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Monday, 15 October 2012 00:00
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India’s Contract Act needs urgent fixing

With just 43 million of India’s 418 million labour force employed in the formal sector, and just 23 million of this in formal contracts, it’s clear the existing labour system isn’t working and this needs urgent addressal. While the political class is against hire and fire, the reality of a rapidly-changing economy where today’s profitable firm is tomorrow’s loss-making one means firms must have flexible labour contracts if they are to survive—how can exporters be expected to keep labour when, for the last 5 months, exports have fallen (that’s in absolute terms, not just in terms of growth) steadily? The only way to do this is to stop repaying bank loans, which has other consequences, but even this cannot be sustained beyond a point.

In such a situation, the only thing that can give firms flexibility, while allowing politicians to look caring by not allowing hire and fire, is contract labour. Firms can hire workers on contracts which give them flexibility, and workers get to make a higher wage than they would in the informal sector. A good example of this is Maruti where, despite what workers said about the salaries of permanent employees and contract ones, there is little doubt contract employees get paid a lot more than informal sector workers do. But here’s the problem. The Indian Contract Act makes it difficult to hire contract workers—it’s difficult to remove workers if they’ve worked for more than 120 days (it’s 240 days under the Industrial Disputes Act) and firms need specific permissions if they hire more contract employees. Which is why, even though India has 23 million flexible staffers in the 43 million formal sector employees, just 3 million of them have fixed contracts—the rest are daily wagers. There is also the clause which doesn’t allow hiring of contract workers for ‘core’ or ‘perennial’ work—so if sales jobs are defined as ‘core’ or ‘perennial’, Big Bazaar can’t hire contract salesmen on weekends, which is when there is a sudden need for more sales staff. While the labour minister has been promising changes to India’s Contract Labour Act, it’s not clear if he has this in mind.


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