1. Need for Labour Reforms in India
Background- History
INDUSTRIAL RELATIONS
Industrial relations are a bonding between the Employer and the Employee to improve their
mutual relationship, interaction and maintaining harmony and peace in the work place. Many
a times Industrial Relations add many other relations which are chain of previous relations.
The primary objective of the Industrial relations is to bring about a positive and healthy
relationship between the employee and the employer, the two partners in the Industry. In the
words of "The state of Industrial relations in the country is intimately connected with the
forms of its political government and the objectives of an Industrial Organization may change
from economic to political ends"
LABOUR LAWS IN INDIA: AN HISTORICAL VIEW
The History of Indian Labour Laws is naturally interwoven with the history of British
Colonialism. The industrial/labour legislations enacted by the British were framed in light of
the Industrial development in the United Kingdom. The laws were primarily intended to
protect the interests of the British employers and Industrialist. The welfare or the interests of
the British Political Economy were of the paramount importance while drafting those laws.
The earliest Indian statute that regulated the relationship between the Employees and
Employer was the e Trade Dispute Act, 1929 (Act 7 of 1929). Provisions were made in this
Act for restraining the rights of strike and lock out but no machinery was provided to take
care of disputes. This act was hugely biased in favour of the British Employers. The original
legislation underwent substantial modifications after the demise of British Colonialism as
there was a huge demand of the clear and unambiguous partnership of the Labour and Capital
from the Independent India. The content of this partnership was agreed on a tripartite
agreement in December 1947, the year of India's Independence. The main agreements were
that the labour would be given the fair wages and fair working conditions and in return the
capital or the employer will receive the full commitment and co-operation in terms of high
productivity and no interruption for the capital to maximize the profits. Ultimately the
Industrial Relations Act was put into force repealing the Indian Act Trade of 1929.This act is

2. in the Indian statute till date. The Central and State Governments enacted several laws for
various categories of Labour and classifications of problems ever since independence.
REFORMS – ARE THEY THE NEED OF THE HOUR?
There is a strong call from India's strongest and influential quarters for the need of the labour
reforms in India. The argument provided for the reforms is that many of the labour laws are
quite irrelevant and do not reflect the current requirements and needs of the Industry. There
are several reasons for this. Under the Constitution of India, Labour is a subject in the
concurrent list where both the Central and State Governments are competent to enact
legislations. As a result, a large number of labour laws have been enacted catering to different
aspects of labour namely, occupational health, safety, employment, training of apprentices,
fixation, review and revision of minimum wages, mode of payment of wages, payment of
compensation to workmen who suffer injuries as a result of accidents or causing death or
disablement, bonded labour, contract labour, women labour and child labour, resolution and
adjudication of industrial disputes, provision of social security such as provident fund,
employees’ state insurance, gratuity, provision for payment of bonus, regulating the working
conditions of certain specific categories of workmen such as plantation labour, beedi workers
etc. Therefore, there are 44 labour legislations at central level and almost four times of them
at State level. As a result, it created a lot of redundancy and loopholes in the legal system
which paves way to exploitation of labour. Implementation of this complex system of laws
has also become a challenge to limited number of Labour Enforcement Officers in India.
India has emerged as an outsourcing hub in the present day world. But did that benefit
Indian Labour? No. Because of the predominantly heavy handed labour regulations (also
called as Inspector Raj) with exploitable gaps, the MNCs and domestic organizations have
resorted to alternate ways i.e. employing contract labours at less than half the payroll of a
permanent employee. In the subsequent pages we give staggering examples to illustrate the
urgency for the reforms.
India has 94% of its workforce in its unorganized sector. With a second highest
workforce of 487 million workers (next to China), Indian GDP is grossly under generated.
The reason is that this 94% of unorganized workforce accounts for 57% of GDP while the
remaining 43% comes from the meagre 6%. This huge workforce getting trapped in
unorganized sector is largely attributed to our stringent labour laws.

