Labour Laws and Employment in India

Tarun Das, Economic Adviser, Ministry ogf Finance, India

1 Labour Laws in India

Labour is highly protected and Indian labour laws do not allow hire and fire policy. As
per existing laws under the Industrial Disputes Act 1947, no employer cannot close an
establishment or declare lock out or retrench any labour without taking prior approval of
the concerned government authority if the establishment employed more than 100
laborers on permanent basis in the previous 12 months. Various researchers in the past
had concluded that this clause stood in the way of further organised employment and led
to growth of more capital-intensive industries. Therefore, this protection was counter-
productive and acted against the overall interest of the workers.

Labour figures in the Concurrent List (for both Centre and States) of distribution of
legislative powers in the Constitution. As both Centre and States can legislate in this area,
India has perhaps the largest number of legislations on labour in the world. There are
over 47 labour related laws enacted by the Central government dealing with industrial
relations, social security, industrial safety and health, child and women labour, minimum
wages and bonus, labour welfare, emigration, employment exchange and miscellaneous
issues (Annex-1). There is a considerable degree of overlap among these acts. Many
studies have suggested simplification of rules and procedures and to group these acts
under five or six broad and comprehensive acts dealing with basic issues.

The National Common Minimum Program (NCMP) states, “The UPA rejects the idea
of automatic hire and fire. It recognizes that some changes in labour laws may be
required but such changes must fully protect the interests of workers and families and
must take place after full consultation with trade unions. The UPA will pursue a dialogue
with industry and trade unions on this issue before coming up with specific proposals.
However, labour laws other than the Industrial Disputes Act (IDA) that create an
Inspector Raj will be reexamined and procedures harmonized and streamlined.”

At present, amendments to 13 acts are being examined by all stakeholders viz. centre and
state governments, trade unions and industry associations. These are indicated in Annex-
2. It may be observed from the table that even amendments of simple issues relating to
definitions and scope have taken much longer period than expected due to existing
parliamentary procedures for amendment of an act. In some cases like a Bill relating to
workers’ participation in management is lying in the Parliament for 15 years since 1990
without any discussion or debate due to lack of interest by political parties.

In order to achieve a consensus among various stakeholders, the present Union Minister
for Labour and Employment Mr. K. Chandrasekhar Rao held a meeting with
professionals and chambers of commerce and industry on the 29th March 2005 and
another meeting with trade union leaders on the 31st March 2005. But, the discussions in

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these meetings remained inclusive. While professionals, government advisers and
industrialists supported flexible labour laws for employment on the ground of
globalisation and general liberalisation of the economy, trade union leaders wanted more
protection, strict enforcement of labour laws and more benefits for labour.
To quote the Minister “Friends, you would appreciate the rationale for having less
rigidity in labour laws which has now become a virtual necessity. The protection, which
was available to the domestic industry from products and services sourced overseas, is
no longer there or is fast reducing. Also the earlier policy and procedures with regard to
industrial licensing has given way to a regime more determined by market forces than
administrative actions. Efficiency, cost cutting and consumer satisfaction are
increasingly becoming the bywords or hall marks of present day business” (Rao 2005b).

The Minister indicated that the government has open mind although it considers that
there is an urgent need for effecting requisite labour reforms. He has convened another
meeting with the State Labour Ministers on the 22nd April 2005. Thereafter, the minister
would prepare a draft proposal for consideration by the government. Thus the reforms are
constrained by the political economy although there is close interactions between
research and policy planning. This aspect is discussed in details in section 2.5 dealing
with backward looking approach.

2 Labour Markets in India

In various five-year plans, employment generation was viewed as a by-product of

development and growth, and not as a goal to be pursued independently of economic
development. 1970s and 1980s witnessed the emergence of various employment
generation and self-employment programs as a part of poverty alleviation programs.
Although level of employment expanded over the years, the growth rate of employment
still lags behind that of labour force.

Open unemployment is not a major problem in India. Out of a labour force of 406
million, 397 million were employed leaving 9 million openly unemployed in 2000.
However, employment is characterised by very low quality of employment and low levels
of productivity. About 31 per cent of the employed live blow the poverty line. There is no
significant growth of regular employment. Organised employment as a proportion of total
employment declined from 9 per cent in 1993-94 to 7 to 8 per cent in 1999-2000.
Significant employment is taking place in services sectors and small and medium
enterprises. Main growth was observed in casual or contractual employment. Self-
employment has not also increased significantly in the period from 1993-94 to 1999-
2000. Educated unemployment at 14.7 per cent is much higher than normal
unemployment at 2.2 per cent.

