INDIAN LABOR LAW REFORMS NOT LIKELY SOON; IMPROVED

C O N F I D E N T I A L SECTION 01 OF 03 NEW DELHI 005365 SIPDIS E.O. 12958: DECL: 06/27/2015 TAGS: ELAB PGOV ECON IN SUBJECT: INDIAN LABOR LAW REFORMS NOT LIKELY SOON; IMPROVED SOCIAL SECURITY IS A PREREQUISITE REF: A. NEW DELHI 4861 ¶B. NEW DELHI 3909 Classified By: Charge Bob Blake for Reasons 1.4 (B, D) ¶1. (C) Summary: The Indian business community is frustrated by what it views as "inflexible" labor laws that constrain business operations and lead companies to use costly loopholes. American companies also favor labor law reforms, but are not as concerned as their Indian counterparts. Labor unions and the Left Front (LF) generally oppose labor reform under discussion in the government, as they anticipate that it will threaten their members' job security. Recently, the UPA government has made minor amendments to some Indian labor laws, but LF opposition has prevented the UPA from making the deeper reforms desired by the business community and foreign investors. The continued power of the LF and its allies, and their firm determination to resist labor reform, makes change difficult. As long as India has no effective worker displacement or unemployment compensation system, workers and their unions will remain focused on job security at any cost. End Summary. Need for Reform? -------------- ¶2. (C) Most Indian economic and business leaders believe that reforming the country's "inflexible" labor laws is essential to achieve higher economic growth. For example, a March IMF report cited these laws as an impediment to India's achieving 6-6.5 percent annual growth, while a recent London School of Economics study of 16 Indian states over a 40-year period found that states with more pro-worker legislation experienced less poverty reduction than states that had made pro-business amendments to labor laws. Dr. Venkat Ratnam of the International Management Institute told Laboff that India's restrictive labor laws also clash with community and consumer rights. ¶3. (C) Indian labor unions and the communist parties are almost united in their opposition to reforms of India's labor laws. The lack of a "safety net" (India has no unemployment compensation) for laid-off workers is a major concern. G Devarajan, Secretary, Central Committee of the All India Forward Bloc, optimistically told Laboff recently that the government should spend a minimum of three percent of GDP (about $17 billion) to provide comprehensive social security for all workers, including access to medical facilities and care, compensation for injury or death, and provision of education for children, especially in rural areas. Devarajan and representatives of the labor unions also demanded that the GOI extend this social safety net beyond urban industrial workers, to those in the agricultural and informal sectors, who make up approximately 93 percent of India's estimated 480 million workers and contribute greatly to the nation's economic output. Currently, India's labor laws apply only to the 7 percent of workers in the formal sector. Reforms Under Consideration -------------- ¶4. (U) The Industrial Disputes Act (1947) regulates reductions in force (RIF) and plant closures. It requires large firms (more than 100 employees) to receive approval from the state or federal labor ministry 90 days before laying off employees. Likewise, no plant employing more than 100 workers can shut down without obtaining approval 90 days before the closure date. The business community believes this law unduly constrains its operations, making firms hesitant to hire in times of expansion for fear that in a downturn they will not be able to lay off redundant workers. Labor unions and the LF oppose proposed reforms of the Industrial Disputes Act that would loosen or drop these strictures -- even though they claim that that the labor ministries already grant permission for RIFs and plant closures in most cases. They believe the reforms will eventually lead to "easy hire and fire" policies that will undermine job security. ¶5. (C) The pro-reform camp also seeks to amend laws prohibiting firms from employing contract laborers for extended periods of time without the promise of eventual permanent employment. Textile companies that compete with China are seeking an extension of the workweek to 60 hours/week from the current 48 hours/week. Reform proponents argue that labor restrictions deter many foreign companies from investing in India. Labor unions and LF believe that if the GOI loosens labor restrictions, it will enable firms to deny worker benefits by replacing unionized workers with "temporary" contract workers. They also believe that contract laborers performing work of a similar nature to permanent employees should have the same benefits as permanent employees. (Currently, contract laborers receive no benefits.) Labor and the Left are not concerned about the loss of potential FDI due to labor restrictions, since they are inherently suspicious of FDI. Recent GOI Actions -------------- ¶6. (U) The UPA government's dependence on LF support has made it even more difficult to reform labor laws. For example, the GOI recently dropped proposals included in the original version of the Special Economic Zone bill calling for labor law flexibility within the zones after the LF objected (Ref B). However, some small reforms have been made. In March, Parliament amended the Factories Act (which regulates workers' health and safety) to allow women to work at night. In May, the GOI reduced the amount of paper records employers were required to keep. The GOI has also prepared draft legislation to permit companies with less than 300 workers to retrench or lay off workers without government approval (although