7 PM | Untangling labour laws | 25th July, 2019

Context: labour laws in India and its reforms

  • Labor reforms essentially mean taking steps in increasing production, productivity, and employment opportunities in the economy in such a manner that the interests of the workers are not compromised.
  • Essen­tially, it means skill development, retraining, redeployment, updating knowledge base of workers-teachers, promotion of leadership qualities, etc. Labor reforms also include labor law reforms.
  • Labor laws are con­cerned with the trade union rights of the work­ers, industrial relations and job security and policies relating to wages, bonus and other in­centive scheme

 Need for labor reforms in India:

  • Segmented labor market:Caste and other forms of social discrimination have a long tradition in India, and these traditions have interacted with changing economic conditions and capitalist conditions to generate peculiar forms of labor market in India like wage differences between different castes and different genders.
  • Pattern of labor growth:in India labor force growth is unbalanced. about half of workers engaged in agriculture, contributing to just 13% in GDP; 13% employed in manufacturing and contributes to 16% of GDP; services employ 27%, but contributes close to 60% of GDP
  • Informal sector:More than 90% of the workforce in India is working as informal labor. These workers, who are without any written contract, social security benefit and security of tenure but still contributes 50% of the national income
  • Modern inequalities: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
  • Contemporary times:Most of the labor laws were enacted 40-70 years back, to address the then needs of regulating the manufacturing sector. Today, service sector has taken the lead with 55% share in the GDP.
  • Labor Laws need to be reoriented to address the emerging needs of the service sector and the new technology intensive manufacturing sector. Labor laws need to be reviewed from time to time to bring them in tune with the changing needs of the economy, such as higher levels of productivity, competitiveness and investment promotion
  • Ease of doing business (EoDB):most of the inspection done through manually in India. While it is important to make some of the inspections manually, a road map of digital inspection should be instituted for better transparency. By promoting digital inspection india can improve its ranking of EoDB.

Labor reforms taken by central government:

  • Codification of laws: In line with recommendations of Second National Commission on Labor, the Ministry of Labor has taken steps for formulating of four Labor Codes on
    • Wages;
    • Industrial Relations;
    • Social Security & Welfare; and
    • Occupational Safety, Health and Working Conditions

By amalgamating, simplifying, and rationalizing the relevant provisions of the existing Central Labor Laws.

  • Passage of Bills:the government of India passed the bills of Labor code on Wages and code on Occupational safety Health and working conditions. These codes will provide single registration, single license, and single return for establishments and also executing multiple projects.
  • Minimum national wage:government of India is promoting country wide minimum national wage so that employee will not get wages less than prescribed limit. And at the same time government addressed the fears of state governments by allowing them to fix separate national minimum wages for different states
  • Shram suvidha portal:The Ministry of Labor & Employment has developed a unified Web Portal ‘Shram Suvidha Portal’, to bring transparency and accountability in enforcement of labor laws and ease complexity of compliance.

Labor reforms taken by states:

Madhya Pradesh:

  • Companies in Madhya Pradesh that employ up to 300 people will be allowed to retrench workers or shut shop without government approval (the current provision is for those employing up to 100 workers.)
  • Employers will have to give a higher compensation package and workers will get a three months’ notice and at least three months’ salary in the event of retrenchment.
  • The process for registration and grant of licenses has been expedited under several legislation, example under the Contract Labor Act, Building and Other Construction Workers Act, and Motor Transport Workers Act. If an application is not disposed within 30 days it will be deemed registered or approved license.


  • The government has proposed an overtime of 115 hours from the present 75 hours for workers in small-scale industrial units.
  • After Factories Act is amended, the units operating without electricity would be considered a factory if they employ 40 workers and units operating with electricity would be treated as a factory if they employ 20 workers. The old limits were 20 and 10 workers respectively. This will exempt the smaller units from the application of the Factories Act.


  • Where any Shops and Commercial Establishment or factory employs 20 or more employees, it shall make the payment of minimum wages through bank account. This amendment will bring transparency in paying minimum wages
  • According to the Building and Other Construction Workers Act, 1996, the definition of worker is limited to the supervisory workers who receive wages of Rs 1600 per month only. By reason thereof many of the supervisors are excluded from the applicability of the Act. Therefore the bill suggests increasing up to three times of the minimum wages for skilled workers

 Further measures:

  • Government should pass the code on Industrial relations as soon as possible, the bill give greater flexibility to hire more workers and attain economies of scale will improve India’s competitiveness in global market.
  • The proposed measures should try to improve the so called business environment by providing flexibility in hiring and firing of workers by raising the threshold limit of state permission and raising somewhat coverage of social security and welfare measures, in addition to improving the labor inspection machinery through technology

Way forward:Thus, in the current scenario, greater flexibility in labor laws must be en­sured so that firms can adjust to changes in demand when necessary. The Government admits that the labor laws focus on job protection and thus inhibit employment. With growth rate picking up, a harmonious balance between efficiency and the quality of employment involving the relationship between management and labor and welfare aspects needs to be maintained.


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