Meaning of Labour Reform:

Policymakers face several kinds of choice and, hence, trade-offs. They can emphasise on en­forcing higher wages only but at the cost of low employment.

Higher growth at the cost of low wages is another option to the policy­makers.

Again, job security of existing work­ers may be the concern for policymakers at the cost of encouraging employers to adopt labour-displacing techniques of employment.

Such trade-offs are bound to emerge when economic restructuring takes place and cause embarrassment to the government and the policymakers. A proper balance between choices is of utmost importance so that nei­ther labour welfare is injured nor industrial peace is disturbed. Thus, labour reforms are of great important as the laws enacted in the labour market aim at regulating the market, protecting employment and ensuring social security of workers.


Labour reforms essentially mean taking steps in increasing production, productivity, and employment opportunities in the economy in such a manner that the interests of the workers are not compromised. “Essen­tially, it means skill development, retraining, redeployment, updating knowledge base of workers-teachers, promotion of leadership qualities, etc. Labour reforms also include la­bour law reforms” (INDIA 2006; p 601, GOl Publication Division). Labour laws are con­cerned with the trade union rights of the work­ers, industrial relations and job security and policies relating to wages, bonus and other in­centive schemes.

Labour Policies before the Reform Era:

Before we move to the labour policy in the pre- reform era of 1990s, we must make one im­portant observation of the Indian labour mar­ket. Indian labour market is characterised by a sharp dichotomy. Here one finds a small en­clave of organised labour. This organised sec­tor is fairly stringently regulated.

On the other hand, a large number of establishments oper­ate in the organised sector where labourers cannot organise themselves to pursue their common interests due to various constraints. Most importantly, this sector is virtually free from any outside control and regulation with little or no job security.

This sector, thus, pro­vides ‘too little to too many’. Further, wages are ‘too high’ in the organised sector and ‘too low’, even below the subsistence level in the unorganised sector. This dualistic set up sug­gests how far the Indian labour market is seg­mented.


Social security to organised labour force in India is provided through a variety of legisla­tive measures. These are payment of compen­sation to workers in cases of industrial acci­dents and occupational diseases leading to disablement or death, provident fund, pension including family pension, health insurance, payment of gratuity, maternity benefit, em­ployees’ deposit-linked insurance scheme, etc.

A number of steps were taken in India to provide social security as back as 1923. The trend towards conferring benefits to the work­ers gained momentum only after independ­ence. But considering the needs of the coun­try, the present social security arrangements are inadequate. More than 90 p.c. of workers in India are outside the purview of the pre­vailing social security arrangements as work­ers of small unorganised sector as well as in­formal sectors remain outside the purview of these arrangements.

Another aspect about labour policies that influence labour market are labour laws re­lating to forming trade unions, industrial re­lations, and job security

As far back as 1926, Trade Union Act was passed. In India, any seven employees could form a union. During the freedom struggle, Indian trade union contributed handsomely. Today, the trade union is more widespread and has taken deep roots. It is now better or­ganised and is now on a permanent footing. But at the same time, one finds same major defects in the Indian trade union movement.


It is alleged that trade unions in India are interested in the growth of capital thereby blunting the edge of a trade union which is a product of conflict between labour and capi­tal. Often employers counter the moves of the workers to hit back the aggressiveness of workers’ unions.

Since workers are not disci­plined, leaders resort to strike and work stop­page even on flimsy grounds. Above all, in­ter-union rivalry and political rivalries are con­sidered to be the major impediments to have a sound industrial relation system in India. It is also said that Indian labour laws are highly protective of labour, and labour markets are relatively inflexible. As usual, these laws are applicable in the organised sector only.

Prevention and settlement of disputes and benign industrial relations are the two impor­tant objectives of India’s industrial relations policy. Industrial disputes are governed by the Industrial Disputes Act, 1947, that aims at promoting good relations between employers and workmen, protecting workers against re­trenchment and settling disputes through con­ciliation, arbitration or adjudication.

However, industrial relations climate were far from sat­isfactory when trade unions resorted to mili­tancy in the 1960s and early 1970s. Between 1972 and 1981, the average number of work days lost per year per employee in the manu­facturing sector stood at 4.070. This figure went up to 5.736 between 1982 and 1992—a very high figure compared to other countries in the contemporary period.

India’s labour laws for the workers in the organised sector give workers permanent employment, of course, after a probation pe­riod ranging from 6 months to 2 years. Job security in India is so rigid that workers of large private sector employing over 100 work­ers cannot be fired without government’s per­mission.

