An Assignment on

The issues with current labour laws in the country and the need for
carrying out labour reforms to progress the performance of India’s
manufacturing sector
By
Group No. : 14
Divyansh Pant(2018B3A30856P)
Shivam Agrawal(2018B3A70786P)
Sushant Rai(2018B3A10799P)
Mohit Bansal(2018B3A20164P)

For the partial fulfillment of the course

Econ F341: Public Finance Theory and Policy

Submitted to:
Dr Arun Kumar Giri,
Associate Professor and Head,
Department of Economics and Finance,
BITS Pilani - Pilani Campus

Birla Institute of Technology and Science, Pilani Rajasthan – 333031 April 2021
 Index

Introduction 4
Literature Review 5
1. Manufacturing Sector in India - Trend Analysis 6
1.1) Contribution of Manufacturing to India’s GDP 7
1.2) Trends in the Manufacturing Sector 7
1.2.1) 2000-01 to 2007-08 8
1.2.2) 2008-09 to 2012-13 9
1.2.3) 2013-14 to 2019-20 (Pre Covid) 9
2. Need for Labour Reforms 10
3. Issues in India’s labour laws 12
4. Labour Law relaxations during Covid-19 Pandemic 15
4.1) Madhya Pradesh 15
4.2) Uttar Pradesh 15
4.3) Other States 16
5) Recommendations and Policy Reforms 16
Reference 19
 Abstract

Title:The issues with current labour laws in the country and the need for carrying out
labour reforms to progress the performance of India’s manufacturing sector

India, today has a greater need for employment generation than ever as the population of youth
in the working age keeps growing. To boost employment India must look to grow its relatively
weak manufacturing sector and equip employees with necessary skills. India should also look to
make policy changes to accommodate demands of employers regarding labor laws so they can
cope with turbulent global manufacturing environment, changes also need to be made to cater to
the social security need of the employees This report aims to study the issues with the labour
laws present in India and how they may be changed to increase employment and provide better
working conditions to the employes. We qualitatively analyze the effect labor laws have on
Industry and investigate the need to change them. Based on this analysis we recommend some
reforms and policy changes
Introduction

India is expected to have the highest working population in the world between 2022 and 2034,
with 10 million young people entering the workforce every year. Demonstrating the true power
of such a powerful workforce requires jobs in the industry. To be able to absorb such a massive
labour force, India needs to increase its manufacturing base and output by multifolds. In order to
deal with the administrative difficulties that prevent India from reaping the demographic
dividend, there is a dire need to address the issue of labour laws through major changes in
policy.

A major roadblock in achieving this are the overly complex and conflicting labor laws present in
the country. For years economists have been complaining about Indian governments failing to
change the rigid laws and regulations governing the labor market. The first generational changes
took place in 1991 these changes - so called second generational changes ie changes in labor law
and skill development are a crucial need.

The paper advocates policies to improve production efficiency by encouraging investment in

research and development, technical training for workers, and technology-aided managerial
processes.
Literature Review
Mehta et al (2017)Manufacturing Sectors in India: Outlook and Challenges: Carried out research
to investigate the current manufacturing strategies being used by India to grow it;s
manufacturing sector. The factors which influence the manufacturing sector across the country
were analysed. Factors which explained the better performance of states like Andhra Pradseh and
Gujarat include Good infrastructure, compliance to tax & labour laws and ability to meet the
desired environmental standards.

The “Flexibility, Employment and Labour Market Reforms in India” by Alakh N. Sharma talks
about the rigidity of Indian Labour laws and the challenges faced in reforming them. If not for
these inflexible laws India would have achieved higher economic growth. The paper states that
the Indian labour laws are complex and too many which promotes litigation rather than solving
the problem of labours. In the end the author suggests that simplification and rationalization of
labour laws are required. The laws should also provide adequate social and income security for
the workers.

The relationship between manufacturing productivity and Employment has been briefly touched
upon in this paper. In “The Sources of the Productivity Rebound and the Manufacturing
Employment Puzzle” William Nordhaus (2005) studied US labour productivity and employment
data and revealed that more rapid productivity growth leads to increased rather than decreased
employment in manufacturing. In the Indian context, a study was conducted by Das et. al. (2017)
that showed different results.