the legislation would also increase compensation to laid off workers by nearly 400 percent.) Some states are also changing their labor laws. The Gujarat government has issued an Executive Order automatically giving permission for a plant closure if the state labor ministry fails to grant permission within a set time frame. Business Finds Costly Loopholes -------------- ¶7. (C) MK Garg, Labor Advisor to the Associated Chambers of Commerce and Industry, told us recently that the business community has stopped publicly advocating labor law reforms because of the lack of progress. Instead, business has used methods such as hiring short-term contract laborers, locking out workers to circumvent labor laws, and using "voluntary retirement schemes" (VRS),in which workers who agree to leave their jobs by a certain date receive additional severance pay. In the short term, these methods are costly, but they save time for the companies, he stated. In the long term, as productivity and wages rise, these methods will become much less cost-effective, according to Dr. Venkat Ratnam of the International Management Institute. Labor and the Left are fighting back, calling for an end to VRS, which they call "forced" or "compulsory" retirement. Labor Insists on Job Security Before Reforms -------------- ¶8. (C) Dr. MK Pandhe, President of the CPI(M)-affiliated labor federation (CITU) and a member of the party's Politburo, told us recently that the CPI(M) would oppose all changes to laws governing retrenchment and layoffs until a proper safety net was in place. G Devarajan of the All-India Forward Bloc told us that if the government provided improved medical care, worker compensation, and education for children, then economic growth would follow. Dr. Ratnam of IMI also believes that a viable unemployment compensation system is a pre-requisite to large-scale reforms. ¶9. (U) Indian labor unions worry that workers who lose their jobs due to reforms will be unqualified for most new jobs that are created, which are emerging more in the new economy rather than the old, where unions are prevalent. Unions would also like additional labor legislation to extend protection to workers in the agricultural and informal sectors of the economy, who make up 93 percent of the labor force. Devarajan explained that labor "reform" has already severely restricted the right to strike and organize unions, and that the proposed "flexible" labor laws will further impinge upon these rights. (Note: India has not ratified ILO Conventions on the Freedom of Association and Protection of the Right to Organize (No. 87) and on the Right to Organize and Collective Bargaining No. 98 End Note.) The Next Generation of Labor -------------- ¶10. (C) Despite the traditional opposition to labor law reform among most union leaders, some of the younger generation, typically found in high industrial growth centers like Mumbai, Pune, Hyderabad, and Chennai, are thinking of the potential benefits of economic restructuring and labor reforms. Arvind Shrouti, of the Janata Dal-affiliated Hind Mazdoor Sabha (HMS) trade union, said that HMS will research the need for, and benefits of, labor law reform before rejecting it outright. He believes growing industries can provide opportunities to expand union membership. His HMS colleague, Arun Jumar, has called for a campaign to unionize multinational corporations in India instead of opposing their entry. However, it will be a huge challenge for these younger leaders to change the minds of their elders, who control their organizations. US Companies' Stance -------------- ¶11. (C) A recent letter from the US-India Business Council to Allan Hubbard of the National Economic Council outlined "key impediments" to the increased development of the US-India economic relationship. The USIBC highlighted the need for India's "anachronistic" labor laws to be brought in line with international standards in order to attract FDI into the manufacturing sector. However, Arun Sehgal, Director-HR for Gillette and member of the American Chamber of Commerce, recently told Pol FSN that most of the demands for labor law reforms are coming from Indian companies, not American ones. While the AmCham has raised the issue of the proposed reforms of laws affecting corporations in their discussions with the FinMin, it has not systematically taken up labor laws as a core issue affecting American businesses. Sehgal added that most American companies are able to cope with the laws concerning company closures and retrenchment by using contract laborers and VRS. According to Sehgal, US companies are more concerned with outdated, obscure laws relating to bookkeeping and upkeep of factories (such as type of paint used and provision of spittoons),and that some of these laws are already being amended. Comment: Reform at a Snail's Pace -------------- ¶12. (C) LF opposition to proposed labor reforms is part of its ideologically driven agenda. The Left has strongly opposed UPA divestment of public sector companies, increases in petrol prices, and a potential opening to FDI, and has withdrawn from the UPA Coordination Committee in protest (Ref A). Determined to maintain a "secular" government in New Delhi, even if it pursues objectionable "neo-liberal" economic policies, the LF is well aware that if it drops the UPA, the "communalist" BJP will return to power, and the Left will lose its influence over the course of economic liberalization. Despite this, the Communists are determined to oppose the UPA's economic program and prevent the GOI from implementing deep labor law reforms in the near term, although the Left may allow passage of small scale reforms, such as relaxing the requirements for paperwork and factory maintenance standards. BLAKE