Above all, in the public sector, one author aptly remarked that ‘workers here have enjoyed almost complete job security since independence’. Promotions are based on seniority and thus workers get fixed annual wage increments unrelated to work perform­ance.

This really tells on the efficiency of the workers leading to low productivity in the manufacturing industry. Even the owners of sick industries are not permitted to downsize the establishments or to close them down. In view of this, one finds the tendency of Indian firms to employ casual or contract workers who are not protected by the country’s labour laws.

Thus, the conclusion in the words of Pradeep Agrawal is; The labour market poli­cies followed in India in the past have led to serious problems due to low labour produc­tivity even in the context of an economy where the firms were shielded from both interna­tional competition (by the very high import tariffs) and domestic competition (by the li­censing policies).

This, in turn, created an in­efficient and internationally uncompetitive in­dustrial sector which eventually led to lower wages (for example, Indian wages in the manufacturing sector are only seventh the Singaporean wages), fewer jobs, and higher unemployment.


P. Agarwal adds further that these labour policies, if pursued in the neo-liberal regime, will create variety of problems in the midst of growing domestic and international competi­tion. It has been also observed that the so- called labour market regulations operating since 1947 have tended to discourage both the growth of employment and productivity.

Fur­ther, it has pushed many activities into the unorganised sector. This is evident from the fact that annual growth rate of employment in the unorganised sector was much higher (2.73 p.c.) than the organised sector (1.58 p.c.) during 1981-91.

Labour Policies and the Reform Era:

Since protective labour policies and inflexible labour laws are not in the long term interests, flexible labour market policies gained legiti­macy in the climate of economic liberalism so as to promote efficiency and productivity of labour and protect them against any hazards.

The Indian neo-liberal economic reforms introduced in mid-July 1991 paid rather little attention to employment generation. That is why one finds poor employment growth dur­ing the reform period—an adverse conse­quence of the reform process.


Before we start our discussion on the la­bour market policies in the reform era, one must say that the existing labour laws are com­mendable in paper but not in implementation. This is what the second National Commission on Labour set up in October 1999 observed in its Report presented on June 2002; “It can be said that our labour laws… have been criticised as being ad hoc, complicated, mutually incon­sistent, if not contradictory, lacking in uni­formity of definitions and riddled with clauses that have become outdated and anachronis­tic, in view of the changes that have taken place after they were introduced many years ago.”

The Government of India has in recognised the following rights of workers as alienable to every worker under any system of labour laws and labour policy.

These are:

(i) Right to work of one’s choice


(ii) Right against discrimination

(iii) Prohibition of child labour

(iv) Just and humane conditions of work

(v) Right to social security

(vi) Production of wages including right to guaranteed wages

(vii) Right to redress grievances


(viii) Right to organise and form trade unions

(ix) Right to collective bargaining

(x) Right to participation in management.

Along with these rights, workers need many forms of security, like labour market se­curity, employment security, job security, in­come security, work security, etc. These are of critical importance in the globalised era as these people are exposed to increased risk of insecurity. Really, a pathetic condition prevails in the unorganised sector. That is why a Na­tional Commission for Enterprises in the Un­organised Sector headed by Arjun Sengupta was set up to provide some sort of social se­curity to the unorganised workers. It submit­ted its report in August 2007.

Unfortunately, these may of rights of workers are rarely met or enforced. This is one of the most common and most effective criti­cisms of labour legislation in India.


(i) Labour Market Reforms are Imperative:

India’s experience of growth during the liberalised regime is rather stunning, but its overall impacts on employment in the organised sector, per worker productivity are not altogether rosy. As employment, during the period considered, grew slowly compared to the GDP growth rate the period has been described very aptly as ‘jobless growth’ or ‘job loss growth’. Employment decelerated in all sectors in the post-liberalisation period.


Another disturbing aspect of the current employment growth is that both the shares of self-employment and wage labour both casual and regular have increased. One then observes concentration of employment in the unorganised/informal sector. Earlier, this in­formal sector was considered as the ’employ­ment of the last resort’.

Such informal as well as non-agricultural employment neither re­sults in higher productivity nor better wages to the workers. Work conditions have been deteriorating gradually as employers of this sector prefer to employ workers on a contract basis.

However, the hiring of casual or con­tract labour is not peculiar in the unorganised informal sector in India. One can see the grow­ing incidence of casualisations and contractualisation of the labour force even in the organised sector. Thus, protection or se­curity of workers is rather a dream workers are at the discretion of the employers.

It is also observed that employment dis­crimination against women workers has in­creased substantially in the reform period though empowerment of women is consid­ered an important avowed objective in India.