Labour and employment

Comprehensive data on employment and unemployment are collected by the National

Sample Survey Organisation (NSSO) through quinquennial surveys. As per the results of
the latest Round (55th in 1999-2000), the rate of employment growth decelerated from 2.7

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per cent per annum in 1983-1994 to 1.1 per cent per annum in 1994-2000 (Table-1). The
decline in the employment growth rate in the 1990s was associated with a higher growth
in GDP indicating a decline in the labour intensity of production. Some of the important
findings emerging from the 55th Round (1999-2000) are:

(i) The decline in the growth rate of employment was associated with a sharp decline
in the growth rate of the labour force.
(ii) As in the past, the share of casual labour in total employment went up.
(iii) The number of unemployed increased from 20 million in 1993-94 to 27 million in
1999-2000.
(iv) The decline in the employment growth in 1994-2000 was mainly attributable to a
stagnation of employment in agriculture, resulting in a drop of the share of
agriculture in total employment from 60 per cent in 1993-94 to 57 per cent in
1999-2000.
(v) On the other hand, employment growth in all the sub-sectors within services, such
as trade, hotels, restaurant, transport, storage, communication and financial and
business services, (except community, social and personal services having
negative growth rate) exceeded 5 per cent per annum (Table-2).

Table-1: Employment growth rates in 1972-2000 (per cent)

Period Growth of population Growth of labor force Growth of employment
(% per annum) (% per annum) (% per annum)
1972-1978 2.27 2.94 2.73
1977-1983 2.19 2.04 2.17
1983-1988 2.14 1.74 1.54
1987-1994 2.10 2.29 2.43
1994-2000 1.93 1.03 1.07
Source: Planning Commission, Government of India.

Table-2 Sectoral Employment in 1983 to 2000

Employment (per cent to total) Annual growth rate (%)

Sector 1983 1987- 1993- 1999- 1983 1987- 1983 1993-

1988 1994 2000 to 1988 to 1994
1987- to 1993- to
1988 1993- 1994 1999-
1994 2000
Agriculture 63.2 60.1 60.4 56.7 1.8 2.6 2.2 0.02
Mining & quarrying 0.7 0.9 0.8 0.7 7.4 1.0 3.7 -1.9
Manufacturing 11.6 11.9 11.1 12.1 3.6 1.2 2.3 2.6
Electricity, gas, water 0.3 0.3 0.5 0.3 2.9 7.2 5.3 -3.6
Construction 3.0 4.4 3.5 4.4 12.1 -1.4 4.2 5.2
Trade, hotels, restaurant 7.6 8.3 8.5 11.1 4.9 3.0 3.8 5.7
Transport, communication 2.9 3.0 3.1 4.1 3.2 3.5 3.4 5.5
Financial, real estate 0.9 1.0 1.1 1.4 4.7 4.5 4.6 5.4
Community/social services 9.8 10.1 11.1 9.2 3.6 4.1 3.6 -2.1
All Sector 100 100 100 100 2.9 2.5 2.7 1.1

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Working Groups on Labour and Employment

A Special Group constituted by the Planning Commission under the chairmanship of the
then Member Mr. Montek Singh (presently working as the Deputy Chairman of the
Planning Commission) on targeting ten million employment opportunities per year over
the Tenth Plan period (2002-2007) recommended that over and above the employment
generated in the process of growth, there is a need to promote certain labour intensive
sectors. These sectors are agriculture and allied activities, small and medium industries,
information technology, construction, tourism, financial sector, education and health etc.
With proper policy initiatives taken in these labour intensive sectors, an additional 20
million jobs will be created in the Tenth Plan. The Report also identified programs for
achieving the ten million employment opportunities per year.

Another Task Force on Employment Strategies and Employment Monitoring at state level
was set up by the Planning Commission under the Chairmanship of the then Member
Dr.S.P. Gupta with representatives from states and major central Ministries. The Task
Force (Gupta 2002) suggested establishing cluster of industries and encouraging
development of agro-based and food-processing industries.

