Gist of EPW August Week 4, 2019

The Economic and Political Weekly (EPW) is an important source of study material for IAS, especially for the current affairs segment. In this section, we give you the gist of the EPW magazine every week. The important topics covered in the weekly are analysed and explained in a simple language, all from a UPSC perspective.

1. Code on Wages and the Gig Economy

Context

  • The Code on Wages, 2019 subsumes four different laws governing the payment of wages and minimum wages in India, and “simplify and rationalise” the law.
  • However, the definition of “employee” in the context of the rise of the “gig economy,” is not updated hence they do not enjoy formal protection under the labour laws.

About Code on Wages

  • The Code on Wages, based on the recommendations of the report of the Second National Commission on Labour in 2002, seeks to repeal and replace four separate legislation dealing with wages, namely:
    • The Payment of Wages Act, 1936
    • The Minimum Wages Act, 1948
    • The Payment of Bonus Act, 1965
    • The Equal Remuneration Act, 1976

Recent developments in labour laws

  • The Supreme Court, in a judgement, ruled that women who worked from home doing piece work would be considered “employees” of the company which had engaged them to do so, even if there was no direct contract of employment between the two.
  • Second important development was the passage of the Code on Wages, 2019 by the Lok Sabha and the Rajya Sabha after having first been introduced in 2017.

Significance of the Developments

  • These two developments gain significance at a time when job creation is not just slowing down, but the new reality is the widespread job losses resulting from structural changes in the Indian economy
  • At the same time, the very nature of work and employment is changing thanks to technological changes. The so-called “gig economy” wants us to believe that we can all be “entrepreneurs,” whether we are driving cars, delivering biryani, or writing code.
  • Workers in the gig economy, unlike permanent employees, supposedly enjoy the freedom and flexibility of choosing their hours and employers.
  • However, the reality is that they are largely doing poorly paid work with none of the legal protections and rights enjoyed by permanent employees.
  • The recent judgment by the Supreme Court is the most emphatic rejection of the idea that an employee-employer relationship requires the employee to work at the employer’s premises in any way.
  • This reaffirms that the test to determine the relationship of employment is control and not necessarily location, this has large implications for workers in the gig economy.

What is a Gig Economy?

  • An economy where workers are not necessarily working out of a fixed place of employment, whether at home or elsewhere.
  • In a gig economy, temporary, flexible jobs are commonplace and companies tend toward hiring independent contractors and freelancers instead of full-time employees.

The Factors of a Gig Economy

  • In the modern digital world, it’s becoming increasingly common for people to work remotely or from home.
  • This facilitates independent contracting work as many of those jobs don’t require the freelancer to come into the office to work.
  • Employers also have a wider range of applicants to choose from as they don’t have to hire someone based on their proximity.
  • Most times, employers cannot afford to hire full-time employees to do all the work they need to be done, so they hire part-time or temporary employees to take care of busier times or specific projects.
  • On the side of the employee, people often find they need to move around or take multiple positions to afford the lifestyle they want.
  • People also tend to change careers many times throughout their lives, so the gig economy can be viewed as a reflection of this occurring on a large scale.
  • In effect, workers in a gig economy are more like entrepreneurs than traditional workers.

Criticisms of the Gig Economy

  • Despite its benefits, there are some downsides to the gig economy. While not all employers lean toward hiring contracted employees.
  • The gig economy trend can make it harder for full-time employees to develop fully in their careers since temporary employees are often cheaper to hire and more flexible in their availability.
  • For some workers, the flexibility of working gigs can actually disrupt the work-life balance, sleep patterns, and activities of daily life.
  • Flexibility in a gig economy often means that workers have to make themselves available any time gigs come up, regardless of their other needs, and must always be on the hunt for the next gig.
  • The gig economy can give greater freedom of choice for the individual worker, it also means that the security of a steady job with regular pay, benefits, and a daily routine that has characterized work for generations are rapidly becoming a thing of the past.
  • The lifestyle and exposure to risk that come with being an entrepreneur or freelancer may simply not be for everyone.
  • Lastly, because of the fluid nature of gig economy transactions and relationships, long-term relationships between workers, employers, clients, and vendors can tend to erode.
  • This can eliminate the benefits that flow from building long-term trust, customary practice, and familiarity with clients and employers.

Challenges in Defining employees

  • On the face of it, the Code on Wages, in Section 2(k) contains a definition of “employee” far wider than any of the laws it repeals.
  • Also, the definition includes those declared by the “appropriate government” (state or union) as employees.
  • One common feature of platform workers in the gig economy is that they are not tied to any one particular platform by law. There are usually contractual terms to this effect, but the level of enforcement is unknown.
  • This leaves open the question: Who is the employer?
  • If a delivery person switches between two non-competing delivery apps, or even competing taxi apps, would they be considered an employee of both entities?
  • Another issue specific to minimum wages is that the Code on Wages refers to those who are doing time work or piece work, what about those who are paid on the basis of tasks fulfilled?
  • Even if interpretation gives a wide definition, how will their minimum wages be fixed in the absence of any guidance from the law?
  • An expansive definition, even widely interpreted, may not, therefore, meet the needs of workers of the gig economy.
  • At the very least, state governments will struggle to make sense of how to set minimum wages for workers in the gig economy.

