Labor Law Reforms (India)

Unfavourable laws are one of the main reasons why labour-intensive manufacturing has suffered in India.

Indian policymakers seem to have realized the importance of manufacturing in providing jobs but it is also equally important to realize that the path leading to higher manufacturing employment has to necessarily cross a difficult bridge called labour reforms. Labour laws in India are perceived by trade and industry circles as complex, archaic and not conducive to promoting the interests of the industry. Some of the labour laws are both enacted and enforced by the Centre; in respect of some others, Centre enacts the law while implementation is done by both the centre and the states. Besides, there are labour laws which are enacted by the centre but are administered by the states. This complexity makes any modification of the labour laws a difficult task. Some of the major problems concerning labour laws in India are listed below-

  1. Many laws are old and irrelevant, a few being almost a century old.
  2. Some of the labour laws contain provisions, which are not perceived to be industry- friendly (eg. Section 25(F) of the Industrial Disputes Act 1947). Further, the Trade Unions Act, 1926 allowing the multiplicity of trade unions, stringent panel provisions under the Contract Labour (R&A) Act, 1970 etc. are also not perceived to be industrial friendly. Besides, the foreign investors are critical of the absence of a comprehensive exit policy.
  3. The process of tripartite consultations, which is mandated under the ILO Convention, often results in a breakdown of the consultation process in respect of contentious issues and the resultant delay.
  4. Definitions under different labour laws vary in respect of workman, establishment, appropriate government, etc. The threshold levels for applicability of the Act are also different under different labour laws. This has given rise to a lot of confusion. There is a need for uniform definition and threshold levels to the extent possible.
  5. Separate filing of returns under different labour laws creates difficulties for industries, particularly for the small units.
  6. Small units look down upon frequent inspections as ‘inspector raj’ since this adds to the compliance costs.

The recent emphasis on Make in India and the suggestion for enhancing the share of manufacturing necessitates rationalization and simplification of labour laws.

In order to understand the real impact of labour reforms on employment growth, it is important to move beyond self-selected anecdotes and engage in careful empirical analysis. Fortunately, a number of prominent scholars have taken up this task and produced a wealth of evidence regarding the association between labour reforms and many real outcomes such as employment growth, firm growth, plant productivity, etc. Almost all of them use the data provided by Annual Survey of Industries (ASI) compiled by the ministry of statistics and programme implementation. The survey provides plant-level information pertaining to inputs used and output produced by thousands of factories. More importantly, the survey is conducted every year—allowing the researcher to track the growth of a factory over the years.


Professors Timothy Besley and Robin Burgess in their seminal research paper published in the Quarterly Journal of Economics examine if labour regulations hinder economic performance in India. They find that rigid labour laws lead to significant reduction in employment, productivity, and growth. More importantly, they document a strong relationship between labour laws and urban poverty. In other words, rigid labour laws are also associated with increased urban poverty. Researchers conclude that rigid labour laws ultimately end up hurting the very same constituency that they are supposed to protect.

Most of the arguments advanced, both in favour of and against labour reforms, are coloured by the ideological worldview or the economic status of the people making the arguments. Many a time, arguments are driven by passion rather than reason. For example, all those who represent workers or subscribe to a leftist worldview believe that labour reforms are likely to have a detrimental impact on employment and hence oppose even simple procedural reforms in this area. On the other hand, industrialists and those subscribing to rightist worldview call for radical labour reforms without appreciating the plausible political consequences and immediate human costs.

What government wants to do?

The government wants to club around 40 existing labour laws into four or five acts. For example, all wage-related laws will be made part of the wage code and all industrial relations laws included in the respective code. The wage code and the industrial relations code will club nearly 10 existing laws, including The Factories Act, 1948, and The Industrial Disputes Act, 1947, into just two. The Employees Provident Fund and Miscellaneous Provisions (Amendment) Bill seeks to position the National Pension System (NPS) as an alternative to Employees’ Provident Fund (EPF). Similarly, the wage code bill seeks to offer health insurance as an alternative to Employees State Insurance Corp.’s health facilities for industrial workers. Given below are some of the changes happened in recent past-

Minimum Wage

Last month the Union government increased the minimum wage of non-agricultural, unskilled workers in the central sphere from Rs.246 to Rs.350 per day. The wage hike move will benefit more than 10 million workers in sectors such as mines, construction, and sanitation. But the labour unions remain unconvinced and went on strike on 2nd September, to protest against labour reforms, disinvestment in profit-making public sector undertakings and contractualization of workforce, and demand a monthly minimum wage of at least Rs.15,000.

The decision to hike minimum wage does not mandatorily apply to all such workers across the country. Labour issues are a part of the concurrent list of the Constitution, allowing both the Union and state governments to make labour laws. The Union government has the power to declare a national minimum wage floor, discussions for which have been on for the past couple of years.

Model Shops and Establishment Bill

According to a 2015 research paper published by NITI Aayog, the labour force participation rate (LFPR) in India is around 40%, but for females, it is only 22.5%. The gap in male-female labour force participation is such that the LFPR for rural females of the age group over 15 years is only 35.8%, while for rural males it is more than double at 81.3%. The Union government is making efforts to bridge this gap. The Model Shops and Establishments (Regulation of Employment and Conditions of Service) Bill, 2016, that the Union cabinet approved last month allows women to work night shifts, albeit with proper safety arrangements. The labour ministry has proposed a similar provision in Factories (Amendment) Bill, 2014, which is pending in Parliament.