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 Annex-1: Details of various acts on labour in India

Subjects Acts
1. Industrial 1. The Industrial Disputes Act 1947
relations 2. The Plantations Labour Act 1951
3. The Trade Unions Act 1926
4. The Weekly Holidays Act 1942
2. Social 5. The Employees State Insurance Act 1948
security 6. The Employees Provident Fund and Miscellaneous Provisions Act 1952
7. The Maternity benefits Act 1961
8. The Payment o9f Gratuity Act 1972
9. The Workmen’s Compensation Act 1923
10. The Employer’s Liability Act 1938
11. The Fatal Accidents Act 1855
3. Industrial 12. The Dock Workers (Safety, Health and Welfare Act) 1986
safety and 13. The Mines Act 1948
Health 14. The Factories Act 1948
15. The Personal Injuries (Emergency Provisions) Act 1962
16. The Personal Injuries (Compensation Insurance) Act 1963
4. Child and 17. The Child Labour (Prohibition & Regulation) Act 1986
Women Labour 18. The Equal Remuneration Act 1978
19. The Children (Pledging of Labour) Act 1938
5. Wages and 20. The Minimum Wages Act 1948
Bonus 21. The Payment of Bonus Act 1965
22. The Payment of Wages Act 1936
23. The Working Journalists and other Newspaper Employees (Conditions of Service)
and Misc. Provisions Act 1955
24. The Working Journalists (Fixation of Wages) Act 1958
6. Labour 25. The Iron Ore, Manganese and Chrome Ore Mines Labour Welfare Fund Act 1976
Welfare 26. The Iron Ore, Manganese and Chrome Ore Mines Labour Welfare Cess Act 1976
27. The Building and other Construction Workers (Regulation of Employment &
Conditions of Services) Act 1996
28. The Building and other Construction Workers Welfare Cess Act 1996
29. The contract Labour (Regulation and Abolition) Act 1970
30. The Inter-State Migrant Workers (Regulation of Employment and Conditions of
service) Act 1979
31. The Cine Workers Welfare Cess Act 1981
32. The Cine Workers Welfare Fund Act 1981
33. The Beedi and Cigar Workers (Conditions of Employment) Act 1966
34. The Beedi Workers Welfare Cess Act 1976
35. The Bonded Labour System (Abolition) Act 1976
36. The Limestone and Dolomite Mines Labour Welfare Fund Act 1972
37. The Iron Ore Mines Labour Welfare Cess Act 1961
7. Emigration 38. The Emigration Act 1983
39. The Foreign Recruitment Act 1874
8. Employment 40. The Employment Exchange (Compulsory Notification of Vacancy) Act 1959
exchange 41. The Apprentices act 1961
42. The National Services Act 1972
9. 43. The Industrial Employment (Standing Orders) Act 1946
Miscellaneous 44. The Labour Laws (Exemption from Furnishing Returns and Maintenance of
Registers by Certain Establishments) Act 1988
45. The Motor Transport Workers Act 1961
46. The Sales Promotion Employees (Conditions of Services) Act 1975
47. The Cine Workers and Theatre Workers (Regulation of Employment) Act 1981

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 Annex-2: Progress of Amendments of Selected Acts on Labour Reforms

Name of the Act Progress As in November 2004

1. The Payments of The Act ensures that wages are paid by the employers within prescribed time
Wages Act limit. Presently the Act is applicable to workers drawing wages up to Rs.1600
per month. For enlarging the scope of the Act, it was proposed in 2002 to
enhance the ceiling from Rs.1600 per month to Rs.6500 per month. The
Payments of Wages (Amendments) Bill 2002 was approved by the Cabinet, but
could not be presented to the Parliament as the previous government lost the
general election in May 2004. It has been approved again by the new Cabinet
and is waiting to be moved in the Parliament in the forthcoming sessions.
2. The Payment of Bonus The Payments of Bonus Act 1965 provides for payment of bonus to the
Act 1965 employees of the factories and establishments employing 20 or more persons
and allows a maximum bonus of 8.33% to eligible employees. As per the last
amendments in 1995, the Act is applicable to employees drawing wages not
exceeding Rs.3500 per month and the calculation of bonus ceiling is fixed at
Rs.2500 per month. The Second National Commission on Labour in 2002
recommended increasing these ceilings to Rs.7500 and Rs.3500 respectively.
The proposal to amend the Act in the light of these recommendations is still
under examination of the government.
3. The Workmen’s The Act was amended in April 2000 and the amended provisions were notified
Compensation Act 1923 on the 14th May 2001. By this amendment the amount of compensation payable
on death has been raised from Rs.50, 000 to Rs.80, 000 and amount of
compensation payable for permanent disablement has been raised from Rs.60,
000 to Rs.90, 000.
4. The Payment of At present the Act is payable to every factory, mine, oilfield, plantation, port
Gratuity Act 1972 and railway company, every shop and establishment employing 10 or more
workers on any day in the preceding 12 months. The amount of gratuity
payable to an employee was raised to Rs.350, 000 in 2000.
5. The Emigration Act The Emigration (Amendment) Bill 2002 proposing compulsory insurance for
1983 anybody going abroad has lapsed consequent on the dissolution of the 13 th Lok
Sabha (lower house of Parliament) in May 2004. It is now proposed to
reintroduce the Bill. A revised Cabinet note has been circulated to the
concerned Central Ministries and all State governments for comments.
6. The Labour Laws Government is contemplating to bring forward amendments in the Act for
(Exemption from reduction of number of returns and simplification of returns and registers
Furnishing Returns & prescribed under the Act. Works started in 2000 and still consultations are
Maintaining Registers by being held with different Ministries.
Certain Est.) Act 1988
7. The Unorganised The second National Commission on Labour in 2000 had recommended an
Sector Workers Bill 2004 umbrella legislation to provide protection to workers in the unorganized sector.
Government considered the proposal to formulate the Unorganised sector
Workers Social Security Scheme and launched a pilot scheme in selected 50
districts in January 2004. The Scheme could not take off for want of statutory
backing. The Bill has been redrafted by the present government and has been
circulated to all Ministries, States and Trade Unions for comments.
8. The Factories Act At present the Act is applicable to any factory (i) where 10 or more workers are
1948 employed on any day in the preceding 12 months and any part of
manufacturing is carried on with the aid of power and (ii) where 20 or more
workers are employed on any day in the preceding 12 months and any part of
manufacturing is carried on without the aid of power. The previous government
decided to amend the Act for proving extra safeguards to workers and