3. Having illustrated couple of several reasons that demand the need for reforms we set
out with the various implications, challenges and recommendations necessary for the present
day system backed by relevant data and analysis.
Impact of Labour Reforms Implementation: The Labour Reforms if not implemented
soon, it would take a gross hit on India as an investment destination. Also it would incur huge
loss to the economy due to undervalued GDP production.
The following is the data that reveals growing labour unrest in India.
Workers involved in strikes and lockouts
3000000
2500000
2000000
1500000
1000000
500000
0
2002 2003 2004 2005
Strikes 900386 1010976 1903054 2722784
Lockoouts 179048 804969 169167 190817
Two examples that took the extreme turn in recent past are 1. Maruti lockout in Gurgaon 2.
Regency Ceramics plant lockout in Yanam, Andhra Pradesh. The two cases have taken lives
of Management people. Such a kind of extreme unrest can only be attributed to archaic
Labour laws existent in India. That gives the dire need for reforms.
The other reason we quoted was economic loss. The data shows that 94% of Labour force in
India is in unorganized sector and that shows how grossly Indian GDP is undervalued. This is
so because the income of these people in workforce is very much less than the permanent
workforce for the same output. The improper regulations coupled with complexity have led to
misuse of vast Labour of India. The data below reveals the contrasting rankings and the need
for reforms.
Compensation of employees > % of expense 9.88% [126th of 135]
Economic activity > Both sexes aged 10-14 12.07 [61st of 89]
Economic activity > Men aged 65 plus 52.67 [54th of 162]
Female economic activity growth 4% [73rd of 156]
Firing cost > weeks of wages 55.9 weeks of wages [58th of 164]
force with tertiary education > % of total 4% [9th of 52]
force, total 43,50,35,700 [2nd of 184]
Labor force > By occupation
agriculture 60%, industry 17%, services 23%
Regulation 51 [72nd of 123]
Regulation > Employment Conditions 75 [65th of 123]

4. Rigidity of employment index 41 [73rd of 166]
Total work time > Males 391 minutes [20th of 29]
Unemployment, female > % of female labor force 5.30% [61st of 95]
Unemployment, male > % of male labor force 4.90% [62nd of 95]
Unemployment, total > % of total labor force 5% [59th of 101]
Work time > Market-oriented 61% [6th of 29]
Workers' remittances and compensation of employees, paid > US$ 1,008,000,000 $ [31st of 149]
Workers' remittances, receipts > BoP, current US$ 21,595,100,000 BoP $ [1st of 115]
Fundamental Challenges in framing Labour Laws in India:
The Indian Labour is a very diverse workforce with different requirements for each cognate
set. Each stakeholder i.e. Labour, Employer, Central Government and State Governments
have different views about the reforms to be brought in. Their interests are often conflicting
and the policy makers have the challenge of balancing that when enacting reforms in Labour
laws. The long term effects are to be considered while doing this. We briefly give the view
points of Trade Unions, Employers and Governments compiled in a recent Government
report to illustrate few of the conflicting challenges that arise for the policy makers.
Contract Labour: One of the main reasons for today’s labour upsurge in India is the concept
of contract labour. Trade Unions suggest that this concept itself should be removed. But
Employers suggest that employing the entire workforce is not possible in the advent dynamic
business cycles. Another reason that is attributed is the stringent hiring and firing process
defined in Industry Disputes Act. It makes it mandatory for the organization to seek
Government permission before removing an employee. This highly regulated firing process
unlike in U.S. would motivate Employers and MNCs to hire contract labour.
Balancing this has become a challenge to Government. The reasons are given the challenges
of huge workforce in unorganized sector, easing the IDA Act would lead to employment in
organized sector is a mere speculation. Easing of firing rules would also have a detrimental
effect on collective bargaining power of employees as it makes easier for employers to fire
the employees and harass them in the event of encouraging the union formations. But on the
other side, having a strong labour policy would make the nation a more socialist country.
This would be detrimental to Investment and Industry growth rate.
This has become a fundamental menace in the present day economy. We illustrate the blatant
exploitation from a live example covered by Newyork Times article here

