The labour reforms debate: Broadening horizons

  • Blog Post Date 01 June, 2015
  • Perspectives
  • Print Page

Even as the government has indicated that it plans to go slow on labour reforms and build consensus among all stakeholders, trade unions are protesting against “anti-labour” reforms. In this article, Radhicka Kapoor, an economist at ICRIER, emphasises the need to go beyond the narrow agenda of providing flexibility to firms to hire-and-fire and focus on decent work conditions and social security for workers in both organised and unorganised sectors.

As the National Democratic Alliance (NDA) government completes one year in office, it seeks to usher in a major labour reform initiative. The Labour Code on Industrial Relations Bill, 20151, drafted by the central government, has proposed that companies with up to 300 workers can lay off employees without government permission, instead of the current 100. It has also made it tougher to form trade unions and has proposed that at least 10% of workers employed by a firm or a minimum of 100 workers would be required to set up a trade union. At present, seven members can form a union, irrespective of the size of the establishment.

It has been often argued that it is India’s inflexible labour market regulations that have hurt the growth of manufacturing in India and therefore, such changes will put the manufacturing sector on a high growth trajectory and accelerate productive employment creation (Basu 2005, Ahmed and Devarajan 2007). There exists a vast empirical literature on the impact of labour market regulations on employment growth in the manufacturing sector. Much of this literature focuses on Chapter VB of the IDA which makes it necessary for firms employing more than 100 workers to obtain the permission of state governments in order to retrench workers. One of the most influential studies in this area is by Besley and Burgess (2004), which constructs an index summarising state-level amendments to IDA between 1949 and 1992 and finds a negative impact of pro-worker regulation on output, investment, employment and labour productivity among registered manufacturing firms. More recently, Gupta, Hasan and Kumar (2009) have created a composite measure of labour market regulations across states by including information on not just IDA but additional areas such as Factories Act, State Shops and Commercial Establishments Acts, CLA, role of inspectors, maintenance of registers, filing of returns and union representation. Categorising states as having flexible, inflexible and neutral labour regulations, they find that states with relatively inflexible labour regulations have experienced slower growth of labour-intensive industries and overall slower employment growth.

Others point out that since labour is on the concurrent list (falls under the purview of central and state governments) there are far too many labour laws2. Moreover, many of these laws covering the same subject that makes compliance difficult. Also, many laws are far too detailed and antiquated, making them difficult to implement. For instance, the Factories Act prescribes the use of earthen pots for drinking water (water coolers are not sufficient) and the use of red painted buckets with sand (instead of fire extinguishers) (Debroy 2005). The report of the 2nd National Commission on Labour submitted in 2001, proposed the unification and harmonisation of labour laws under five heads of industrial relations, wages, social security, safety and welfare, and working conditions. There is no disputing the fact that the rationalisation of India’s labour laws is long overdue. But before reforming the regulatory framework, some ground realities need to be understood.

Organised vs. unorganised sector

India’s manufacturing sector is characterised by dualism - a formal/ organized3 sector coexists with a large unorganised sector. The unorganised sector accounts for a disproportionately large share of employment (90%), but a very small share of value added in manufacturing. However, most of India’s labour regulations cover only the organised sector, which accounts for a little over 10% of the total employment in the manufacturing sector4. In fact, there are no regulations for decent conditions of work and no provision for social security of any kind for the workers in the unorganised sector. Significantly, even in the organised sector, most laws do not apply to establishments employing less than 10 workers, which account for an overwhelmingly large share (97%) of total firms in the manufacturing sector. The proportion of workers covered by the Factories Act and Chapter V-B of IDA is as low as 2.45% and 1.8% of the workforce respectively5. If labour laws are in fact covering such a small proportion of the total workforce in India, what inflexibilities in legislation are we talking about? The whole edifice of the argument that it is the inflexibility of labour laws which is harming industrial growth needs closer scrutiny. The high degree of protection given to very few workers has created a false image of excessive rigidity in the labour market, thus concealing the fact that over 90% of the workforce escapes this perceived rigidity and is left unprotected against any contingencies and arbitrary actions of employers.

Contractualisation of workforce

The labour market debate also needs to be viewed in the backdrop of the fact that firms have worked out innovative ways to get around the rigidities in the labour market. These include the substitution of contract and temporary labour for permanent workforce; firms moving to states where labour is less unionised; and the adoption of capital-intensive techniques of production. Of these, the increasing contractualisation of the workforce is a cause of serious concern as it reflects deterioration in the quality of employment generated. Contractual employment has been on a rise, with its share in total organised manufacturing employment increasing from 15.59% in 2000-01 to 26.57% in 2010-11, while that of permanent employees declining from 61.26% to 51.73%. Estimates from ASI data (2000-01 and 2010-11) indicate that contractual workers grew at 10.05% for India over the last decade while directly employed persons grew at 2.8%. The use of contract workers provides a means of getting around stringent labour regulations, particularly IDA, as contract workers do not come under the purview of labour laws that are applicable to permanent workers. Given the deplorable conditions under which they work, a rapid increase of such jobs will certainly not meet India’s challenge of productive employment creation.

