Labour Regulation and Job Creation in India

This page in:

Mumbai, India

has long been criticized for strict labour laws and burdensome business regulatory environment. This can also be easily substantiated by the fact that India is ranked 134 out of 189 economies in terms of ease of doing business by World Bank in 2014 (1). Indian labour market is subject to more than 50 central government laws and regulations that deals with range of subjects such as employment condition, social security, wages, industrial relations to name a few. As labour is a “concurrent” subject in Indian constitution, both state and central government can pass laws pertaining to this subject within their jurisdiction. As a result, there are numerous other state specific labour laws as well which varies from one state to other.

The large number of regulations has resulted in high cost of compliance for enterprises both in terms of time and money. It is worthwhile to note that all the labour laws in general are applicable to enterprises employing more than 10 workers and hence businesses in a way are forced to remain in informal sector to save on the high compliance costs. This is also partly responsible for having large number of informal workforce in India which is estimated to be around 90% out of total workforce (2). The irony of the situation is that the largest component of the workforce which is informal in nature is employed in low quality, less paid jobs and not been able to harvest any social security or employment benefits such as pension, medical leaves, insurance, equal wages and employment conditions.

There are in particular some provisions of enacted regulations which are considered to play a very restrictive role in creating private sector jobs in India. One such provision in Industrial Disputes Act (IDA) 1947 is, “any enterprise employing 100 or more employees needs prior permission from the government to lay-off or closing the enterprise”. Another example is Contract Labour (Regulation and Abolition) Act 1970 which restricts enterprises to employ causal workers in the core business activities. In the era of global value chains and dynamic demand conditions, businesses needs more flexible laws which allows them to hire temporary workforce to meet the sudden and seasonal demand which is however not the case in India. The tightly regulated labor market and inflexible laws have created a kind of psychological barrier among the entrepreneurs to expand their business in terms of hiring more workforce in their enterprise. This is tending to become a very unfavorable condition for country as it impacts both in economic output and job creation.

In the recent years, some states have been proactive in amending the labour laws and made them more flexible to foster business confidence and growth. Some of these amendments include exempt companies not to seek any prior approval in case of lay-off or decrease the number of activities included in the core activities list to enable companies to hire more contractual workforce. However, there is still a long way to go.

The large number of labour laws often increase the difficulty for employers to comply and adhere to regulation as the probability of committing even a smaller mistake is very high.

This makes the businesses more vulnerable to penalties and exploitation at the time of inspections. Many of the laws in India were drafted in the British era and have become archaic. The need of the hour is to rationalize and simplify the labour laws so that it is easier for the common people to comprehend and adhere to them.

Too much focus on stopping the contract labour has overruled the need of proper regulatory mechanism in place to govern the informal sector. There is an urgent need to ensure that people working in the informal sector should get the equal salary as the permanent employee and basic social security cover atleast such as safe working conditions, minimum wages, and maternity leave. Labour market reform is long pending agenda and if implemented can have a significant and wide impact on job creation through the country. The largest beneficiary of these reforms will be the manufacturing sector through which India is aiming to create more private sector jobs to reap its demographic dividend in a time bound manner. It’s a high time that India should seriously look at striking right balance between the employment growth and the protectionist measures.

1. “Doing Business Rankings 2014”, World Bank Group, 2014
2. “Report of the Committee on Unorganised Sector Statistics”, National Statistical Commission, Government of India, February 2012

Cross-posted from Let's Work Partnership Blog


Join the Conversation

The content of this field is kept private and will not be shown publicly
Remaining characters: 1000