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Modi’s ‘Make in India’ plan needs more labour market reform

Modi is making changes to Indian labour laws that are likely to boost worker productivity. Image sourced from

Reviving domestic investment, ensuring ease of doing business, and attracting foreign investors to enable his “Make in India” initiative to succeed were three of the key policies set in place by Narendra Modi’s government in its first year.

However, unlike China’s flexible and business-friendly labour laws, investors find labour laws in India rigid and restrictive.

Though the Modi government has initiated a few steps towards more flexible labour laws, much work is left to do if labour-intensive manufacturing and “Make in India” are to succeed.

The problem

India’s labour laws - numbering around 250 both at central and state level - are restrictive in nature and hurt investments in the manufacturing sector. For example, the Industrial Disputes Act (1947) has rigid provisions such as compulsory and prior government approval in the case of layoffs, retrenchment and closure of industrial establishments employing more than 100 workers. This clause applies even when there is a good reason to shut shop, or worker productivity is seriously low.

If the job or the nature of work of an employee or group of employees needs to be changed 21 days’ notice must be given under Indian law. While not particularly restrictive, in practice the changes also require the consent of the employees, and this can be tricky.

While the right of workers to associate is important, the Trade Union Act allows even outsiders to be union office bearers, leading to strikes and lockouts without any genuine grievances. This hurts investor faith in the process and restricts economic growth, which in turn results in a lack of jobs and rising unemployment. Rigid labour laws discourage firms from introducing new technology that would require some workers to be retrenched. Foreign investors are put off, worried they would be unable to dismiss unproductive workers or downsize during a downturn.

Reform initiatives

The first set of initiatives, announced in October 2014, were the “unified labour and industrial portal” and “labour inspection scheme”. These are meant for objective criteria and a transparent process for labour inspection. These reforms have given a breather to industry, more so for SMEs, which are supposedly victims of arbitrary use of labour rules by labour inspectors.

The prime minister’s efforts to raise the monthly minimum wage ceiling from Rs6500 (US$105) to Rs15000 (US$240) and to ensure a retirement savings scheme (the EPF) for vulnerable groups and the pension system, though small, are laudable steps.

Further, to undo the malady in India’s labour market, some changes have recently been initiated in the three acts that largely govern India’s labour market - the Factories Act, Labour Laws Act and Apprenticeship Act. Amendments to some restrictive provisions of all these acts have been cleared by the Cabinet and are being tabled in Parliament.

Key changes proposed in the Apprenticeship Act include dropping the punitive clause that calls for the imprisonment of company directors who fail to implement the Act. The government is also going to do away with a proposed amendment to the Act that would mandate employers to absorb at least half of its apprentices in regular jobs.

In order to provide flexibility to managers and employers, the amendment to the Factories Act includes doubling the provision of overtime from 50 hours a quarter to 100 hours in some cases and from 75 hours to 125 hours in others involving work of public interest. This is seen by some as being anti-labour as it imposes greater working hours without ensuring their security and welfare. However, the penalty for violating the Act has been increased so as to deter exploitation.

Increasing working hours might also impact low worker productivity in India. Importantly, the number of days that an employee needs to work before becoming eligible for benefits like leave with pay has been reduced to 90 from 240, a pro-labour step.

The amendments to the Labour Laws Act meanwhile will allow companies to hire more employees without having to fulfil weighty labour law requirements. It is proposed that companies with 10-40 employees be exempt from provisions under labour laws that mandate them to furnish and file returns on various aspects.

Rajasthan shows the way

The finance minister under the new regime has also encouraged Indian states to bring in appropriate labour reforms in line with Chinese provinces promulgating labour reforms suited to their needs. The government in Rajasthan has enacted reforms that would make it easier for firms to adopt hire and fire policies.

The Rajasthan government’s labour reforms are manifold. For one, industrial establishments employing up to 300 workers are now allowed to retrench employees without seeking prior permission of the government. In addition, the threshold number of employees required for the purpose of applicability of the Factories Act has been increased from 10 to 20 (in electricity-powered factories) and from 20 to 40 (in factories without power). This is expected to reduce bureaucratic and paper work related delays in scores of small units. Following Rajasthan, there are efforts now by other states like Madhya Pradesh, Maharashtra, Haryana for similar labour reforms.

The reality is manufacturing has to grow to absorb millions of semi-skilled young Indians. This will be difficult without rationalising labour reforms. Though the Indian labour force has been much more disciplined and cooperative during the post reforms period leading to decrease in number of strikes, lockouts, days lost etc, the large number of labour rules and the process of enforcement scares investors, at least on paper. Much more labour reform is required to help India reach its manufacturing potential.

Read the other articles in our “Modi one year on” series here.

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