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 introduced the Factories (Amendment) Bill 2003 in the Lok Sabha on the 29th
July 2003. The Bill lapsed due to the dissolution of the 13 th Lok Sabha. The
Bill is under examination by the new government.
9. The Employees At present, the Act is applicable to any establishment employing 20 or more
Provident Fund And workers. A comprehensive amendment is under examination by various
Miscellaneous Provisions ministries, states and trade unions.
Act 1952
10. The Employees State At present the Act is applicable to all factories and workers getting wages up to
Insurance Act 1948 Rs.7500 per month are eligible to receive benefits under the Act. The proposed
amendments for extending facilities under the Act are under examination by
the government.
11. The Minimum Wages The Act was enacted primarily to protect the interests of the workers in
Act 1948 unorganized sectors and provides for enforcement of minimum wages by both
central and state governments. The Act is undergoing thorough amendment
process and is under examination by the centre, states and trade unions.
12. The Mines Act 1952 Draft amendments are under examination by the centre, states and trade unions.
13. The contract labour The new government has decided not to pursue with the earlier proposal to
(Regulation) Act 1970 exempt certain activities like sweeping, cleaning, courier service, security,
export oriented units, Special Economic Zones, information technology etc.
from the purview of the Act. Amendments, if any, would now require fresh
approval by the centre, states and trade unions.

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 Labour Regulations, Investment, Employment and Poverty

Any strategy to improve the condition of the poor hinges on improving the
labour market, since income from work and quality of work are the main
determinants of the living conditions of the poor (World Bank 1996). India
is endowed with an abundant and technologically skilled labour force, and is
ranked first for both these criteria in the Global Competitiveness Report
(GCR). However, India’s labour market has low degree of labour market
flexibility in terms of deployment of human resources, work practices, and
wages. Various studies (Anant 2005, Debroy 1997; Fallon and Lucas 1993;
ILO 1999; OECD 1995; Surendra Nath 2005) suggest that such rigidities
constrain the effective redeployment of labour during the process of
industrial restructuring and changes in demand and technology, and act as a
disincentive for employment creation. An industry survey and discussions
with industrialists also identify labour regulation as the second highest
obstacle to the operation and growth of business (World Bank 2000).

Average labour intensity in unregistered manufacturing increased from an

average of 59.3 per cent over 1988-9 to 1990-1 to 62.4 per cent over 1993-4
to 1995-6 (World Bank 1998). Hence, had labour markets functioned more
flexibly, pensions been more mobile, and legislation been more conducive,
the organized sector might have occupied a more prominent share of the
work force. Formal sector employees might have grown more rapidly and
been more mobile, and the benefits of more formal employment shared
across a larger number of employees, including women, who have been
unable to participate fully in the labour market.

Rigid labour laws and high protection of labour encouraged increasingly

capital-intensive industries (Gangopadhyay and Wadhwa 1998). Labour
legislation and public sector employment gave employment protection and
relatively high wages to the few employed in the formal sector, which
constitutes only 8 per cent of total labour force. In addition, labour mobility
across sectors was hindered by the pension system in the formal sector,
pensions are not mobile across jobs and many years of work are needed
before an employee becomes eligible for a pension.

