India’s labour laws are restrictive in nature and hurt investments in the manufacturing sector. The Industrial Disputes Act (1947) has rigid provisions such as compulsory and prior government approval in the case of layoffs, retrenchment and closure of industrial establishments employing more than 100 workers. This clause applies even when there is a good reason to shut shop, or worker productivity is seriously low.
The Contract Labour (Regulation and Abolition) Act (1970) states that if the job content or nature of work of employees needs to be changed, 21 days’ notice must be given. The changes also require the consent of the employees.
While the right of workers to associate is important, the Trade Union Act (1926) provides for the creation of trade unions where even outsiders can be office-bearers. This hurts investor faith and restricts economic growth.
Rigid labour laws discourage firms from trying to introduce new technology, requiring some workers to be retrenched. This deters FDI because of the fear that it would not be possible to dismiss unproductive workers or to downsize during a downturn. Hence getting FDI into export-oriented labour-intensive sectors in India has not been fully achieved.
In contrast, China has succeeded in attracting FDI to export-oriented labour-intensive manufacturing, in part because of flexible labour laws such as the contract labour system implemented in 1995. Whereas in India, employers have taken to hiring workers on contract outside the institutional and legislative ambit, resulting in informalisation of the labour market. This hampers worker well-being.
It’s been well established that China’s flexible and business friendly labour laws have ensured continued investments in Chinese manufacturing, unlike in India where restrictive labour laws have been a cause of concern for investors. Though the Indian labour force has been much more disciplined and cooperative in the post-reforms period leading to a decrease in the number of strikes, lockouts, mandays lost and so on, the large number of labour rules and the process of enforcement by inspectors scares investors, at least on paper.
Large number of FTAs we have entered into require labour standards hat are global.
Success of Make in India and the need to skill millions require labour reforms.
More recently, a few scholars have completed a comparative study between states of India with different labour regulations. They compared states of India who have amended labour legislations to grant more flexibility to employers, to those states in India that have made their labour laws even more rigid and complicated to comply with. These studies find that states with flexible labour laws have grown significantly faster. Flexible labour states have been able to take advantage of the export opportunities, and the per capita household income has risen much faster in states with flexible labour laws. States with rigid labour laws have led local entrepreneurs to prefer casual workers or contract workers with finite employment time period; in essence, more rigid and inflexible labour law states see increased informal employment.
The Economist finds India to have the most restrictive labour laws in any major economy of the world. India’s private sector, including its organised manufacturing sector, employs about 10 million Indians. Manufacturing firms need to obtain government permission to lay off workers from factories, and this permission is usually denied if they have more than 100 staff. This partly explains why most Indian firms are small: 87 percent of employment in India’s organised manufacturing sector is in firms with fewer than ten employees, compared with only 5 percent in China. Small Indian firms cannot reap economies of scale or exploit the latest technology, and so suffer from lower productivity than if they scaled up, employed more people and were much bigger companies. This cripples Indian firms ability to rapidly expand or adjust with changes in global economy, both during early opportunity phase and during economic change.
Between 2004/05 and 2011/12 data suggests that 5 million jobs were created in the organised sector. But this pales into insignificance if one considers the fact that 12 million jobs are needed for the country to employ the youth coming out of colleges every year. These laws have also pushed workers into the unorganised sector where their pay and rights were terribly compromised.
Changes being made
The changes to the Factories Act will improve safety of workers, doubles their overtime, relaxes norms for female workers like enabling them to do night shifts in select industries, and reducing to 90 days from 240 that employees need to work before becoming eligible for benefits such as leave without pay. It also proposes higher penalty on establishments that violate the Act. All these measures clearly enhance the welfare of workers.
The amendments to the Apprentices Act drop the provision that mandates imprisonment of directors of companies that do not implement the Act. Also, the changes proposed by the previous UPA government that stipulated that 50 per cent apprentices should be absorbed by the company have been dropped. At the same time, the apprentices scheme has been extended to 500 new trades/vocations.
These measures will help industry take in more apprentices without the fear of having to employ them even when they have no need. Getting apprentice training will help workers enter the organised sector.
Contract labour reforms
The Report of the Working Group on “Labour Laws and other Regulations” for the 12th Five Year Plan, also proposed that the 1970 Act should be amended. The amendment should ensure that in case of contract labour performing work similar to that performed by permanent workers, they should be entitled to the same wage rates, holidays, hours of work and social security provisions. Furthermore, whenever a contract worker is engaged through a contractor, the contract agreement between the employer and the contractor should clearly indicate the wages and other benefits to be paid by the contractor.
Recent labor reforms by GOI
As mentioned above, the central government amended the Apprentices Act, revamped the labour inspector regime, gave employers and employees unique numbers and is moving to online compliance.
With the finance minister encouraging States to bring in appropriate labour reforms, Rajasthan has gone the Chinese way. Henceforth, it will be easier for firms there to adopt hire and fire policies. The Rajasthan government’s labour reforms are manifold. For one, industrial establishments employing up to 300 workers are now allowed to retrench employees without seeking the prior permission of the Government.
In addition, the threshold of the number of employees required for the purpose of applicability of the Factories Act has been increased from 10 to 20 (in electricity-powered factories) and from 20 to 40 (in factories without power). This is expected to reduce bureaucratic delays.
Finally, membership of 30 per cent of the total workforce needs to be recorded for a union to obtain recognition, up from 15 per cent, a move that will halt productivity losses out of politically motivated petty strikes.
The reality is that manufacturing has to grow to absorb millions of semi-skilled young Indians, a difficult task without rationalising labour reforms.
Regulation by labour laws
Industrial Disputes Act of 1948 and an additional 45 national laws along with another 200 state laws ( Labour being a Concurrent subject) control the relationships between the worker and the company. These laws mandate all aspects of employer-employee interaction.
Article 39(d) of the Constitution provides that men and women should receive equal pay for equal work. In the Equal Remuneration Act 1976 implemented this principle in legislation.
Bonded Labour System (Abolition) Act 1976, abolishes bonded labour, but estimates suggest that between 2 million and 5 million workers still remain in debt bondage in India.
Domestic workers in India
While several legislations such as the Unorganized Social Security Act, 2008, Sexual Harassment against Women at Work Place (Prevention, Prohibition and Redressal) Act, 2013 and Minimum Wages Schedules notified in various states refer to domestic workers, there remains an absence of comprehensive, uniformly applicable, national legislation that guarantees fair terms of employment and decent working conditions.
Also see Prime Minister Inaugurates Shramev Jayate, Ushers in A Slew of Labour Reforms