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Why do we need Labour Law Reforms?

DEEPAK SETH , Last updated: 26 August 2020  


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.

Labour Law Reforms

Issues faced by labours in India

1. Huge Informal Sector
2. Surplus Labour Force
3. Unskilled Labour
4. Lack of Absorption of Skilled Labour
5. Imperfections and Work Culture
6. Militant Unionism
7. Unemployment
8. Lack of Labour Reforms

Need for labour protection laws in India

• Labor protection legislation is one of the basic features of welfare state and aims at providing social justice.

• The main aim of such laws should be to create more, safer, and rewarding jobs for the labour.

• This includes standards on minimum wages, working conditions, overtime controls, right against unjustified retrenchment, strengthening of Labor unions, Right of worker to compensation in case of accident at work place, post-retirement benefits, Personal progress, skill development, Social security and Dignified and respectful job etc.

Reason for Labour reforms

• Labour law reform is necessary in India-jobs in the manufacturing sector have reduced by 3.5 million between 2011-12 to 2017-18, and economic growth was at a 26-quarter low of 4.5% in the July-September 2019 quarter.

• Currently, 44 labour-related laws enacted by the central government deal with wages, social security, labour welfare, occupational safety and health, and industrial relations. Labour is on the concurrent list, giving both central and state governments the power to legislate, resulting in more than 100 state labour laws.

• Most companies find it impossible to follow this myriad of laws and find ways to subvert them.
Restrictive Labour Laws In India

• 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.

• 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.

Industrial Relations Code proposes

• Fixed-term work
• Reduction in permanent jobs
• Clearer terms for short-term workers
• Diluting worker rights
• Giving states more authority on lay-offs
• Reskilling fund

Restructure The Existing Labour Law Framework In India

The Ministry of Labour and Employment (“Ministry”) proposed the following four codes to consolidate and restructure the existing labour law framework in India:

• Code on Wages, 2019 (“Wage Code”) and corresponding rules
• Occupational Safety, Health and Working Conditions Code, 2019 (“OSH Code”)
• The Industrial Relations Code, 2019 (“IR Code”)
• The Code on Social Security, 2019 (“Social Security Code”)


• Shram Suvidha Portal
• Common Registration
• State Integration
• Start Up India
• Social Security Schemes
• Pradhan Mantri Shram Yogi Maan-dhan (PM-SYM)
• Life Insurance Corporation of India (LIC)


Some Recent Labour Market Outcomes

• Slow transfer of workers from agriculture to non-agriculture

• Increasing informalisation and contractualisation and shrinkage in collective bargaining; even in formal sector, majority of workers are of informal/flexible categories

• Increasing labour market inequalities - widening wage differentials between groups and sectors - widening gap between per worker earnings in agriculture and non-agriculture - Increasing share of capital and declining share of wages

• Modern sector also shows striking inequality, with significant increase in contract and other flexible categories of workers - rising inequality in remuneration of production and managerial workers: ratio constant at 2 until late 1990s, but sharply rose thereafter and now stands around 4.5.

• Since mid-2000s, diversification of agriculture to non-agriculture has accelerated, and informalisation seems to have halted.

• Significant increase in real wages and labour productivity and decline in absolute poverty since 2000s.

Government Schemes Related To Labour Reforms In India

• Apprentice Protshan Yojana and the Effective Implementation of revamped Rashtriya Swasthaya Bima Yojana (RSBY) for labour in the unorganized sector were the important steps in this direction.

• Shramev Jayate : Skill development of youth would be created through initiative under "Shramev Jayate". It is one of the most important elements of

• The “Make in India” vision and aims to create an opportunity for India to meet the global requirement of skilled labour workforce in the year ahead.

Some suggestions regarding labour reforms are:

1. To give more economic independence to the State Governments and promote federalism,
2. A uniform definition of terms like "industry" and "worker" is necessary across statutes.
3. Reduction/ reforms in dispute settlement mechanisms between labour and employers.
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 government needs to bring more investor-friendly labour laws at the national level and reforms such as deregulating labour laws.

• Governments should maintain balance between workers" rights and industrial growth by legislation.


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