Labour regulation has been identified by many researchers (Stern 2001 and
Sachs et al. 1999) as an important factor influencing the investment climate
in India. As Besley and Burgress (2004) show, policy choices of the Indian
state governments as regards labour legislation strongly affected

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manufacturing performance. Manufacturing has played a major role for
improving economic growth in the East Asian countries. For example, the
share of manufacturing in GDP in Malaysia improved from only 8% in 1960
to 26% in 1995, whereas that in India increased from 13% to 18% in the
same period. East Asian countries had also experienced sharp reduction of
poverty.

The study by Besley and Burgress (2004) based on state level panel data for
the period 1958-1992exploits two important facts: (a) labour regulation only
applies to the registered manufacturing sector and (b) the Indian constitution
empowers the state governments to amend central legislation. The principal
central legislation is the Industrial Disputes Act of 1947. This Act has been
extensively amended by the state governments since 1950s. Besley and
Burgress (2004) read the text of each amendment and classified these as pro-
worker (+1), neutral (0) and pro-employer (-1).

Besley and Burgress (2004) then show that pro-worker labour reforms are
closely associated with an increase of urban poverty but do not affect rural
poverty. This is due to the fact that labour legislation applies basically to the
registered manufacturing units, which exist primarily in urban areas.
Moreover, they observe that the adverse affects are large. For example, the
state of West Bengal, which is ruled by the communist parties for the last
three decades, had passed large number of pro-worker amendments during
his period. Had it not taken these labour policies, its urban poverty ratio
would have been 11 per cent lower in 1990. These results suggest that
attempts to redress the balance of power between capital and labour can end
up actually hurting the poor in the medium and long term.

Besley and Burgress (2004) further observe that a pro-worker labour

legislation is associated with lower per capita manufacturing output. This is
due to the fact that pro-worker legislation led to less output in registered
manufacturing sector. States with more pro-worker labour regulation tend to
have less investment in the registered manufacturing sector, and larger
informal manufacturing sectors. As organised trade unions are able to extract
more wages and benefits in the registered sectors, capitalists prefer to remain
in the unorganised sectors where labour has no power.

These results on labour regulations are mirrored in the relationship between

urban poverty elasticities and labour regulation. States that had more pro-
worker legislation had been less effective in reducing poverty at a given

9
level of growth. States, which enacted pro-employer labour legislation,
achieved significantly higher growth rates.

Labour Legislation and Reforms

The main rigidities in the labour laws include a very wide scope for
initiating industrial disputes (which can be initiated on the basis of
‘interests’ rather than ‘rights’), long procedures for settlement of industrial
disputes, inflexible provisions relating to change in conditions of service
(instead of being part of the collective bargaining process), and provisions
enabling government interventions in areas such as lay off, retrenchment and
closures.

Mr. Mukesh Ambani, Vice-Chairman of Reliance Industries, India’s largest

private sector company, recently declared in a meeting with World Bank
staff that Reliance could increase its textile and garments business tenfold,
from its current $ 0.5 billion to $ 5 billion- provided labour laws, which he
considered the single biggest barrier to India’s industrial growth, were eased.

The principal legislation covering employment security is the Industrial

Disputes Act (IDA) 1947 (which provides for settlement of disputes in the
case of termination) and the Industrial Employment Act 1946 (which sets
rights and obligations of employees and employers relating to service rules).
Industrial sickness is dealt with under the framework provided by the
Industrial Disputes Act 1947 (and the 1976 Amendment), the Companies Act
1956, and the Sick Industries Companies Act 1985.

The IDA was amended in important ways in 1976 and 1982. Chapter V-B of
the IDA makes it obligatory for firms employing 100 or more workers to
obtain prior official permission for layoff, retrenchment and closure. As
Datta Choudhury (1994) observes, “government permission is seldom
given” due to socio-political reasons.

Framework impedes large-scale industrial restructuring, relocation or exit of

an enterprise without specific approval of the government. In the private
sector, these rigidities are circumvented by the setting up of smaller units,
which are beyond the purview of labour legislation, or the increasing use of
contract labour. Also the implementation of labour laws, in particular labour
welfare laws, results in the ‘Inspector Raj’ syndrome, which affects Small

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Scale Industries (SSIs) disproportionately. For example, SSIs are
constrained by excessive regulatory burdens and disclosure requirements-80
per cent therefore operates without incorporating.

As many as 165 labour legislations exist in India, including 47 Central Acts

(Debroy 1997), and substantial need exists for harmonizing and rationalizing
them. For example, as the Acts have evolved, definitional variations have
developed in concepts such as employee, workman, wages, factory, child
labour and industry. The term ‘wage’ has been defined in 11 different ways
in as many labour laws. Court case laws also differ among different states
causing further confusion.