In addition to declining employment opportunities in the organised sector, we see that wages are not increasing in commensuration with the workload that the workers carry now. In other words, workers are exploited not only in the unorganised sector but also in the organised sector in spite of the legislation providing social security to these workers. Unfortunately, most of these legislations are dated and not adequate ‘fit’ in the current globalised-liberalised economy. In fact, labour market in India is now showing a great deal of inefficiency and a high cost structure economy.

Rigid institutional structures in the labour market need to be made flexible and transpar­ent, It is commonly alleged that the employ­ment growth in the organised sector is largely impeded by ‘the prevalence of excessively rigid labour laws’ (11th Plan Document). It is found that in India there are 45 laws at the national level and close to 4 times that at the State levels (since labour falls in the Concur­rent List) that monitor the functioning of the labour markets.


It is, thus, necessary to review the existing laws and regulations so that the (i) corporate sector can be induced to adopt more labour intensive sectors, and (ii) unorganised sec­tors which are traditionally labour-intensive sectors are encouraged to facilitate the ex­pansion of employment.

(ii) Different Aspects of Labour Market Regulations:

Against the backdrop of current liberalised Indian economy, we can say that as changing labour laws is a sensitive issue it requires consensus among all the parties involved. The three issues involved in the labour market regulations are: (i) the wage setting process, (ii) the labour market conditions, and (iii) the hiring and firing process.

The issue of labour reforms has been a source of debate since the reforms era begun in 1991 when the State withdrew itself from intervening the labour market. Historically, the government had a ‘social pact’ with labour reflected in the labour laws of the country. Employers argue that the rigid labour laws are fetters to their development in the current competitive environment. Flexibility in the labour market is of urgent necessity.

But in the name of flexibility in labour laws, one must not ignore the interests of labour so that their jobs are not threatened. Thus, labour market reforms must ensure greater flexibility to our firms and employers in such a way that labour is adequately protected against any casualties.

A belated attention was made by the Government on the need for bringing about changes in the labour laws in 1999 when the Second National Labour Commission was constituted. The Commission was asked (i) to suggest nationalisation of existing labour laws applicable in the organised sector, and (ii) to suggest ‘umbrella’ legislation for insuring a minimum level of protection to workers in the unorganised sector.

The two aspects of labour reforms that have come to the surface in recent times are Chapter V-B of the Industrial Disputes Act and the Contract Labour (Regulation and Abolition) Act. Under Chapter V-B of the ID Act, all establishments employing more than 100 workers must obtain prior approval for closure, retrenchment and lay-offs from the appropriate Government authority.


It has been recommended by the Second National Commission on Labour that the provisions may be applicable to organisations employing over 300 persons. Some argue that the limit be raised to establishments employing more than 1,000 workers. Employers want the provision relating to ‘prior permission’ needs to be deleted. Another alternative is to pitch the compensation to be paid to workers in the event of closure, retrenchment or lay-offs be raised at a higher level.

The objective of the Contract Labour (Regulation and Abolition) Act is to abolish contractual employment in activities and processes in core production/service activities. However, contract workers must enjoy prevalent social security provisions and other benefits.

(iii) Unorganised Sector and Umbrella Organisation:

These are all about formal or regular em­ployment. But an umbrella legislation is in­deed of great importance so that the unorgan­ised sector—where the majority of workers are engaged—is protected. It is necessary to take steps to improve quality of employment in the unorganised sector.

Any significant improve­ment in their incomes and the quality of em­ployment is feasible if the ‘institutional envi­ronment in the labour market makes it feasi­ble for the formal sector to reach out to the workers of the unorganised sectors on a de­centralised basis. This is also possible if provi­dent fund, ESI and a variety of welfare funds are extended to the unorganised sectors. All these would give the workers a better deal in terms of wages, and security of all kinds.

Unfortunately, the quality of employment is far from satisfactory and the NSSO 61st Round (2004-05) shows, as usual, that as most of the workers do not have any (written) job contracts they are not eligible for leave and social security benefits, if any. Thus, what is needed is ‘the creation of a formal relation­ship between the worker and the hiring es­tablishment’.


Thus, in the current scenario, greater flexibility in labour laws must be en­sured so that firms can adjust to changes in demand when necessary. The Government admits that the labour laws—such as Chapter V-B of the ID Act, and Contract Labour (Regu­lation and Abolition) Act—lack flexibility. Further, those laws focus on job protection and thus inhibit employment. These aspects re­ceived attention in the Mid-term Appraisal of the Tenth Plan.