Research Limitations
Most of the empirical studies on wage-employment relationship through productivity growth are
based on macroeconomic data from the developed countries. Thus, a qualitative rather than
quantitative approach has been used in this paper. The number of experimental studies on such
issues in India is very limited as there is not much data available . The effect of technological
change on wage differential in Indian manufacturing was examined by Pal(2004) by using the
data from National Sample Survey Office for the years 1983-84, 1987-88 and 1993-94, it was
observed that educated workers had a disadvantage when a new technology was introduced.
Goldar et al. (2005) observed a positive correlation between labour productivity and wage rate,
but the marginal effect of labour productivity on wage rate was minimal..

1. Manufacturing Sector in India - Trend Analysis

The early years of India’s economic growth were heavily dependent on the output of the
manufacturing sector. The liberalisation reforms of the 1990s were great moves in the right
direction. In this section, we try to focus on the period between the 2000s and 2010s. We take a
look at the growth and slowdowns in the manufacturing cycles. The initial growth in the
manufacturing sector could not be sustained as this growth was primarily driven by the growth in
input factors rather than an increased efficiency. Towards the end of this section, we shall discuss
the relationship between productivity growth and employment trends.

1.1) Contribution of Manufacturing to India’s GDP

Share of manufacturing in India's GDP has been constantly declining as is evident from Figure 1.
The shift from manufacturing to the service sector has been a central theme for this shift. The
decline continues even after the government has made efforts to boost the manufacturing
industry in the last few years.

Fig 1. Manufacturing as a Percentage of GDP

1.2) Trends in the Manufacturing Sector

Figure 2 provides us with a snapshot of the trends in Indian Manufacturing Sector through a
graph which plots IIP for the last 25 years. The Manufacturing sector has gone through a series
of peaks and troughs and through multiple cycles, both major and minor.

Fig 2. Trend in Manufacturing Growth (IIP)

In analysing the trends in the manufacturing sector, the analysis becomes easier if we divide the
period into three segments.

1.2.1) 2000-01 to 2007-08

In this period, India’s economy underwent a good economic growth, with a massive rise in
India’s export in the service sector. The demand was majorly outsourced from Europe and The
United States. However, the manufacturing sector too, saw robust growth in the 2002-2007
period, with growth peaking at a 20% level. The possible reasons to this growth, as pointed out
by Nagaraj (2017) were primarily a steep rise in domestic savings, investment, and capital
inflows, boosting the capital formation rate to close to 36% of GDP at the peak of the boom in
2008 (Fig 3)

Fig 3. Trend in Capital Formation as a percentage of GDP

1.2.2) 2008-09 to 2012-13

In this short period, the manufacturing output actually shrank in the beginning due to the
spillover effect of the financial crisis in the US. The period post 2008 saw liquidity in world
financial markets due to reserve banks across the globe choosing an accommodative stance. India
too, eased monetary and fiscal policy stances to promote growth. The growth did revive, but it
was slower than the previous period. The growth lasted till 2011-12, post which it started it
declined rapidly.

1.2.3) 2013-14 to 2019-20 (Pre Covid)

In this period, India witnessed a change in the ruling party from Congress to BJP and this was
accompanied by changes in policy in multiple dimensions. However, there is no clear trend in the
growth rate of the manufacturing sector. The growth has fluctuated with the towards the end of
this period, a lot of economies across the globe began to show signs of slowdown and India
being integrated with the world economy, was affected too. A lot of initiatives were taken
towards boosting the manufacturing, the most notable being the Make in India Scheme.
2. Need for Labour Reforms

Today, the service sector in India contributes around 55 per cent to the nation’s GDP whereas the
manufacturing sector just contributes around 14 per cent, which earlier was 16 percent (FICCI,
2014).No country has ever become developed without the help of a strong manufacturing sector.
This disparity has urged the government to consider reforms in labour laws.The difference
between the sectors reflect that there is a need for reform in the indian labor market to make it
more flexible and competitive for the international players The government with the help of
other experts is putting in efforts to shift Indian labour market from being protectionist to
competitive and open. Still the government has a large amount of control over the supply side of
the economy i.e land, labour and material. Indian labour laws which have more than 150
legislations, many of which are conflicting make them almost impossible to follow

The key ways to increase the manufacturing sector is reviving domestic investment, ensuring
ease of doing business and attracting foreign investors to set up manufacturing units; these
objectives however are difficult to achieve with the age old labor laws present in india .
A study conducted by KPMG-CII tried to list down the factors that act as a hindrance to setting
up business in India . The study lists down eleven approvals comprising approvals associated
with environment, land procurance, construction permits, industrial safety permits etc. These
approvals were thought as prime five obstacles faced when setting up a business (Confederation
of Indian trade and KPMG, 2014). Other problems that the survey listed were education of
employees, and want for reforms in labour laws, customs and trade laws and access to land
(Confederation of Indian trade and KPMG, 2014). According to the survey 47% of the
respondents felt that the labor laws made it difficult to set up manufacturing business in India.