5. Mr. Manish Sabharwal runs Team Lease, a Bangalore-based agency that has created
thousands of jobs by fielding temporary workers for companies in India that want to expand
their work force while skirting India’s stringent labor laws, which businesses say discourage
the hiring of permanent employees. Many labor leaders and left-leaning politicians accuse
him of running the nation’s largest illegal business. Walk into any of India’s shining new
shopping malls that sell expensive brands, like Gucci and Satya Paul, and many of the store
clerks, janitors and security guards will be on the payrolls of outsourcing companies, not
those of the owners of the mall or stores in it. Team lease boasts many clients like Whirlpool,
Videocon, Maruti Suzuki, Mitsubushi etc Their only argument is it’s better to have some job
than no job at all.
The practice highlights a fundamental tension between India’s socialist past and a new
freewheeling, private sector that is increasingly powering the economy while chafing at what
many companies say are laws so protective of workers that they blunt hiring and stifle
growth.
So contract labour has become a thriving business in India and it deserves urgent addressal.
Equal Benefits for Contract and Permanent labour: Trade Unions demand for this.
Employers oppose this. The argument being provided is that the selection process and skill
set of employers greatly varies between Contract and Permanent Labour. The Government
has to address this because the grossly unequal payrolls are motivating organizations to
follow Contract hiring process and that’s the reason for recent Labour unrest.
Collective Bargaining: Trade Unions have condemned the recent declaration of Strikes as
illegal by Supreme Court. They are seeking a provision by which the strikes cannot be
declared illegal in the event that certain percentage of workforce opts for it. Investments can
take a hit if there are frequent strikes as it would halt the production and Employers have to
operate in an environment of constant insecurity. Governments are recommending non
association of trade unions with political parties and looking for a smoother mechanism for
dispute resolving other than strikes.
Uniform Definitions and Consolidation of Laws: The current Constitutional framework
puts Labour as a Concurrent Subject and has 45 laws enacted at Central level and over four
times of them at state level. These were created to cater to various cognate levels of
workforce and their diverse needs. But this has created widespread confusion and
implementation ambiguities. For ex: Minimum Wages in Andhra Pradesh for a Plougher is
Rs 126 per day. In Haryana, it is Rs 216 for a skilled agricultural labour. The way labourers

6. are classified in Andhra Pradesh are totally different from the way it is in Haryana. The
wages are also different. Therefore, a uniform definition is desired by Trade Unions. But
Employers and Government are of the view that uniform definitions are impossible as skill
sets varies according to the jobs. But everyone agree to the fact it is time for consolidation of
all the existing laws and provide equitable justice to every stakeholder.
Enforcement of Labour Laws: the enforcement of Labour laws is always a major problem
in India. For ex: the field survey done in state of Karnataka about the minimum wage
implementation at a work place shows the following data.
Though the contract workers are supposed to get above Rs 4000 as per law, the reality is a
gross violation. Not even 1.1% is getting that wage. The State Governments are demanding
for more funds for creation of stronger Labour Enforcement Departments and imposing
greater penalties for violation. This would add additional burden on Central Government.
Payment through Cheques or Bank Accounts: All the stakeholders agree that this has to be
implemented. But employers state that RBI should bring in a change in policy to allow
existence of zero balance accounts.
Social Security Net: India doesn’t have a social security net for Unemployed workforce.
Though we have it for old and disabled, we don’t have security for job seekers. This is one of
the major bottlenecks for easing the IDA Act. If workers have a minimum social cover

7. during retrenchment, they would not panic till they find another job. Without a social net and
easing of firing policies would make lives miserable for workers.
Data from World bank shows the coverage of India when compared to other countries like
Brazil, Mexico and Russia.
ASPIRE: The 2011 Atlas of Social Protection
BRA BRA IDN IND MEX MEX RUS
Coverage (%)
(2006) (2009) (2009) (2005) (2008) (2010) (2007)
Social Protection 63.11 58.16 69.00 44.08 78.21 86.32 73.24
Social Insurance 9.21 11.10 14.82 4.03 59.44 75.71 45.56
Old Age contributory pensions 9.21 11.10 - - 2.13 2.71 42.53
Social Security/Health Insurance - - 14.82 4.03 59.25 75.57 5.07
Labor Market programs:
unemployment benefits and 5.75 6.74 - 1.75 - - -
ALMP
Social Safety Nets 55.44 47.91 65.81 40.10 54.75 57.42 46.79
Cash Transfer programs/Last resort
- - - - 9.61 13.55 0.78
program
Social Pensions 2.27 1.47 - - 6.16 8.71 3.72
Other cash transfers programs:
- - - - - - 39.45
family, child or disability allowances
Conditional Cash Transfer program 51.89 47.05 - - 48.37 48.64 -
In-kind food programs - - - 39.00 - - -
School Feeding - - - - - - -
Public Works & Food for work - - - 3.04 - 0.37 -
Other social assistance programs 5.07 - 65.81 - 6.04 5.68 12.37
Private transfers 4.44 2.95 - - 19.89 17.83 -
Please note the Conditional cash transfer program is totally non-existent in India.
Recommendations
Consolidation and Simplification of Labour Laws and Definitions: There are few sets of
laws which can be replaced by one law and implemented more effectively. For ex:
Laws governing Wages
The Equal Remuneration Act, 1976
The Minimum Wages Act, 1948
The Payment of Bonus Act, 1965