However, the 11th Plan Document says that the V-B provisions of the ID Act, 1947 ‘has not proved to be a major obstacle in downsizing by several manufacturing enter­prises during the past few years with the aid of generous packages for voluntary retire­ment.’ The labour market is required to be made more flexible in the days to come so that labour force shifts gradually from the unor­ganised sector to the organised ones.

However, trade unionists as well as work­ers of the organised sector are of the opinion that labour market reform is anti-labour. But as far as labour laws are concerned, workers of the organised sector, especially in PSEs, enjoy virtually ‘complete’ job security. But protective labour policies may cause damages in the long run in the midst of rising number of unemployment.

Further, if employers enjoy more bargain­ing power, interests of the workers may be at jeopardy. Indeed, this is what we observe in the rising incidence of contract- based employ­ment leading to conflicts with the more gen­eral requirement that society must ensure ‘de­cent work’ for all. With growth rate picking up, a harmonious balance between efficiency and the quality of employment involving the relationship between management and labour and welfare aspects needs to be maintained.

In the ultimate analysis, labour laws, significant as they are, are not the true drivers of growth. Changes in labour laws are only one of the issues that merit attention. Flow-ever, the Second National Labour Commission Report goes on stating that these labour laws ‘have to be visualised and effected in a broader perspective of infrastructural facilities, social security, and Government policies.’

The Commission adds that it is necessary to provide for both protective and promotional measures, the latter being highly relevant for the workers in the unorganised sector.

Another Important Issue:

Labour laws and labour market regulations will surely erode the powers of the workers’ association. This is undesirable on any ground and the work­ers’ rights to form associations need to be pro­tected at any cost. Labour market regulations must be designed in a manner that prevents employers from being vindictive.

Social Safety Net for Workers:

It has been said that the labour market is anti- labour. ID Act, 1947 stipulates that workers cannot be retrenched without prior permission of the Government. This, of course, safeguards the interests of the workers. But employers are of the opinion that, in this competitive globalised world, an organisation needs to be efficient.

Against the backdrop of changing scenario firms should respond in such a man­ner that labour forces are kept small as far as possible. But hiring and firing of workers on any pretext by the employers is hardly defen­sible. Even if such firing is needed at all, work­ers need to be adequately compensated so as to minimise the risks of losing jobs.

a. Rationale for Safety Net:

(i) Safety valve against job loss:

Firstly, globalisation and liberalisation have resulted in higher economic growth rate in collision with a lower employment. Loss of jobs conse­quent upon volatile demand is the social and distributional consequence of globalisation. This is true for all the economies. Provisioning of social safety net for workers will act as a cushion to the victims so as to legitimise re­forms. This argument is valid for all the econo­mies, including India.

(ii) Cancelling out the adverse impacts of reforms:

Secondly, globalisation and its attend­ant consequences on the Indian economy is unavoidable. Workers, in the present scenario, are bound to lose jobs. If a social safety net for workers is created the adverse consequences of economic reforms can be minimised. This compliments economic reforms and related labour market developments.

(iii) Minimising the unfavourable impacts of structural shifting of labour force:

Thirdly, one finds the rationale of such social safety net for workers against the backdrop of structural transformation of an economy. Following the liberalisation measures intro­duced since 1991, the Indian economy has been seeing structural changes where some sectors of the economy lose importance while other sectors gain in importance.

This kind of structural change, thus, necessitates a shift in work force from one sector to another sector, i.e., from the contracting sector to the expand­ing sector. The labour market should be made more flexible so that the labour force could be shifted from the unorganised sector to the or­ganised sector and vice versa without any hassles.

In fact, problems get multiplied when an organised labour force is forced to migrate from its own forte to the unprotected unor­ganised sectors. Anyway, the process of tran­sition of workers from one sector/industry to another sector/industry could be managed both by the provision of financial compensa­tion and through retraining of skills. This is suggestive of the fact that the statutorily- backed social security to the workforce en­gaged in the unorganised sector needs to be provided.

b. Mechanisms of Social Safety Net:

To minimise the adverse impacts of closure of a firm, or retrenchment of workers, the option of social security net needs to be promoted. One such option is the ‘Voluntary Retirement Scheme’ (VRS). This is the most common method to shed off excess labour- load. It is also known as ‘Golden Handshake’—a golden route to retrenchment. This scheme, thus, does not create any pressure to workers to exit as voluntarily retired workers are to be paid lump-sum tax- free benefits. It has been introduced both in public and private sectors in India.

The second option was the creation of Na­tional Renewal Fund in 1992. Its basic objec­tives were (i) to provide funds for compensa­tion to employees, and (ii) to provide funds for employment generation schemes in order to provide a social safety net for labour aris­ing out of closure of units or industrial restruc­turing.