The greater part of labour legislation is in the Concurrent List of the Seventh
Schedule of Article 246 of the Indian Constitution, giving both Central and
state governments the power to legislate for items that are on this list. State-
level amendments were actively introduced, for example by the state
governments of West Bengal, Andhra Pradesh, Maharashtra, Gujarat, and
Madhya Pradesh.

Special provisions have been incorporated by states in the Trade Unions Act
1926 (by Gujarat, Madhya Pradesh, Maharashtra, Orissa, Uttar Pradesh, and
West Bengal) and Industrial Disputes Act 1947 (by Andhra Pradesh,
Karnataka, Kerala, Gujarat, Maharashtra, Madhya Pradesh, and West
Bengal) (Venkata Ratnam 1999). Wage protection under the Minimum
Wages Act 1948 covers 79 job categories in Orissa, while only 8 in Manipur
(Anant 1998). In addition, the range of minimum wages varies from the
highest in Maharashtra to almost none in Haryana.

Differences among states also arise in the institutional framework and the
industrial relations scenario. However, state governments are required to
refer their amendments to legislations to the Centre for the assent of the
President of the Indian Union. This procedure has been slow, and proposals
submitted by Tamil Nadu and Andhra Pradesh a few years ago, for example,
have still not been processed. To bypass this process, some states have
substituted the term ‘appropriate government’ with ‘state government’ in the
Industrial Disputes Act 1947.

The argument about Chapter V-B of Industrial Disputes Act is indeed a valid
one. Labour markets become artificially rigid; employers adopt artificially
high capital intensity and circumvent the legislation. The provisions of the

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Industrial Disputes Act make recourse to the government and thus to Labour
Commissioners, mandatory. Given the other provisions of labour
legislation, the requirement of governmental permission can be dispensed
with, without adversely affecting the interest of labour. Unless this rigidity in
labour markets is removed, higher growth will not necessarily translate into
greater employment. What is involved is not primarily an exit policy for
labour. The statute makes it impossible for companies to exit. Competition
cannot function without free exit.

To muddy matters further, there are at least three definitions of organised,

although they do largely overlap. First, there is the standard definition
through labour laws, that is, organised means non-agricultural
establishments that employ 10 or more persons and use power or employ 20
or more persons and don’t use power. Second, there is a small-scale sector
definition, through threshold levels of investment in plant and machinery.
Third, under the Income Tax Act, there is a threshold level of turnover below
which an enterprise does not pay excise duties.

In generating consensus on reforms, labour market reforms have been

subject to intensive debate by trade unions, political parties and
professionals. Indeed, they have figured on every reform agenda since 1991,
irrespective of the political parties in power. As only a small percentage (8
per cent) of the total workforce of the country is employed in the organised
sector, the “hire and fire” policy, for practical purpose, operates for 92 per
cent of the labour force, which is unorganised. While harmonisation and
unification of labour laws are not controversial, blood pressures begin to rise
the moment one talks about hire and fire policy (Khan 2005).

During a meeting on labour reforms with industrialists, chambers of

commerce and labour researchers on the 29th March 2005, Union Minister
of Labour and Employment Mr. K. Chandrasekhar Rao (2005a) clearly
indicated that “Labour is a very important, if not the most important facto of
production, and he more we look after it and its welfare, the more productive
it can become. In this context, I find that he manoeuvrability which we have
in making our labour laws less rigid, is constrained by one very important
consideration, viz. that we do not, as yet, have an adequate safety net in
place for our work force in the country. Another issue, which we need to
seriously ponder over, is that if labour laws and regulations have to be made
more flexible, there is a need for employers also to take upon themselves
corresponding greater responsibility in terms of financial compensation to

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the workers, who might face greater uncertainty or be otherwise adversely
affected”.

The researchers’ standard argument is that inflexible labour laws make the
organised labour market rigid, deter employment creation and increase
capital intensity, despite India’s advantage in terms of labour cost.
Simultaneously, necessary protection and adequate social security and
welfare schemes donot exist for the unorganised sector or for the
unemployed.

The NCMP (National Common Minimum Programme) states, “The UPA

rejects the idea of automatic hire and fire. It recognizes that some changes in
labour laws may be required but such changes must fully protect the
interests of workers and families and must take place after full consultation
with trade unions. The UPA will pursue a dialogue with industry and trade
unions on this issue before coming up with specific proposals. However,
labour laws other than the Industrial Disputes Act (IDA) that create an
Inspector Raj will be re-examined and procedures harmonized and
streamlined.”

Accordingly the Minister for Labour had a series of discussions with all
stakeholders in the last week of March 2005. Everyone who is against
reforming labour markets, particularly the trade unions and the communist
and other left parties criticized the government for trying to introduce hire
and fire. On the other hand, industrialists in general were in favour of
reforming labour markets criticized the government for not introducing hire
and fire.