8. The Payment of Wages Act, 1936
The above four Acts may be consolidated into one Act i.e. Payment of Wages Act.
Simplification and rationalization of labour laws will require examination of labour laws
individually. In the process provisions which have outlived their existence may be deleted. If
necessary, certain laws may be considered for being repealed. A consensus will have to
emerge from the stakeholders regarding this. Similarly, few common definitions can be
provided for things like classification of work force etc.
Urgent need for changes in Contract Labour Act: Prof Kaushik Basu stated the need for
flexible employment contracts. Some workers may sign a contract for a high wage but one
that requires them to quit at short notice; others may seek the opposite. This would allow
firms to employ different kinds of labour depending on the volatility of the market they
operated in. This would be an equitable idea for both Unions and Employers. Also the wage
difference between contract and temporary should have a ceiling.
Effective Enforcement of Existing Laws: The need of the hour is the emphasis on how the
implementation of labours could possibly be improved. Over 13626 cases are currently
pending in the central tribunal (Source: Business Line). Steps to make the grievance redressal
process more effective and simultaneously more efficient so that the labours get the
maximum possible benefit of its purpose. Most importantly, ways to improve collective
bargaining and ways to improve solving disputes. Holding Lok Adalats should also be
encouraged to enable faster disposal of cases. A database should be built on all aspects
relating to industrial relations and the officers of the Labour Departments should have access
to such database through computer connectivity. Codification and simplification of Labour
Laws it is also suggested for creating online single window system for making compliance as
user friendly, simple and for bringing transparency. Employers can seek the registration,
license etc. online and can also file returns etc. online.
Creation of an All India Service for labour administration to provide professional experts in
the field of labour administration, autonomous bodies and labour adjudications could help.
Most of the labour laws have lost their efficacy because of very meagre penalties. There is a
viewpoint that penalties should be graded depending on the seriousness of offence, the
number of times the offence has been committed and the capacity to pay. Often organizations
choose to violate than implement because the latter is more costly.

9. Indexing of Benefits and Penalties: Instead of amending the Acts for wages, penalties etc
periodically by the Government, Indexing can be done by evaluating a formula that is
connected to Inflation. As a result, the laws need not be reviewed by the Government and
employers need not wait till they are enacted. Employees can easily benefit and it would lead
sustainable life styles even though laws are archaic. For ex: the gratuity payment was revised
from Rs 3.5Lakh to Rs10Lakh in 2009. Again the policy makers have to sit on it and bring in
amendments through a rigorous process which would take a lot of time. Indexing would help
overcome the problem.
Digitization of Employment Exchanges and Easing of Regulatory Compliances: The
huge unorganized sector if moved to Organized sector would increase Indian GDP greatly.
For that to happen, mandatory registration and tracking of Labour force is necessary.
Provisions of Social Security for the unemployed registered at the exchanges should be
provided in long run. Also the Regulatory compliances for employers should be transparent
and easy to follow. A clear policy would always motivate better investment.
Conclusion: Indian Labour Laws need many reforms failing which would lead to a great economic
and social loss to the country. Economic loss occurs because of labour unrests and lesser GDP
output. Social loss occurs because of deteriorating life styles due to raising inflation and stagnant
wages, increasing insecurity among workers and management. Given the complexity in the legal
system that evolved in the past 50 years, there is an urgent for consolidation and better
implementation for the holistic benefit of the country.
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