LawFarm- Advice & Lawyers Online

Share on facebook
Share on linkedin

Labor Law Reforms- Is flexibility the only resort left?

 By Ayushi Singhal,

3rd Year, WBNUJS, Kolkata



After the recent clean sweep victory of the right wing party in the elections of the largest democracy in the world, the talk for reforms in the Labour Laws of India (which are more than 250 in number) has begun again. Reforms like flexibility in these laws have been demanded by many liberalists like Mr. Kaushik Basu time and again.

Since the subject of labour is included in the concurrent list, the states can change their own laws. Some states like Gujarat have already made amendments in their laws by allowing industries in the Special Economic Zones to lay off workers without permission. These amendments have been lauded by various economists[i] and after Mr. Modi’s debut on the national political scene; there is a hope that he will apply the same for the whole of India. He envisages this as a necessary step in bringing up the contribution of the manufacturing sector (which is right now only 15%) by attracting foreign investment.[ii]



The Goldman Sachs Report has also stated that more flexible laws like that in Gujarat, as opposed to the pro labor laws in West Bengal are beneficial for economic growth.[iii] However, one needs to cogitate upon the fact that- is flexibility the only option left? For this we need to analyze the problem which we seek to rectify.

Here, I will focus on the one related to the Industrial Disputes Act (“IDA”), 1947. This Act, which was legislated a few months before our country’s independence, guides the hiring and firing policy of the industries. An amendment which was made in the Act in the 1980’s asks an industry employing more than 100 workers to get permission from the state government before firing any of these workers. The industry also needs to take permissions before winding up even a sick unit. Moreover, it is required that the workers be given a 21 day notice before alteration in work, wages and other terms and conditions of work. This permission is seldom given and the process to attain the same is lengthy and circuitous, which has had several adverse consequences.


Arguments For Flexibility

What might happen is that a company might just be ready to give labourers higher wages for a particular period of time, but since the firm cannot remove workers all of a sudden, it will have to spread those wages for a longer period of time, which is only counterproductive. Moreover, some industries which have a volatile demand have not been exploited well in the fear of this legal regime.

It has also been alleged that this very policy has held back the growth of India’s manufacturing sector since this permission is seldom given,[iv] making the dismissal even in the extreme circumstances very difficult. To avoid this, the employers become extra wary while hiring which ultimately leads to the dwindling of potential jobs.

They cannot increase the workforce even during the time of a boom, since they cannot be removed when the market falls. These have added the burden of extra costs (both direct and indirect) which further decrease competitiveness. The long lines for the dates of cases and their disposal along with the unchecked corruption make the adherence to these guidelines much more difficult.

Consequentially, to avoid coming under the umbrella of industries that ought to follow these rules, firms generally limit the number of their formal employees below 100, leading to the increased hiring of contract labour. These laborers are not only more often than not paid less, but also have no job security. New labour saving technologies have been devised which replace human labour. There has also been a tendency to resort to grease the palms of officials in order to get rid of the consequences of retrenchment.[v]

This has led people, including economists and lawyers to believe that the pro-worker legislation is harming workers more than it is helping them.[vi] A civil servant believes to such an extent that there is a causal relationship between these laws and the “low number of intermediate-sized firms”.[vii] A study by World Bank has in fact rated India – 48 out of the highest 100 in terms of rigidity, whereby China scoring a 30 and Singapore scoring equivalent to 0.[viii]



Having understood that this requires a change, what is needed is a policy which achieves the dual objectives of development of the manufacturing sector along with the welfare of workers. As mentioned earlier, flexibility in these laws has been one of the obvious methods suggested to get rid of this impasse. Others include simplification of these laws, introduction of self-certification akin to the states of Gujarat, Maharashtra and Rajasthan and the reforms in the dispute settlement mechanism.[ix] I will restrict my criticism to the demand for flexibility, since other reforms are beneficial ‘directly’ (as argued by many, flexibility is ‘indirectly’ beneficial to the employees) both to the labourers and the industries.

Flexibility will naturally come in the form of removing the need for seeking permissions for the removal of workers or winding up the industries. Now even if we accept the argument that there is an established causal relationship between the prosperity in developed countries (like Norway) and the flexible labour reforms; we do not have similar social security schemes like an unemployment insurance program etc., which may decrease the effects of bringing flexibility in these policies. In the absence of such measures, bringing flexibility in these laws can pose a huge threat to the workers who are dependent on the industries for their livelihood.

We are living in a myth whereby we conceive everyone to be ready for the developmental changes, which however is not the case for one and all.[x] If we envisage building labour laws in the same mould as these countries, which take bold steps of removing workers from sick units, we should not forget that the ideas like celebrating ‘May day’ are the brain child of these nations only.

Since the problem arises due to the lengthy and time consuming mode of taking permission and because of the few cases who ultimately receive such permissions, changing the regulatory mechanism can be an alternative consideration. This implies that the means rather than the end should be changed. For instance, there are numerous adjudicating authorities under the IDA like conciliation officers, conciliation boards, courts of inquiry, labour courts, industrial tribunals and the national industrial tribunal. This increases the complexity of the process. This complex procedure makes the survival of these companies a difficult task.



The construction of a mechanism which ensures quick disposal of permission related processes will be helpful to the employers in adapting to the market changes and will also not harm workers. However even here, the authority should make sure that the permissions are given after proper assessment of all the factors involved. We need to realize that this efficiency, which we might bring by vouching for flexibility, may not necessarily transform into prosperity for people at the lowest rung of the corporate chain. Having said this, we will have to make the workers adept to adjusting to changes in the economic environment.[xi]

Nevertheless, whatever reforms we cogitate to bring in, they should not instill fear in the minds of workers of being laid off any time. This can be ensured by making workers aware of the reasons for the change we decide to bring about in the laws. Until all this is achieved, reforming the implementation of these laws is a far better option than changing these laws wholly.







 [vii] “A recent study by International Finance Corporation compared the sizes of the typical Indian, Mexican, and US firms at start-up and at the end of 35 years and found that their size declined by a fourth in India whereas it doubled in Mexico and rose 10 times in the US.”