Labour in India

Labour in India

Labor availability map for the world. In 2011, India had about 487 million workers compared to China's 795 million and United States' 154 million.

The labour in India consists of about 487 million workers, the second largest after China.^[1] Of these over 94 percent work in unincorporated, unorganized enterprises ranging from pushcart vendors to home-based diamond and gem polishing operations. The organized sector include those employed by the government, state-owned enterprises and private sector enterprises. In 2008, the organized sector employed 27.5 million workers, of which 17.3 million worked for government or government owned entities.

India has numerous labor laws such as those prohibiting discrimination and child labor, those that aim to guarantee fair and humane conditions of work, those that provide social security, minimum wage, right to organize, form trade unions and enforce collective bargaining. India also has numerous rigid regulations such as maximum number of employees per company in certain sectors of economy, and limitations on employers on retrenchment and layoffs, requirement of paperwork, bureaucratic process and government approval for change in labor in companies even if these are because of economic conditions.

India is considered to be a highly regulated and most rigid labor law countries in the world. Rigid labor laws in India have been criticized as the cause of low employment growth, large unorganized sector, underground economy, use of casual labor and low per capita income. These have led many to demand reforms for labor flexibility in India.

History

The labor laws of India originated and express the socio-political views of leaders such as Nehru from pre-1947 independence movement struggle. These laws were expanded in part after debates in Constituent Assemblies and in part from international conventions and recommendations such as of International Labour Organization. The current mosaic of Indian laws on employment are thus a combination of India's history during its colonial heritage, India's experiments with socialism, important human rights and the conventions and standards that have emerged from the United Nations. The laws cover the right to work of one’s choice, right against discrimination, prohibition of child labor, fair and humane conditions of work, social security, protection of wages, redress of grievances, right to organize and form trade unions, collective bargaining and participation in management.^[

Labor laws in India

Labor law notices in India.

India has over 50 major Acts and numerous laws that regulate employers in matters relating to industrial relations, employee unions as well as who, how and when enterprises can employ or terminate employment. Many of these laws survive from British colonial times, while some have been enacted after India's independence from Britain.

India is a federal form of government. Labour is a subject in the concurrent list of the Indian Constitution and therefore labour matters are in the jurisdiction of both central and state governments. Both central and state governments have enacted laws on labour relations and employment issues. Some of the major laws relevant to India are:^[

Workmen’s Compensation Act of 1923

The Workmen’s Compensation Act compensates a workman for any injury suffered during the course of his employment or to his dependents in the case of his death. The Act provides for the rate at which compensation shall be paid to an employee. This is one of many social security laws in India.^[

Trade Unions Act of 1926

This Act enacted the rules and protections granted to Trade Unions in India. This law was amended in 2001.

Payment of Wages Act of 1936

The Payment of Wages Act regulates by when wages shall be distributed to employees by the employers. The law also provides the tax withholdings the employer must deduct and pay to the central or state government before distributing the wages.

Industrial Employment (Standing orders) Act of 1946

This Act requires employers in industrial establishments to define and post the conditions of employment by issuing so-called standing orders. These standing orders must be approved by the government and duly certified. These orders aim to remove flexibility from the employer in terms of job, hours, timing, leave grant, productivity measures and other matters. The standing orders mandate that the employer classify its employees, state the shifts, payment of wages, rules for vacation, rules for sick leave, holidays, rules for termination amongst others.

Industrial Disputes Act of 1947

The Industrial Disputes act 1947 regulates how employers may address industrial disputes such as lockouts, layoffs, retrenchment etc. It controls the lawful processes for reconciliation, adjudication of labour disputes.

The Act also regulates what rules and conditions employers must comply before the termination or layoff of a workman who has been in continuous service for more than one year with the employer. The employer is required to give notice of termination to the employee with a copy of the notice to appropriate government office seeking government's permission, explain valid reasons for termination, and wait for one month before the employment can be lawfully terminated. The employer may pay full compensation for one month in lieu of the notice. Furthermore, employer must pay an equivalent to 15 days average pay for each completed year of employees continuous service. Thus, an employee who has worked for 4 years in addition to various notices and due process, must be paid a minimum of the employee's wage equivalent to 60 days before retrenchment, if the government grants the employer a permission to layoff.

Minimum Wages Act of 1948^[

The Minimum Wages Act prescribes minimum wages in all enterprises, and in some cases those working at home per the schedule of the Act. Central and State Governments can and do revise minimum wages at their discretion. The minimum wage is further classified by nature of work, location and numerous other factors at the discretion of the government. The minimum wage ranges between 143 to 1120 per day for work in the so-called central sphere. State governments have their own minimum wage schedules.

