provision of not being able to deploy women in night shifts has also been done away with, thereby not disincentivizing firms that hired more women.
The new codes have been so written that the limits when all these rules start applying can be changed through simple notification of rules thereby obviating to go through the time-consuming legislative route. This means that the limits can all be revised even further upwards, for example, without a circuitous process.
Most of the compliance requirements have been made self-certifying in nature thus ending discretionary inspections.
So, what are some of the big takeaways of these reforms? There will now be just 1 registration, 1 inspection and 1 return for complying with all the central labour laws.
Uniform definitions across sectors and removal of discretionary powers to inspectors make compliance further simplified. Assessment has been made faceless through randomly allotted cases by a computerised system without tying it down to local jurisdiction.
Overall, for the wealth creators, this means less compliance costs, less litigation, less hassles, more operational freedom and the end of the dreaded ‘inspector raj’.
But this is not all. India has been on a reform spree in the last few months which are neatly delivering the long pending second generation reforms.
Corporate tax rate for new manufacturing units has been reduced to just 15%, which would be among the lowest in the world, if not the lowest. A simplified, national Goods and Services Tax (GST) already exists which ends tyranny of myriad local taxes and regulations.
A new structural framework
Privatisation, which till now had been attempted only in an ad hoc basis, has finally been put into a well-defined structural framework. There will now be a shortlist of a few strategic sectors where a maximum of only four, but in practice even lower, Public Sector Enterprises (PSEs) would exist. Even within these strategic sectors, private sector would be allowed. In non-strategic sectors PSEs would completely exit. Some potential strategic sectors have as many as 10 or more PSEs. With limit set to maximum four, obviously many of these would be privatised as also all PSEs in non-strategic sectors. Privatisation attempts in the past had been stalled for multiple reasons, one of which was judicial pronouncements that it cannot be on ad hoc basis but through a well-structured policy framework. That lacunae have been plugged.
The Space sector, where India has considerable prowess, has been opened up for private investment and collaborations.
Commercial coal mining is now a reality in India after being blocked for almost five decades. A unified single license will be issued to private players for exploration, mining and production thereby ensuring seamless recovery of costs and earning profits. Difference between captive and non-captive blocks has been eliminated making it a truly welcome space for private industry. More than 500 blocks are on offer in the first round itself.
Definition of MSMEs has been upwardly revised thereby allowing companies to invest and expand without losing additional benefits that come with tag of being a MSME.
Environmental and other statutory approvals of this nature are now paperless and deemed to be given after a fixed time limit. Tax assessment across the board has been made online and completely faceless. This ends local inspectors running amok, ends harassment and rent seeking.
Seamless and smooth laws
Investment friendly states such as Uttar Pradesh and Karnataka have already put in seamless and smooth land acquisition laws thereby reforming one of the most important factors of production. The central government has meanwhile framed a policy which will free up large, unutilised land banks available with such entities as Railways and similar PSEs. Since these are already acquired lands, they can straight away be put to productive use.
FDI limits have been revised upwards through automatic route in most sectors. For example, in the Defence Sector, the limit has now been raised to 74% without seeking any prior approval. With prior approval it can be even up to 100%. In multiple sectors, FDI automatic limit is already at 100%.
India’s principal selling points to a potential global investor have existed for some time — a large and expanding middle-class base, rule of law, fair and free judiciary, a vibrant media, well developed capital markets, quality human capital, elite engineering and management schools and above all a functional and vibrant democracy. With the long pending, politically contentious, factors market reforms now also put in place, Prime Minister Narendra Modi’s government has put a board out there — India is open for business. Come, Invest!