Importantly, if we classify states as having flexible, inflexible and neutral labour market regulations (classification in Gupta et al. 2009), we find that the growth of contractual workers has exceeded the growth of permanent workers in both flexible and inflexible states. Moreover, the growth of contractual workers in the two types of states is not significantly different. Lower wages of contractual workers and the savings made on the expenditure of worker benefits (as they do not enjoy social security cover under legislative provisions such as Employees’ Provident Fund Act, 1952) help in reducing costs incurred by firms. Thus, firms in both flexible and inflexible states are incentivised to substitute permanent workers with contractual workers in ‘core’ activities, in spite of the CLA prohibiting the use of contract labour in ‘core’ and ‘perennial’ activities. This raises concerns about whether making labour regulations more flexible will actually arrest the trend of increasing contractualisation. In fact, if labour regulations were actually as stringent as they are made out to be and were being enforced in the letter and spirit of the law, how were firms able to expand their contractual workforce so rapidly?

Going beyond the narrow agenda of flexibility

There is an urgent need to expand the focus of the debate and reduce “dualism in the regulatory regime” (Papola and Pais 2007) by bringing in the largely excluded segments of the unorganised sector into a regulatory framework. If labour market reforms are to make a real difference and create more productive jobs and pathways out of poverty, it is necessary to take this debate beyond the narrow agenda of flexibility to macroeconomic issues like “a minimum set of conditions of work to all workers, a minimum level of social security, better and efficient labour administration machinery and a simple and fast-responsive grievance redressal machinery” (National Committee for Enterprises in the Unorganised Sector, 2009). While there is a need to provide firms in organised manufacturing flexibility to adjust their workforce as regulations such as IDA Chapter V-B have neither served the interests of industries nor of labour, there is also a pressing need to ensure job security, health and social protection for all workers irrespective of the size of the establishment and sector of their employment. Dilution of labour laws by raising the limit of firms to which IDA Chapter V-B or the Factories Act are applicable, will neither take us closer to creating more productive jobs nor to ensuring healthy growth of Indian manufacturing.


  1. This draft Industrial Relations Code Bill combines Industrial Disputes Act, 1947, the Trade Unions Act, 1926, and the Industrial Employment (Standing Orders) Act, 1946.
  2. Some estimates list 47 central laws and 200 states laws (Anant et al. 2006).
  3. As per the Factories Act, the formal sector includes all factories using power that employ 10 or more workers, and all factories that do not use power and employ 20 or more workers.
  4. This is based on calculations from unit-level data from National Sample Survey (NSS) (2010-11) and Annual Survey of Industries (ASI) (2010-11).
  5. Estimates are from ASI (2010-11) unit-level data

Further Reading

  • Ahmed, S and S Devarajan (2007), ‘For Good Jobs, Reform Labour Laws’, Economic Times, 19 March 2007.
  • Anant, TCA, R Hasan, P Mohapatra, R Nagaraj and SK Sasikumar (2006), ‘Labor Markets in India: Issues and Perspectives’, in Felipe, J and R Hasan (eds.), Labour Markets in Asia: Issues and Perspectives, Palgrave Macmillan, New York.
  • Basu, K (2005), ‘Why India Needs Labour Law Reform’, BBC News.
  • Besley, Tim and Robin Burgess (2004), “Can regulation hinder economic performance? Evidence from India”, Quarterly Journal of Economics, 119(1): 91-134.
  • Bhattacharjea, Aditya (2009), "How do Indian firms respond to employment protection legislation?", Economic and Political Weekly of India, Vol. XLIV No. 22, May 30, 2009.
  • Debroy, B (2005), ’Issues in Labour Law Reform’, in Debroy, B and PD Kaushik (eds.), Reforming the Labour Market, Academic Foundation, New Delhi.
  • Gupta, P, R Hasan and U Kumar (2008), ‘Big Reforms but Small Payoffs: Explaining the Weak Record of Growth in Indian Manufacturing’, in Bery, S, B Bosworth and A Panagariya (eds.), India Policy Forum, Vol. 5, Sage, Delhi.
  • National Committee for Enterprises in the Unorganised Sector (2009), ‘The Challenge of Employment in India: An Informal Economy Perspective’.
  • Papola, TS and Jesim Pais (2007), “Debate on labour market reforms in India: A case of misplaced focus’, The Indian Journal of Labour Economics, Vol. 50, No. 2, April-June.
No comments yet
Join the conversation
Captcha Captcha Reload

Comments will be held for moderation. Your contact information will not be made public.

Related content

Sign up to our newsletter