Time for another look at labor laws in India?

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India is known for its stringent labor laws—so stringent, in fact, that studies have shown they stifle employment creation. The current global financial crisis seems to have forced policy makers to take another look at these laws and their impact on employment. Last week, India’s Ministry of Finance presented the Economic Survey (2008-09) for the year to the Parliament. The Survey is an annual exercise taking stock of the economy and suggesting the way forward.

What caught my attention this year was the discussion on labor issues: labor laws and the emerging skill shortage. Taking note of the global crisis and the impact on the Indian economy, the Survey highlights the urgent need to create more employment by reviewing labor laws. It notes that:

Further, there is an imperative need to facilitate the growth of labour-intensive industries, especially by reviewing labour laws and labour market regulations. This is particularly important in reversing the current, not-so-encouraging manufacturing employment trends.” (Economic Survey, page 223)

Some of the specific measures recommended include the following:

  • Retrenchment of workers: At present prior permission of Government as per Chapter V-B of Industrial Dispute Act is needed for this purpose. The Survey recommends abolishing this procedure with simultaneous increase in compensation from the present 15 days wages for every year of service.
  • Contract Law: The Survey recommends amendment of the Contract Law to allow use of contract labour in non-core activities or when the activity is of intermittent nature during the year.
  • Working hours: Amendment of the Factories Act is recommended to increase workweek to 60 hours (from 48 hours) and daily limit to 12 hours to meet seasonal demand through overtime.

The above recommendations suggest a modest and cautious start towards the contentious and politically sensitive issue of labor reforms in India. While actual implementation is a different issue, the hope is that a consensus among policy makers to take another look at the labor laws in India is around the corner.

Authors

Mohammad Amin

Private Sector Development Specialist

Arvind
July 31, 2009

Are they gone crazy man? Why increase the work hours and give the employers a license to exploit the workers ever more? It is bad as it is already.

Mangesh
August 21, 2009

No way 60 hours is not practical.....I think human rights need to be provoked here.

Wesley
August 27, 2009

I believe that under the current laws, no workers are allowed to work more than 48 hours per week under any circumstances. This actually severely limits their income potential by allowing them only a few hours of overtime. Under the proposed legislation, the absolute weekly cap would be lifted to 60 hours, giving workers and management more flexibility during peak seasonal demand.

The damage done by the existing law is that it requires firms to hire more full time workers than they actually need in order to meet their peak demand. This means that hourly workers actually work less than full time except during peak season, thus the per worker income is reduced and the productivity is lower for that firm vs. its competition due to other worker benefits.

Ultimately this means higher prices must be charged to maintain margins. These higher prices artificially devalue the currency when applied country wide and hurts the workers even more with their lowered income.

Conversely, when company productivity goes up (i.e. from overtime) the margins increase and deeper discounts can be used to win more business. This increase in business requires more labor and the company can now pay more per worker due to their increased productivity without impacting profits. Once the business has increased beyond the existing capacity under the new laws, the company can now hire more workers, pumping more money back into the local economy.

You can see this happening in developed nations today - particularly in the US financial system. These firms were forced to cut thousands of jobs during the recession and are now the first firms to recover. They are now moving into hiring mode at breakneck pace and their corporate profits are being reinvested in new projects and new hires that were put on hold during the recession.

Had these firms been forced to retain those workers, they may have failed entirely, impacting far more people than their original cuts.

With regard to exploitation, I suggest that a conversation be held with a union representative from a developed nation. In many union positions (manufacturing, shipping, construction, etc) overtime is highly coveted by the workers due to the increase in wages paid for the overtime work. Typically the wage increase is 50% or more. In some cases, double or even triple overtime is paid under special circumstances (holidays, weekend, special events). These workers would not be considered to be exploited as they would be making 2-3 times their normal pay for the extra work.

With regard to human rights - this isn't a governmental issue, it is referring to regulating private industry. People always have the choice NOT to work for a particular company if they abuse their workers. Human rights issues only arise if people's personal sovereignty is violated - for example if the law was changed such that all workers MUST work 60 hours per week, then there could be a potential human rights violation - the violation would be that the person could not choose to work for a company that did not require overtime as all firms would be forced to do so.

N.V.Ramana Rao
November 25, 2009

While considering for amendment of labour laws, the same amendment should be considered for the workforce in the Government departments also. A worker whether in the Government, public sector or in the private sector the benefits and fecilities should be one and the same. There should not be any discrimination among the workforce. Resulting the amending this way a gloomy picture to a human being for employment in government sector will not be there. Here the management is varying Government or Private sector. Regarding the working hours why not it also applicable to the Government employees?.

XY
November 07, 2010

India Labor law was better in 1988. It should protect from the women from working night time. It should be 40 hrs per week than the 48hrs.

It should protect from the people from the firing from the foreign company. They should have given an enough time to find the other job.

I saw how the engineer and other employee sufferes in the down time of INDIA.

I saw the people made to work extra hours especially women and man in export zone and Foreign Company. They exploited them becuase of the necessaity of the attraction of money and they can afford the basic needs by working in the INDIAN Company.

debora
September 10, 2021

Thanks for sharing this valuable information with us. It is really a helpful article!