Industries (Regulation and Development) Act of 1951

This law declared numerous key manufacturing industries under its so-called First Schedule. It placed many industries under common central government regulations in addition to whatever laws state government enact. It also reserved over 600 products that can only be manufactured in small scale enterprises, thereby regulating who can enter in these businesses, and above all placing a limit on the number of employees per company for the listed products. The list included all key technology and industrial products in early 1950s, including products ranging from certain iron and steel products, fuel derivatives, motors, certain machinery, machine tools, to ceramics and scientific equipment.

Employees Provident Fund and Miscellaneous Provisions Act of 1952

This Act seeks to ensure the financial security of the employees in an establishment by providing for a system of compulsory savings. The Act provides for establishments of a contributory Provident Fund in which employees’ contribution shall be at least equal to the contribution payable by the employer. Minimum contribution by the employees shall be 10-12% of the wages. This amount is payable to the employee after retirement and could also be withdrawn partly for certain specified purposes.

Maternity Benefit Act of 1961

The Maternity Benefit Act regulates the employment of the women and maternity benefits mandated by law. Any woman employee who worked in any establishment for a period of at least 80 days during the 12 months immediately preceding the date of her expected delivery, is entitled to receive maternity benefits under the Act. The employer is required to pay maternity benefits, medical allowance, maternity leave and nursing breaks.

Payment of Bonus Act of 1965

This Act, applies to an enterprise employing 20 or more persons. The Act requires employer to pay a bonus to persons on the basis of profits or on the basis of production or productivity. The Act was modified to require companies to pay a minimum bonus, even if the employer suffers losses during the accounting year. This minimum is currently 8.33 percent of the salary.

Payment of Gratuity Act of 1972

This law applies to all establishments employing 10 or more workers. Gratuity is payable to the employee if he or she resigns or retires. The Indian government mandates that this payment be at the rate of 15 days salary of the employee for each completed year of service subject to a maximum of 1000000.

Labor structure in India

A majority of labor in India is employed by unorganized sector (unincorporated). These include family owned shops and street vendors. Above is a self-employed child laborer in unorganized retail sector of India.

Labor at an unorganized handicraft manufacturing enterprise.

Over 94 percent of India's working population is part of the unorganized sector. In local terms, organized sector or formal sector in India refers to licensed organizations, that is, those who are registered and pay sales tax, income tax, etc. These include the publicly traded companies, incorporated or formally registered entities, corporations, factories, shopping malls, hotels, and large businesses. Unorganised sector, also known as informal sector or own account enterprises, refers to all unlicensed, self-employed or unregistered economic activity such as owner manned general stores, handicrafts and handloom workers, rural traders, farmers, etc

India's Ministry of Labor, in its 2008 report, classified the unorganized labor in India into four groups. This classification categorized India's unorganized labour force by occupation, nature of employment, specially distressed categories and service categories. The unorganized occupational groups include small and marginal farmers, landless agricultural labourers, share croppers, fishermen, those engaged in animal husbandry, beedi rolling, labeling and packing, building and construction workers, leather workers, weavers, artisans, salt workers, workers in brick kilns and stone quarries, workers in saw mills, and workers in oil mills. A separate category based on nature of employment includes attached agricultural labourers, bonded labourers, migrant workers, contract and casual laborers. Another separate category dedicated to distressed unorganized sector includes toddy tappers, scavengers, carriers of head loads, drivers of animal driven vehicles, loaders and unloaders. The last unorganized labor category includes service workers such as midwives, domestic workers, barbers, vegetable and fruit vendors, newspaper vendors, pavement vendors, hand cart operators, and the unorganized retail.

The unorganized sector has low productivity and offers lower wages. Even though it accounted for over 94 percent of workers, India's unorganized sector created just 57 percent of India's national domestic product in 2006, or about 9 fold less per worker than the organized sector. According to Bhalla, the productivity gap sharply worsens when rural unorganized sector is compared to urban unorganized sector, with gross value added productivity gap spiking an additional 2 to 4 fold depending on occupation. Some of lowest income jobs are in the rural unorganized sectors. Poverty rates are reported to be significantly higher in families where all working age members have only worked the unorganized sector throughout their lives.

Agriculture, dairy, horticulture and related occupations alone employ 52 percent of labor in India.

About 30 million workers are migrant workers, most in agriculture, and local stable employment is unavailable for them.

India's National Sample Survey Office in its 67th report found that unorganized manufacturing, unorganized trading/retail and unorganized services employed about 10 percent each of all workers nationwide, as of 2010. It also reported that India had about 58 million unincorporated non-Agriculture enterprises in 2010.