Conclusion

  • The fact that the Code on Wages remains somewhat backward-looking means that it risks becoming obsolete almost as soon as it becomes law.
  • With the structural changes taking place in the Indian economy, where manifestations of the gig economy are prominent it might have been a worthwhile effort to go deeper into the definitions of “employee” and “employer” in the law itself.
  • Far better, perhaps, would have been for the Code on Wages to acknowledge the workers of the gig economy and create separate provisions for them,
  • These separate provisions must be made keeping in mind the peculiar nature of work and the trend of economic and technological change in the country.
  • Needless to say, it looks like the task will now lie before the judiciary and possibly state governments to take the lead on the matter.
  • As gig economy workers potentially organise and place their demands overpayment to their employers and governments, it is possible that the remedy will come in the form of judicial or state government intervention.
  • While this might provide some succour to workers in the gig economy, it risks the fragmentation of gains as different courts take different approaches or state governments come up with entirely different regulatory mechanisms.
  • Needless to say, both situations will create precisely the kinds of problems that the Code on Wages is supposed to solve, the uncertainty and confusion in the law.

2. Interest Rate and India’s Economic Revival

Context

  • Apart from the trade war, media in the United States is actively discussing this in the context of a relative fall in the returns of long-term government bonds vis-à-vis bonds of shorter maturity; the so-called “inverted yield curve.”

Background

  • The experience of government responses since the global recession of 2008, which preferred monetary easing over a genuine fiscal stimulus across the globe, does not inspire much confidence.
  • Indian policymakers too do not seem to have learnt much from the global failure of monetary policy as a way out of a slowdown.
  • There seems to be a general consensus among the policymakers, despite concrete evidence to the contrary, that economic activity can be manoeuvred through changes in the interest rates.

Latest Development

  • The Reserve Bank of India has accepted the government’s view and decreased the repo rates by 35 bps (100 bps = 1 per cent) in its last monetary policy review meeting.
  • The expectation is that credit-financed private investment and consumption would pick up as a result of a fall in the cost of credit and bring the Indian economy back on its feet.

Why consumption cannot revive the economy

  • A relationship between consumption and current income, that acts like a principle in is that consumption and current income is a cyclic process. So, when the expectations of future incomes is less, consumption will be unsuitable for revival
  • It is for this reason that Keynes called consumption a passive factor when it came to the question of how to revive a flailing economy.

Role of Investors (Borrower)

  • Two factors that is considered for investing is the profitability and the interest rate.
  • When a company is running below capacity, it makes no sense to the invester, creating more capacity by investing only because the cost of loans have come down.
  • Credit and its cost may be a necessary condition, but not a sufficient one to influence investment.
  • This means that investment too is indirectly a function of demand, past and current, and therefore cannot expect investments to happen when the credit costs are reduced.

Roles of Banks and NBFCs (Lenders)

  • For the fall in repo rate to percolate down to the borrower (like the investors), the banks and the NBFCs has to reduce their rate of interest charged: There can be 2 types of cases
  1. The lenders have to bring down their rates, which may not necessarily happen for various reasons.
    • Lenders may want a higher margin of security during difficult times because of piling non-performing assets and failing non-bank lending institutions.
  2. Even if they bring it down, like it is happening now, at least with some public sector banks, the banks may go slow on the volume of the credit.
    • So, the banks may bring their lending rates down, but still be wary of lending except to very creditworthy borrowers.
  • What matters for the expansion is not just the incremental cost, but the volume of loans too.
  • Therefore, even the necessary condition, that is reducing the credit cost may not get created.

Way Forward

  • Keynes had argued that fiscal policy is far more effective since it directly influences the level of activity.
  • Indeed, fiscal expenditure has the potential to revive the economy, but, unfortunately, because of the Fiscal Responsibility and Budget Management Act, that has been given up.
  • The Fiscal Responsibility and Budget Management (FRBM) Act was enacted in 2003 which set targets for the government to reduce fiscal deficits.
  • A fixation of the deficit target to 3.3% of the gross domestic product in the last budget means that the government expenditure itself becomes a function of the current income.
  • Unless these self-imposed constraints are broken, there is hardly any scope for revival and the recession would have to run its full course before revival begins.
  • The Indian economy is not just in a trough of a usual business cycle, it is also going through a structural crisis, that is, it is a crisis of both the trend and the cyclical component of economic activity.
  • While the cyclical component can be tackled through tinkering fiscal policy, the trend in the economy requires deeper intervention.
  • It would require identifying sources which can deliver equitable and sustainable growth. Perhaps, this is an opportune time for a new green deal.
  • The government could, among other initiatives, aggressively invest in green infrastructure as a specific form of fiscal intervention.
  • Such expenditure has the usual benefit of generating a multiplier, but it has several additional benefits. Green growth is usually more inclusive both because of its higher employment elasticities as well as its environment-conserving potentialities.
  • In short, without a comprehensive plan about the future of the Indian economy, quick-fixes alone will not serve us well in the long run, but then we have a government in power which does not believe in plans anymore!

Difference between monetary and fiscal policy

  • Monetary policy involves changing the interest rate and influencing the money supply.
  • Fiscal policy involves the government changing tax rates and levels of government spending to influence aggregate demand in the economy.

Monetary policy

  • Monetary policy is usually carried out by the Central Bank/Monetary authorities and involves:
    • Setting base interest rates
    • Influencing the supply of money.
  • The Central Bank may have an inflation target of 2%. If they feel inflation is going to go above the inflation target, due to economic growth being too quick, then they will increase interest rates.
  • Higher interest rates increase borrowing costs and reduce consumer spending and investment, leading to lower aggregate demand and lower inflation.
  • If the economy went into recession, the Central Bank would cut interest rates.

Fiscal policy

  • Fiscal policy is carried out by the government and involves changing:
    • Level of government spending
    • Levels of taxation
  • To increase demand and economic growth, the government will cut tax and increase spending (leading to a higher budget deficit)
  • To reduce demand and reduce inflation, the government can increase tax rates and cut spending (leading to a smaller budget deficit)

For more EPW articles, read “Gist of EPW”

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