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Daily Editorial : LABOUR REFORMS – Final Overhaul

It is often commented that India’s labour laws are very regressive and anti-business which may force the companies to automate, but in the face of our peaking demographic dividend, if not utilized may become a nightmare for us.

Therefore Indian government plans to overhaul the labour laws this budget session. The objective is to improve ease of doing business by providing flexibility to hire workers. There is a clear need to rationalise the multitude of labour laws at the central and state level.

What are the problems in Labour laws in India?

  • Labour is a subject in the concurrent list of the Constitution of India. Thus, both centre andstates can enact laws on labour matters.There are 44 central laws and more than 150 state laws on labour.
  • There are multiple laws onsimilar subjects like 19 laws governing conditions of work and industrial relations and 14 lawson social security and labour welfare.

The main problems are around the three acts:Industrial Disputes Act (1947), Contract Labour(1970) and Trade Union Act (1926).

The Industrial Disputes Act, 1947

  • The act mandates companies employing 100 or moreworkers to seek prior permission of the government for firing workers.
  • Itbars companies from exiting or downsizing quickly – a company needs to seek permission fromthe government three months in advance. This locks up capital in unproductive assets.

The Contract Labour (Regulation and Abolition) Act 1970

  • It was enacted to regulate the practiceof contract labour to avoid exploitation of labourers.
  • This act empowers thegovernment to prohibit contract labour in certain situations at the discretion of the government.
  • A Supreme Court judgment said that if the factory employs contract labour for work, which alsohappens to be its main activity, then contract labour should be abolished.

Although no firmwould like to use contract labour for its regular work but the legal tangle is such that someservices which are not related to the core activities but are of regular nature (such as canteen,gardening, loading-unloading etc.) may be treated as contract labour and firms may be forced tokeep such labourers on permanent roll. Due to these issues, the industry expressesdisappointment with this act because its provision defeats the purpose of employing contractlabour.

Trade Unions Act, 1926

  • This is the most archaic of all labour law and is the cast in the colonial periodand constructed along the lines of the then prevailing British law it merely provides forvoluntaryregistration of trade unions, affords certain kinds of protection and regulates rather severely theinternal affairs of the trade unions.
  • The protective clauses of the law were rendered technicallysuperfluous once the Constitution established the fundamental right of association. It is alsomentioned that while forming a union it is necessary to have 25% of members not of the same
    organization which is absurd.

Manifestations of the regressive laws

  • They discourage industrial employers to hire. The laws have resulted in companies adopting ‘hire and fire policy’ where they would hire more contractual labour without any social security.
  • The labour laws divided at the Centre and State levels, induce unwanted red-tape and bottlenecks thereby hampering the industrial growth.
  • This has constrained the growth of the MSMEs which are mostly labour intensive.
  • If our exports are closely analysed, we can find out that despite being the labour surplus country, our exports are mainly the capital intensive goods such as petroleum products, jewellery, transport equipment, pharmaceuticals.
  • Due of these problems, the manufacturing sector growth has stagnated between 14-18%. The reforms in labour laws are of utmost importance if the Make in India campaign is to succeed

Need for the Reforms

  • India’s growth rates in the 2000s are often derided as “jobless growth” sincethe service sector-led model has been capital rather than labour intensive.
  • More than 200 million Indians will reach working age over the next two decades, our demographic dividend will ripen and creatingsufficient jobs for perhaps the largest youth bulge the world has ever seen is among thetoughest challenges for the country.
  • In 2009, 84 percent of India’s manufacturers employed fewer than 50 workers, compared to 25percent in China, according to a study by consultancy firm McKinsey.
  • Nine out of 10 Indians are employed in the informal sector, where labour laws are rarely
  • We need to make the labour laws modern, so that, it encourages the employers to keep more workers in formal roles with social security benefits.
  • The compliance burden on MSMEs should be reduced to ensure the ease of doing business and simultaneously lead to jobs creation.



What are the bills that are going to be passed?

  • There are four proposed laws — the Industrial Relations Code Bill 2016, Wage Code Bill 2016, the Small Factories (Regulation of Employment and Conditions of Services) Bill, and Employees Provident Fund and Miscellaneous Provisions (Amendment) Bill.
  • The Bills that are to be tabled this session are Industrial Relations Code Bill 2016, and the Wage Code Bill 2016. Through these, the government wants to merge around 40 different labour laws in to four codes of legislation by repealing unwanted laws.
  • The four codes are Wages, industrial relations, social security, and welfare, safety in work conditions.

Important features of the two bills

The Labour Code on Industrial Relations Bill 2015 will combine Industrial Disputes Act, 1947, theTrade Unions Act, 1926, and the Industrial Employment (Standing Orders) Act, 1946.

  • Once enacted, the Labour Code will allow companies to sack as many as 300 employees
    without prior government approval. Companies are now allowed to let go of up to 100
    employees without needing government approval.
  • The definition of ‘strike’ has been widened under the code to include casual leave by 50 per centor more workers in the industry.
  • For employers employing less than 50 employees, the requirement to provide a minimum of onemonths’ notice and retrenchment compensation (severance) is to be removed.
  • The draft code raises the retrenchment/closure compensation payable to workers from 15 dayswages to 45 days wages for every completed year of service.
  • The Labour Code is modelled on the lines of a similar law in Rajasthan, where the BJP-led stategovernment approved the plan in 2014.

The Wage Code Bill provides for a floor rate of national wage that will be mandatory for allstates and across all sectors.

  • The Centre and states now set minimum wages for different categories of workers, in their respective jurisdictions.
  • Once it sees the light of day, the Wage Code will allow fixing a benchmark wage for workerswhich will have to be adhered to by the states as well. This provision will ensure a minimumwage to workers across the country. However, the states will be free to prescribe higher wages.

Criticism for the Reforms
There is stiff opposition from unions which could hinder the government’s plans to bring in a raft of labourreforms.

  • Industries are already flouting labour regulations and any dilution of the existing laws will
    compromise employees’ welfare and they think the government is insisting on changing labour laws without realizing that it is not a shortcutfor job creation
  • Another argument is that Indian workers are largely badly paid, andduring the EPF tax debate, the government said that 30 million organized sector workers are getting less than 15000 a month. So, by changing the laws you will put these poor workers in
    further trouble.
  • The trade unions have rejected the bill on the proposal of strike- that for going on strike for a day, salary of 8 days will be deducted and said that theproposed legislations have been drafted primarily from an employer’s perspective.


Labour reforms are the need of the hour not only as a thrust on Make in India and ease of doing
business, but also to ensure the demographic dividend does not turn into a nightmare of
unemployment and under-employment.The Economic Survey 2016-17 notes that the growth boost from the demographic dividend inIndia is likely to peak within the next five years.

It is challenging to make a delicate balance between the interest of the businessmen and those
of the weaker section of the society.No matter how crucial these reforms are for the benefit of
India’s economic future, their success depends on how the government implements them, given
the large population of our country.

We need a minimalist labour regime.


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