Another factor to consider is the fact that labor laws cover only the organised sector which is
only around 20% and leave out the unorganised sector thus not only makes it more difficult for
businesses to set up plants it also neglects a large share of the working population potentially
exposing them to exploitation and hazardous working conditions. If the labor laws were made
less stringent a greater no of business could follow them thus the number of people working
under organised sector could increase.

The need for these reforms can also be understood by comparing India with countries that had
similar situations initially but brought such reforms before India. One such evidence is the
contrast of India and China. In the 1950 India had a slight edge over China industrialisation by
2010 however China had become the second largest manufacturing nation in the world while
India ranked tenth and produced approximately one-fourth of China’s industrial output.

These reforms are especially urgent now as in the wake of covid-19 pandemic and rising tension
between the US and China a lot of companies are fleeing from China. Archaic labor laws
however are preventing them from coming to India and thus they are ending up in more business
friendly countries like Vietnam. Particularly now when the economy is not in good shape it is
important to cater to industry demand and liberalise some of the laws which have otherwise
destroyed many industries in the past

One important aspect that every economy has to pay attention to is employment. Here, we take a
look at the relationship between productivity growth in the Manufacturing sector and
employment. The task of finding this relationship can be simplified by narrowing down the
theoretical viewpoint to two different arguments. The first argument is the crowding out
effect.The higher productivity can crowd out employment and thereby become a source of
unemployment. The second argument simply states that more rapid productivity growth leads to
higher rather than lower employment in manufacturing. Multiple research studies have been
conducted throughout the world and no clear pattern has emerged. Nordhaus, in 2005 published a
paper which argued that overall, higher productivity had led to lower prices, expanding demand,
and to higher employment.
However, a research conducted by Das et. al. in Indian context attempted to analyze a
relationship between labour employment, Wages, Productivity and Industrial Output for a period
of 40 years (1975-2014). They concluded that there is no significant causal relation between
employment, wage rate and productivity in the registered manufacturing industry in India.
3. Issues in India’s labour laws

Indian labour laws have been debated upon from quite a long time. For a developing country like
India, rigid labour laws are a big hurdle in its road to development. Indian Labour laws and
regulations add to production costs, restrict flexibility and efficiency, stifle competition, hinder
economic growth and impair urgently required market adjustments.

Ironically, the sole framework that is put together to guard the interest of labours has led to
decline in employment rate. The Industrial Disputes Act in 1976 says that any company
employing 300 or more employees, must seek permission from the government before
terminating the employees or closing down the unit. The number was brought down to 100 in
1984. This gives incentives for the firms to stay small and get their things done by contract
labour. This led to reduction in employment in the organized sector.

The reformation of labour laws in India has been a slow process. Even the LPG(liberalization ,
privatization and globalization) in 1991 brought little improvement in the labour market. Due to
this India missed the opportunity of being one of the world leaders in manufacturing and this
boils down to rigidities in labour markets and lack of skills. With the demographic dividend as
that of India, it should be able to attract foreign investments in the labour intensive industries like
rubber products, furniture, leather goods , textiles etc.

Furthermore these laws define and regulate the relationship between the employee and the
employer which is very rare in developing countries. The Industrial Employment act states that
employers having terms including leave, working hours, productivity goals, dismissal
procedures or worker classifications, must get them approved by a government body. These
issues hampers the ease of doing business in India. Indian markets appear less attractive to
foreign investors due to these rigid labour laws. Given the recent changes in the regulations,
India now ranks 63 in Ease of Doing Business.
Labour comes under the concurrent list. So the state as well as the center has the right to make
laws regulating the labour market. There was an entire gamut of 200+ state and 40+ central laws
with often colluding jurisdictions. This leads to complex, multiple and overlapping labour laws
in India. The lengthy almost interminable nature of legal proceedings contributes greatly to the
cost of hiring labour and the associated “hassle factor” . This also makes compliance difficult for
the regulating machinery which leads to Inspector Raj (Corrupt Inspectors and bureaucrats
having unlimited power to exploit the suspected employers ). This leads to corruption and
exploitation of workers. There are many complaints from the industry that these inspectors, with
their extensive power , harass employers in order to extract bribes from them.