The recently published Economic Freedom of the World 2004 has graded
countries in terms of labour market flexibility. Scores are out of 10 and the
higher, the better. India gets an overall score of 6.3. But for flexibility in
hiring and firing, the Indian score is 2.0.

The then Finance Minister Yashwant Sinha’s 2001-02 budget promised a

new Industrial Relations Bill, so that the threshold for permissions would
increase from 100 workers to 1000 workers. And the severance
compensation would increase from 15 days to 45 days for every completed
year of service. Meanwhile, the Second National Commission on Labour
submitted its Report in 2002, which did not agree with proposed changes.
Therefore, Chapter V-B continues and so does the debate. But in the

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obsession with Chapter V-B, or other elements of IDA, reformers tend to
ignore other laws that make labour markets just as rigid. Since political
economy type resistance is less to these changes, those could have been
implemented. In searching for an elusive consensus on IDA, government
ignored the consensus that already exists in these areas.

If some of these changes were implemented, labour markets would have

become more flexible, the segmentation between organised and unorganised
labour markets would have broken down and India would have been able to
tap the comparative advantage of an abundant supply of skilled and
unskilled labour.

In his respect, one should mention the main recommendations of the Second
National Commission on Labour, which submitted a Report in 2002. The
first National Labour Commission was set up in 1929. There are 2700 pages
in this Report. Major recommendations include the following:

Existing set of labour laws should be broadly grouped into four or five
groups of laws pertaining to Industrial Relations, Wages, Social security,
Safety, and Welfare and working conditions.

As regards Chapter VB (Special Provisions relating to lay-off, retrenchment

and closure in the establishments employing not less than 100 workmen) of
the Industrial Disputes Act, the Commission has felt that, in the new
circumstances of global competition, it may not be possible for some
enterprises to continue and meet the economic consequences of competition.
In such cases, one cannot compel non-viable undertakings to continue to
bear the financial burden for keeping the concern alive. They should,
therefore, have the option to close down. However, adequate compensation
needs to be given to the workers.

Prior permission is not necessary in respect of lay-off and retrenchment in an

establishment of any employment size. Workers will however be entitled to
two months notice or notice pay in lieu of notice in the case of retrenchment.

In the case of establishment employing 300 or more workers where lay-off

exceeds a period of one month, such establishments should be required to
obtain post-facto approval of the appropriate government. The provisions of
Chapter VB pertaining to permission for closure should be made applicable
to all the establishments to protect the interest of workers.

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Under the socio-political pressure and the mandate of the National Common
Minimum Programme, the Labour Ministry is not interested in amending the
provisions of IDA. The Labour Ministry received proposals for amendments
from some states such as Andhra Pradesh, Gujarat, Madhya Pradesh,
Rajasthan, Maharashtra and Jharkhand. While the Ministry agreed with a
few proposals for amending the Gujarat special Economic Zone Ordinance
2003, the Industrial Disputes (Gujarat Amendment) Ordinance 2003, the
Andhra Pradesh special Enclaves (Services Conditions and Disputes
Resolution) Ordinance 2003 and the Industrial Disputes (Maharashtra
Amendment) Bill 2003 with some modifications, it expressed reservations
about the rest.

Role of Trade Unions

Trade unions play an important role in labour reforms. Today practically

every political party has its trade union wing. Given the flexibility of the
Indian party structure, the number of trade union federations and their
respective influence varies considerably over time. In 1989, the Labour
Ministry listed eight major trade unions federations viz. Indian National
Trade Union Congress (INTUC), All India Trade Union Congress (AITUC),
Centre of Indian Trade Unions (CITU), Hind Mazdoor Sabha (HMS),
Bharatiya Mazdoor Sabha (BMS), Hind Mazdoor Kamgar Party (HMKP),
United Trade Union Congress (UTUC), and National Labour Organisation
(NLO) besides a number of small independent unions. Due to party
affiliations, politics at national and regional levels finds its reflection in trade
union activity.

Although trade unions represent only the organised labour, which constitutes
hardly 8 to 9 per cent of total labour force, they are very vocal, and the
vulnerability of Indian politics to capture by vested interests is great. To
quote an observation made by a joint study on “Economic Restructuring in
East Asia and India Perspectives on Policy Reform” by the Indira Gandhi
Institute of Development Research (IGIDR), India and the Institute of South-
East Asian Studies, Singapore: “Democratic regimes in South Asia are
vulnerable to capture by vested interests. The less dependent the
development process is on state involvement, the less damage these interests
can do” (Pradeep Agarwal et. al 1995).

