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.


Mohammad Amin

Private Sector Development Specialist

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