In the organized privately owned sector with more than 10 employees per company, the biggest employers in 2008 were manufacturing at 5 million; social services at 2.2 million, which includes private schools and hospitals; finance at 1.1 million which includes bank, insurance and real estate; and agriculture at 1 million. India had more central and state government employees in 2008, than employees in all private sector companies combined. If state-owned companies and municipal government employees were included, India had a 1.8:1 ratio between public sector employees and private sector employees. In terms of gender equality in employment, male to female ratio was 5:1 in government and government owned enterprises; private sector fared better at 3:1 ratio. Combined, counting only companies with more than 10 employees per company, the organized public and private sector employed 5.5 million women and 22 million men.

Given its natural rate of population growth and aging characteristics, India is adding about 13 million new workers every year to its labor pool. India's economy has been adding about 8 million new jobs every year predominantly in low paying, unorganized sector. The remaining 5 million youth joining the ranks of poorly paid partial employment, casual labor pool for temporary infrastructure and real estate construction jobs, or in many cases, being unemployed.

Criticisms

Scholars suggest India's rigid labor laws and excessive regulations assumed to protect the labor are the cause of slow employment growth in high paying, organized sector. India's labor-related acts and regulations have led to labour market rigidity. This encourages shadow economy for entrepreneurs, an economy that prefers to employ informal labor to avoid the complicated and opaque laws. In particular, Indian labour legislation such as the Industrial Disputes Act of 1947 added rigid labour laws and one sided trade union laws. Although the Act does not prohibit layoffs and retrenchments, it does require entrepreneurs and companies to get the permission from government officials to fire an employee for absenteeism, retrench employees for economic reasons, or to close an economically nonviable company. This bureaucratic process can stretch into years, and the government officials have consistently and almost always denied such permission. As a result, the scholars argue that India's inflexible labor laws have created a strong disincentive to formally register new companies and hire additional workers in existing organized sector companies. Unlike China, Indian businesses have avoided substituting India's abundant labor for export or domestic opportunities, or use labor instead of expensive equipment for quality control or other operations. These are reasons for India's weak employment growth.

More recently, a few scholars have completed a comparative study between states of India with different labor regulations. They compared states of India who have amended labour legislations to grant more flexibility to employers, to those states in India that have made their labor laws even more rigid and complicated to comply with. These studies find that states with flexible labor laws have grown significantly faster. Flexible labor states have been able to take advantage of the export opportunities, and the per capita household income has risen much faster in states with flexible labor laws. States with rigid labor laws have led local entrepreneurs to prefer casual workers or contract workers with finite employment time period; in essence, more rigid and inflexible labor law states see increased informal employment.

A 2007 article in The Economist finds India to have the most restrictive labor laws in any major economy of the world. India's private sector, including its organized manufacturing sector, employs about 10 million Indians. Manufacturing firms need to obtain government permission to lay off workers from factories, and this permission is usually denied if they have more than 100 staff. This partly explains why most Indian firms are small: 87 percent of employment in India's organized manufacturing sector is in firms with fewer than ten employees, compared with only 5 percent in China. Small Indian firms cannot reap economies of scale or exploit the latest technology, and so suffer from lower productivity than if they scaled up, employed more people and were much bigger companies. This cripples Indian firms ability to rapidly expand or adjust with changes in global economy, both during early opportunity phase and during economic change.

One exception is white collar jobs, where companies have stronger lobbies and employees are not unionized, so they have managed to operate freely with a much larger workforce and have been able to lay off significant chunk of their workforce without cognizance of the labor laws. In almost all cases white collar employees are forced to resign under threat of negative recommendations and black-listing with industry associations.

Djankov and Ramalho have reviewed a number of labor studies on developing countries including India. They find, consistent with above criticisms, that countries with rigid employment laws have larger informal/unorganized sectors and higher unemployment, especially among young workers. They also report the rigid, inflexible labor laws are strongly related to low per capita income.

International comparison of Indian labor laws

The table below contrasts the labor laws in India to those in China and United States, as of 2011.

Relative regulations and rigidity in labor laws
Practice required by law	India	China	United States
Minimum wage (US$/month)	90 (INR 5000)	182.5	1242.6
Standard work day	8 hours	8 hours	8 hours
Minimum rest while at work	30 minutes per 5 hour	None	None
Maximum overtime limit	200 hours per year	1 hour per day	None
Premium pay for overtime	100%	50%	50%
Dismissal due to redundancy allowed?	Yes, if approved by government	Yes, without approval of government	Yes, without approval of government
Government approval required for 1 person dismissal	Yes	No	No
Government approval required for 9 person dismissal	Yes	No	No
Government approval for redundancy dismissal granted	Rarely	Not applicable	Not applicable
Dismissal priority rules regulated	Yes	Yes	No
Severance pay for redundancy dismissal of employee with 1 year tenure	2.1 week salary	4.3 week salary	None
Severance pay for redundancy dismissal of employee with 5 year tenure	10.7 week salary	21.7 week salary	None