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Trade unions wield a reinforced political power. Besides casting their votes
in elections, they influence politics and government policies between
elections and act as a strong pressure group through strikes and
demonstrations. As neither political parties nor union leaders are stake
holders in the industry in real sense of the term, the focus of their
interventions in labour reforms is their limited private interest which clashes
with interests of consumers and unemployed.

Concluding Remarks

While China drastically reformed its previous employment relations pushing

the workers to a more insecure regime and transferring substantial
bargaining power to the employer within a decade of reforms, India virtually
did nothing to change its labour laws even after 14 years of reforms (Saha
2005). In the absence of labour reform, the only avenue of downsizing was
voluntary retirement schemes (VRS), pursued both by the private and the
public sector, which resulted in high costs and long adjustment period. The
methods of recruitment were also predominantly contractual, and where that
was not possible, firms resorted to outsourcing. This led to dualism within
firms, slower growth of permanent employment and abnormally high share
(82 per cent) of unorganised employment in total labour force.

China made significant reforms in labour markets within a decade of

initiating reforms. As for the labour relations within an enterprise, the reform
went deeper by transferring the bargaining power mostly in favour of the
employer, while the enterprise union and the state machinery are expected to
protect the workers’ interest under the general guidelines for labour welfare
and protection. The employer has freedom in hire and fire and to make his
employees work according to a mutually agreed contract. This particular
provision of allowing firm-specific contracts to govern the employment
relation has reduced the state’s role drastically. In practice, things can go
wrong, if the state agencies do not play their roles properly and workers are
forced to accept unfair terms.

China’s long history of extreme employment security might have compelled

them to reverse almost all the previous provisions. In the absence of
domestic private entrepreneurs, liberalised labour market was perhaps
necessary to attract foreign investors (Henley 2004). But it has made
redistribution of surplus within the Chinese enterprises biased in favour of
employers (Ostrovisky 2003).

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China was successful in creating a new labour market, which enhanced
mobility of labour. Although this led to mass layoffs and open
unemployment, sustained high industrial growth especially in the coastal
regions helped their redeployment. In spite of harsh working conditions led
by competition, workers seemed to have benefited from wage growth,
significant new job creation and opportunities for self-employment (Saha
2005). In sum, China’s manufacturing sector experienced a sort of industrial
revolution, which reduced people’s dependency on agriculture.

Despite various studies done in India indicating such benefits from

liberalisation of labour markets, Indian labour laws still remain highly
restrictive due to political economy constraints. India has not achieved
remarkable improvement in manufacturing growth. Although industrial
output has grown at a faster rate than before, employment growth has
decelerated in the recent years. This suggests that labour reforms are
necessary to allow for larger investments in manufacturing. Manufacturing
growth is crucial for the absorption of semi-skilled and unskilled workers
and to reduce the dependency of labour on agriculture, which employs 58%
of labour force but contributes only 20% of GDP.

The different courses of reforms taken by India and China can be explained
partly by their policy history, political institutions and industrial relations
framework. In the case of China, the history of extreme employment
security compelled a complete reversal of labour policy to attract foreign
capital, which was very important, as there was very little entrepreneur class
within the country. Political institutions and one trade union policy further
restricted the Chinese workers from conducting true collective bargaining.
Hence, they suffered on the redistribution front (Chen et.al.1996, Kanbur
and Zhang 2005).

Currently the median age of the Indian working population is, at 24.3 years,
one of the lowest among the large nations. India is likely to add 83 million to
its working age population of 675 million by 2010 according to the estimates
by the United Nations. However, existing restrictive labour laws have been a
deterrent to employers forcing them to prefer capital-intensive options for
production, even if they would have otherwise preferred labour-intensive
options due to low wages in India (Ahya and Sheth 2005). Despite various
well-researched studies, which recommended initiating a structural approach
to labour market reforms, the government has avoided confronting the issue

17
of unemployment head on (Aya and Sheth 2004). Politicians’ efforts to
protect labour in the public sector add to inflexibility in the labour market.

Only 8% of Indian labour force are employed in the organised sector and
almost 60% of manufacturing output comes from unregistered companies. A
large number of factories remain outside any regulations. Although certain
industries took the advantage and grew in terms of size, profit, skill and
technology, most others existed for bare survival. A prolonged regime of
import substitution damaged their business instincts. While the organized
sector provided too much of job-security for too long, the unorganised sector
provided too little to too many. Unfortunately, political parties preferred
retaining this dualism in order to preserve their vote banks in organised
labour force. Consequently, good research works and policy prescriptions on
labour reforms remained on paper leading to poor uptake of research by the
policy makers.

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