Maternity Benefit Act

Rajya Sabha also passed the Maternity Benefit Amendment bill 2016 which raises maternity leave from 12 to 26 weeks. The bill also provides 12 weeks leave for commissioning and adopting mothers. A commissioning mother is one who gets a baby via surrogate mothers. This bill also makes it mandatory for an establishment where the number of workers is 50 and above to provide a creche facility . Beverage maker Coca-Cola India Pvt. Ltd, pharmaceuticals firm Dr. Reddy’s Laboratories Ltd and diversified Hinduja Group are among those firms who have recently taken similar moves. Startups like Jabong and Care24 (Aegis Care Advisors Pvt. Ltd) too has announced a similar policy for women workers.

Factories Act

The cabinet also gave ex-post facto approval for amendment of the Factories Act, 1948 by introducing the Factories (Amendment) Bill, 2016 in Parliament. The amendments relate to increase in overtime hours from the existing 50 hours per quarter to 100 hours (Section 64) and existing 75 hours per quarter to 125 hours (Section 65) in some urgent situations.

Exemption to MSMEs

The ministry has decided to exempt MSMEs from inspections related to key labour laws—including the Contract Labour Act, the Employees State Insurance Act, the Trade Union Act, the Employees Provident Fund and Miscellaneous Provisions Act and Industrial Disputes Act—in a bid to dispel fears and encourage entrepreneurs to help promote manufacturing in the country. The internal circular issued by labour secretary Shankar Aggarwal proposes to simplify the compliance burden of MSMEs in the first three years of establishment.

Some suggestions from FICCI regarding labour reforms are-

  1. To give more economic independence to the State Governments and promote federalism, FICCI strongly pleads for shifting labour to the State list, from existing concurrent list of the constitution.
  2. A uniform definition of terms like ‘industry’ and ‘worker’ is necessary across statutes. For better interpretation and understanding, industry should be termed as ‘enterprise’ and workman should be termed as ‘employee’.
  3. Reduction/ reforms in dispute settlement mechanisms between labour and employers. There are more than 4 levels of dispute settlement which are available after arbitration. These should be reduced to maximum one or two levels on a priority basis.
  4. Almost every Act requires the employer to maintain a set of registers, submit periodic returns and display certain notices near the main entrance of the establishment. The efforts spent to complete these formalities are not commensurate with the utility of such registers, returns, and notices. Besides, there is a lot of duplication and over-lapping.
  5. Laws governing terms and conditions of employment, which may consolidate:

(a) Industrial Disputes Act, 1947

(b) Industrial Employment (Standing Orders) Act, 1946

(c) Trade Unions Act. 1926

Laws governing wages, which may consolidate:

(a) Minimum Wages Act, 1948

(b) Payment of Wages Act, 1936

(c) Payment of Bonus Act, 1965

Laws governing welfare which may consolidate:

(a) Factories Act, 1948

(b) Shops and Establishments Act

(c) Maternity Benefits Act, 1961

(d) Employees’ Compensation Act, 1952 and

(e) Contract Labour (Regulation & Abolition) Act, 1970

Laws governing social security, which may consolidate:

(a) Employees Provident Funds and Miscellaneous Provisions

Act, 1952

(b) Employees State Insurance Act, 1948

(c) Payment of Gratuity Act, 1972

Here some of the questions from the change management perspective are-

  1. The laws framed mainly to cater the manufacturing sector, do not address the problems of the service sector, which today, accounts for 55 per cent of our GDP. How are we going to address problems of such a large workforce?
  2. When the multiplicity of labour laws will end? 44 central and about 100 state laws – present operational problems in implementation and compliances that need to be looked into. Besides, using different terminologies like – employee, workman, worker to denote a worker or wages, basic wages, salary referring to the compensation, yet covering different components in each legislation, have made compliance very cumbersome multiplying litigations.
  3. In the market economy of today, average shelf-life of a product is less than 6 months. Companies are under pressure to innovate, redesign and technologically upgrade the products to suit consumers’ choices which are not possible without restructuring and rightsizing. Chapter V-B of the Industrial Disputes Act, 1947 enacted during emergency puts all these processes under Government purview which has promoted industrial sickness. How can the entrepreneurs avail benefits of Make in India or Skill India in such circumstances?
  4. For the implementation of the Minimum Wages Act, 1948, in 2012 an estimated 3,171 inspectors were expected to cover around 7.70 million establishments in the country, giving a ratio of 2,428 establishments per inspector. Inspection rates, that is, the proportion of registered factories that have been inspected declined from 63 per cent in 1986 to 18 per cent in 2008. Notwithstanding data limitations, this decline is symptomatic of the poor state of inspections. What is the use of stringent acts if the implementation is not happening?
  5. The government is talking of simplifying labour laws but there are no labour laws to cover women who deliver crucial government schemes, such as the Anganwadi Worker and Helper of the ICDS [Integrated Child Development Services] or the Accredited Social Health Activist [ASHA] of the NRHM [National Rural Health Management], the IKP [Indira Kranti Patham] or Grama Deepika workers of the National Rural Livelihood Mission or the various Shiksha Karmis involved in primary education or those involved in the National Child Labour Programme.
  6. What is the action plan of government in the creation of skilled labour? The ITIs need to be modernised but the private sector will not step in to do that. Companies have stepped in to modernise the ITIs with government help before, but it is primarily the responsibility of the government to invest in training.

 (Sources- Multiple articles from LiveMint, ET, Frontline special issues, ILO paper, FICCI report)


About Mukesh Bhavsar

Mukesh has done BE Civil from Mumbai University and masters in HRM from Tata Institute of Social Sciences (TISS). He has worked for a couple of NGOs in India and abroad. He has also written for some newspapers and magazines on different social issues. Mukesh is interested in entrepreneurship, writing, social work, travelling, and photography. Follow him on twitter-
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1 Response to Labor Law Reforms (India)

  1. soniy says:

    Hello sir, thanks for the wonderful and useful article provide us. i hope you will also help to increase our knowledge in future

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