Why are labour law reforms in India required?

The biggest challenge facing Indian economy is to provide employment to the youth.

And the rigid labour regulations in India act as a deterrent to employment generation.

As per the World Bank, India’s labour laws are among the most restrictive in the world. (1)

India has to urgently reform its British colonial-era labour laws to prevent its ‘demographic dividend’ from turning into a ‘demographic disaster’.

Need for labour law reforms in India

Research done by several economists claims that labour reforms in India are a necessity for achieving employment growth. (2)

We have a myriad number of labour laws. There are over 200 laws related to labour in India. We have 44 Central laws and more than 150 labour laws from the states.

These laws often have overriding provisions and facilitate inspector raj of the worst kind.

Moreover, the labour laws are applicable only to the formal sector. As a result, manufacturing companies prefer to hire contractual workers to get around inflexible labour laws. They limit their permanent workers to a minimum.

India has the largest proportion of employment in the informal sector (above 80 %). They remain outside the ambit of any law related to labour.

Moreover, in 2014-15, as much as 93.9% of the addition to the workforce in the formal manufacturing sector was hired through contractors. (3) 

These contractual workers do not have any security of tenure. Manufacturers do not invest in training of these workers as they are not permanent.

Labour laws also restrict the growth of small and medium sector enterprises. The SMEs do not increase the scale of their operations so as to not come under the ambit of these convoluted laws. This further restricts employment generation.

A recent report, ‘Ease of Doing Business – An Enterprise Survey of Indian States’ found that 85% of the firms operating in the apparel sector employed less than eight workers. (4)

Hence, the tough labour laws ultimately lead to lower benefits to the labour class and affect the ease of doing business as well. These tools do not protect workers. They are instead used as a tool to harass businessmen.

[You may also read: Why India’s textile sector lost out to Bangladesh?]

Some restrictive labour laws in India

The World Bank blog writes:

Probably, the three most restrictive acts are the Industrial Disputes Act (IDA), the Industrial Employment (Standing Orders) Act and the Trade Union Act.

The IDA requires firms with more than 100 workers to seek permission from their respective state governments for retrenchment or laying off of workers. This is seldom granted.

The Industrial Employment (Standing Orders) Act requires such firms to ask for permission even for modifications in job descriptions.

The Trade Union Act lets any seven workers within a firm form a union, which leads to multiple labor unions. In addition, this act provides each such union the right to strike and to represent workers in legal disputes with employers.

Reforms in the labour law in India

Even though labour laws do not benefit the poor, it is difficult to make any reforms in labour law because of the resistance by trade unions.

The Modi Government has been trying to reform labour laws by merging various laws into 4 codes. The four codes are wages, industrial relations, social security, and occupational safety, health & working conditions.

Labour law comes under the concurrent list of the Indian constitution.  Hence, states like UP, MP, Gujarat, etc have considerably eased labour regulations in light of the coronavirus pandemic.

[You may also read: Companies to move manufacturing out of China- Will India benefit?]

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References:

• World Bank Blo
•  Labour Law reforms are a necessity- Livemint
• The Casualisation of Organised Labour – Livemint
• Ease of Doing Business Report