Indian labour laws largely ignore the huge informal sector. In India almost 92% of the workforce
comes in the informal sector with 5-10 million workers added annually. The informal sector is
accredited with the absorption of large masses of workers that would otherwise remain
unemployed due to the absence of formal-sector opportunities. In the AGEGC and
non-agricultural sectors, only about 23% of employees (excluding self-employed) have reported
receiving paid leave. Around 93 percent of casual employees do not have a written job contract,
suggesting that they are more informal than contract workers (68.4 percent). Among the
wage/salaried employees where more formal jobs available, about 66 percent of employees have
reported to be working without a written job contract. The female labour force participation is
very low and it is mainly engaged in the informal sector and low-paid jobs.

On the other hand an opposite view is expressed by trade unions that the labour enforcement
machinery needs to be further strengthened in the interest of better enforcement of labour laws.

It is important to eliminate absurdities, dualities and ambiguities from existing labour laws so
that industry is in a better position to leverage the full potential of the labour market in the
country without any fear of the law. Creating healthy business environment will be possible only
when the administrative machinery is efficient and prompt
Reforms Issued

Parliament in September,2020 passed the three labour code bills , the Occupational Safety,
Health And Working Conditions Code, 2020; the Industrial Relations Code, 2020; and the Code
on Social Security, 2020.The trade unions termed these Codes as anti-worker legislations, the
government and private sector have called this move as the game changer which will harmonize
the needs of workers, industries and others.

Contractual employment workforce is quite often exploited with respect to wages, social
security, and working conditions as well as welfare facilities. Fixed Term Employment is an
intervention to enable the hiring of employees directly instead of hiring through contractors,
which will ensure flexibility.

Social security for the unorganized sector will be funded by the Government. The funds collected
from breaking these laws will go into the social security fund for the unorganized labour market.
The migrant workers are entitled to certain benefits such as the public distribution system in the
state of employment and insurance and PF benefits.

As per the Industrial Relations Code a firm with less than 300 employees can fire workers or
shut down the firm without any prior notice to the government. Now the unions have to give 60
days strike notice. Flash strikes are now outlawed.

The passage of three labour codes in Parliament marked a milestone in this process and came
after many years of consultations and discussions between the government, industry, trade unions
and other stakeholders. In the last five years, India has seen several legislative reforms to boost
employment generation such as the Shram Suvidha Portal, MUDRA (Micro Units Development
and Refinance Agency), Startup India, Make in India, Skill India, digitisation of labour law
compliances, etc. With the codes on wages, industrial relations, social security, and welfare and
safety, a new environment for job creation is underway.
4. Labour Law relaxations during Covid-19 Pandemic

The coronavirus pandemic has pushed the world into an unprecedented crisis and uncertainty. It
was not merely a health crisis, but equally a labour market and economic crises. The labour
market was at a standstill and all the manufacturing units were shut down. Nearly 9.13 crore
people lost their employment in April 2020 alone. The satibily of MSMEs was disrupted. The
government felt the need to relax labour market regulations in order to bring investments. States
though that lesser compliance with the laws will protect small and medium enterprises from
shutting down. In May , 2020 many of the states made relaxations in the labour law. The states
and their corresponding changes are as follows-

4.1) Madhya Pradesh

On 6th May 2020, the government of MP declared the Madhya Pradesh Labour Law
(Amendment) ordinance , 2020. This ordinance dealt with amendments in two state laws. These
are the Madhya Pradesh Industrial Employment (Standing Orders) Act, 1961, and the Madhya
Pradesh Shram Kalyan Nidhi Adhiniyam, 1982. As per the ordinance any establishment with less
than 100 employees is exempted from compliance to Act of 1961( which states the conditions of
employment of workers ). The government also exempted the newly formed factories from
certain provisions of the Industry Act,1947. The provisions related to strike, dispute resolution
and trade unions will not apply.

4.2) Uttar Pradesh

The Uttar Pradesh government announced the Uttar Pradesh Temporary Exemption from Certain
Labour Laws Ordinance, 2020. The Ordinance seeks to exempt all enterprises and factories
engaged in manufacturing processes from all labour laws for a period of three years. The
ordinance is countering the center level labour laws therefore it requires assent from the
President. The labour laws regarding trade unions , social security, strikes will not apply to
business in Uttar Pradesh for next three years.
4.3) Other States
The Uttarakhand, Rajasthan ,Gujarat, Haryana and Himachal Pradesh governments have passed a
plea to increase maximum weekly work hours from 48 hours to 72 hours and daily work hours
from 9 hours to 12 hours for certain factories. This will help in overcoming the shortage of
labour and furthermore longer shifts would ensure that fewer number of employees in
workspaces which will allow for social distancing.

5) Recommendations and Policy Reforms

If we are to realise the true potential of demographic dividend of India, we will have to make
significant progress in the manufacturing sector and thus, a lot of emphasis has to be given on
improving the labour efficiency. By using learnings from successful nations in this regard, India
can work towards skill development in the workforce and making Indian manufacturing more
competitive.

Skills and knowledge are the driving forces for economic growth and social development for any
country. As per our worthy Prime Minister, for any country in the world that offers a unique 3D
combination known as Democracy, Demography and Demand, initiatives must focus on skill
development. In India, labour requirement in the primary sector is falling quickly as
mechanization increases. As per CII survey, roughly 16 percentages of labour in India is still in
the primary sector compared to 6 percentages of BRIC countries. Through skill development
initiatives, this labour force can be converted into the secondary manufacturing sector. Semi
Skilled labour can also be absorbed by the manufacturing sector with the help of skill
development programs.The government is aware of the importance of Skill development and
besides adopting skill development as a national priority the Government has created a new Skill
Development Department under a full-fledged cabinet minister.

To expand on the export opportunities, the Indian manufacturing must be competitive, in terms
of pricing as well as quality. The government has been focusing on PLI schemes, easing the
terms of business and reducing the export duties to expand the manufacturing exports. The need
of the hour is that quality of product manufactured in India should be competitive with foreign
products. Here the issue is to make Indian labour achieve such competencies to make high
quality products through skill development programs. One way to achieve this is by signing
MoUs to train the labours.

Due to the issues in the labour laws in India,there has always been a necessity to introduce labour
reforms from time to time for the betterment of the labour sector .There have been various
proposed reforms for issues in the current labour law. The most important one being exempting
small firms from various labour laws. This will reduce the burden on infant industries and
promote their economic growth. To promote the growth of smaller establishments, some states
have amended their labour laws to increase the threshold of their application. One such
successful example is Rajasthan. Rajasthan increased the threshold of applicability of the
Factories Act, 1948, from 10 workers to 20 workers (if power is used), and from 20 workers to
40 workers (if power is not used). The Economic Survey (2018-19) noted that increased
thresholds for certain labour laws in Rajasthan resulted in an increase in growth of total output in
the state and total output per factory.
Conclusion
In the last five years, India has seen several legislative reforms to boost employment generation
such as the Shram Suvidha Portal, MUDRA (Micro Units Development and Refinance Agency),
Startup India, Make in India, Skill India, digitisation of labour law compliances, etc. With the
codes on wages, industrial relations, social security, and welfare and safety, a new environment
for job creation is underway. The trade unions view these laws as anti-workers whereas the
industry wanted these flexibilities from a long time. India needs to reform its labour laws from
time to time in order to compete for its piece of pie in the global market. These labour codes will
usher in a new wave of reforms in industrial relations and also help in attracting more
investments but employment generation will remain a key challenge in 2021.
Reference

● Nordhaus (2005) The Sources of the Productivity Rebound and the Manufacturing
Employment Puzzle (https://www.nber.org/papers/w11354)

● Radhicka Kapoor,27 July,2020, “The unequal effects of covid-19 crisis on the labour
market”
(https://www.theindiaforum.in/article/unequal-effects-covid-19-crisis-labour-market)

● Ravikiran,18 May,2020, “ Labour Laws in India : Purpose ,History,Ongoing reforms”

(https://www.iasexpress.net/labour-laws-in-india-purpose-history-ongoing-reforms/#:~:te
xt=Evolution%20of%20labour%20laws%20in%20India,-British%20Rule&text=The%20
Factories%20Acts%2C%201883%20and,for%20work%20beyond%20eight%20hours.)

● Shukla, K., Purohit, M., & Gaur, S. P. (2017). Studying ‘Make in India’ from the Lens of
Labour Reforms. Management and Labour Studies, 42(1), 1–19.
https://doi.org/10.1177/0258042x17690842

● Contributors, E. T. (2020, May 10). Why Indian economy needs swift and robust labour
reforms. The Economic Times.
https://economictimes.indiatimes.com/news/economy/policy/why-indian-economy-needs
-swift-and-robust-labour-reforms/articleshow/75664922.cms

● Nagaraj (2017) Employment, Wage and Productivity: Analysis of Trend and Causality in
Indian Manufacturing Industries
(http://mospi.nic.in/sites/default/files/reports_and_publication/NSS_Journals/jr3_6_1Mar
ch2017.pdf)
● The Economic Survey (2018-19)