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With India’s entry into the fourth phase of lockdown, the lingering uncertainty of livelihood, income loss and the stranded worker’s desperation to return home have showed up the grave fault lines of our segmented economy. In these difficult times, when workers need more fiscal stimuli, the quashing of labour laws tops the list of policy measures in Uttar Pradesh, Madhya Pradesh and Gujarat. This has brought about numerous, labour-insensitive (even industry-insensitive) ordinances which have tremendous adverse implications for a highly segmented labour market like India. Reforming labour markets by suspending key laws will lead to the debasement of labour rights and the concomitant rise of a discourse that delegitimises the criticality of these rights and will intensify informality and precarity in several ways.

Notably, it will informalise the formal sector and lead to multiple labour market issues like employment, health and safety, skills and weakened or nil incomes. In the past too, there were various soft attempts to deregulate labour markets in line with product and other input market competition. However, it was difficult to implement due to strident protests by a somewhat coordinated working class movement.

This time, when organised protest is not possible due to the lockdown, state governments are engaged in a race to the bottom to bring substantial changes in existing labour laws to encourage ease of doing business and to promote flexibility. Supporters of these changes argue that it would reduce the burden of labour costs and encourage flexibility for employers to adjust their production activities and help the state to attract foreign direct investment. In the short run, this strategy may assist the states to align their reformist measures with the centre’s macro agenda for privatisation. But in the long run, neither the employers nor employees would be better off as it will promote unhealthy competition and expose workers to higher levels of exploitation.


The negative effects of a country’s outdated labour laws have been intensifying over the years. A few studies and the World Bank’s opinion on India’s labour laws were evident in the Economic Survey 2005-06 and later in 2017-18. The main motivation to pursue this reform emanated from the controversial growth model of Gujarat and Rajasthan, both of which pursued changes in labour laws. Here, a flexible business environment was flaunted to promote higher economic growth despite having a poor record in social protection and the human development index. Several robust empirical studies, including a few by me, showed the positive impact of labour rights and collective bargaining in promoting economic development and reducing income inequality that supports pro-worker labour legislation.

As India’s Ease of Doing Business Index ranking increased from 130th (2016) to 63rd (2019), our global ranking point estimate of ITUC’s Global Rights Index during the same period declined to the bottom quintile scoring 5 points on a scale of 1-5+ in a group of countries, where a higher score indicates no guarantee of workers’ rights. Neither the workers nor the economy witnessed any benefits from India’s quest to top the global ranking. For instance, the last five years witnessed slow growth of investment, especially in the manufacturing sector.

According to the Economic Survey 2018-19, the gross capital formation of the private sector (i.e. new productive investment) declined to 28.6% of GDP in 2017-18 from 31.3% in 2013-14. Interestingly, the public sector’s share remained more or less the same during this period. Total industrial production during the same period remained below 3% or even negative for some months, implying the contraction of the manufacturing sector.

Under the pretext of the Covid-19 crisis, Uttar Pradesh, Madhya Pradesh and Gujarat have taken a frog’s leap in suspending essential labour laws. These include allowing non-hazardous factories employing less than 50 workers to use third-party certification in lieu of routine inspections; exempting industries from the provisions of the Industrial Disputes Act, 1947 (IDA) except Chapter V-A, Sections 25-N and 25-O (restrictions on retrenchment and closure, respectively), 25-Q and 25-R (the penalty for illegal retrenchment and closure for new registered for the next 1,000 days; exempting 11 industries from the MP Industrial Relations Act, 1960; exempting all registered factories from the provisions of the Factories Act, 1948 except Sections 6-8, 21-41H dealing with safety and health for the next 1,000 days and extending the hours for business from 6 am to midnight.

The UP government has exempted all factories from all laws subject to the following conditions, among others—timely and bank payment of wages, payment of minimum wages, applicability of provisions relating to safety and security in the Factories Act and the Building and Other Construction Workers Act, 1996, compensation for death/disability as per Employees’ Compensation Act, 1923 and applicability of provisions in all labour laws relating to women’s and children’s employment.

Following in the footsteps of UP and MP, Gujarat announced that new industrial units will be provided with relief from all the related acts save minimum wages, industrial safety and employees’ compensation for at least 1,200 days.

Will these measures help the states to review the economy? Based on available empirical evidence, the answer is no. The dilution of labour laws was already there in UP, MP, Gujarat and Rajasthan. It was often called reform by stealth in favour of employers since the beginning of economic reforms. Hence, an unnecessary squashing of labour laws will externalise the business costs onto the local economy.

Secondly, according to RBI, theses states have witnessed a substantial increase in FDI inflow from 2013-14 to 2015-16. However, it started showing a declining trend from 2015-16—UP (Rs 5,238 million or 0.21.% of total FDI inflow); MP (Rs 5,181 million or 0.18%) and Gujarat (Rs 1,46,669 million or 5.61 %). In 2018-19, it was as follows—UP (Rs 2,339 million or 0.08 % of total FDI inflow); MP (Rs 2,234 million or 0.17 %) and Gujarat (Rs 1,26,183 million or 4.06%).

Interestingly, according to the Ministry of Corporate Affairs, during the same period, the total number of firms closed increased from 996 to 7,929  in UP; 371 to 4,968 in MP and 867 to 11,787 in Gujarat. According to the Annual Survey of Industries, the principal factor for this higher exit rate largely accrues to the lowest cumulative average growth of output per workers—0.04% for Gujarat, -0.07 % for Uttar Pradesh and -0.12% for Madhya Pradesh. This implies a lower level of workers’ productivity from 2016-17 to 2018-19. Hence, it is natural to ask what happened to the investment summits held from 2016 to 2019 in these states.

Third, it was observed in the World Bank’s Enterprise Survey (2014-15), that the major challenges in conducting business, as reported by Indian firms, was the lack of access to formal credit (i.e. 54%) and inadequate electricity supply (i.e. 47%). Only 11% of large-size firms reported having labour regulation as a major challenge.

Finally, despite having a pro-business climate prior to the suspension of labour laws, the infusion of fresh fixed capital declined from 21.15 % to 6.26 % in Gujarat; from 16.48 % to 6.25 % in Uttar Pradesh and 41.10 % to 3.24 % in Madhya Pradesh from 2015-16 to 2018-19. Therefore, it clearly shows that the economic logic to increase India’s ranking on global performance indicators by suspending labour laws is indeed unwarranted.


Without effective enforcement, the adverse effects of suspension of labour laws will be more for workers with less bargaining power and for those who are invisible and informal in the labour legislation. According to the Sixth Economic Census, 97.39 million (45%) work in establishments without any hired workers (also referred to as own-account/home-based enterprises, etc), whereas 118 million (55%) work in establishments with at least one hired worker. Broadly, the former category falls under the Shops and Establishment Act and later, the Factories Act.

In other words, debasement of labour rights and non-recognition of employment status due to suspension of labour laws will lead to a higher propensity for exploitation and exposure to occupational health and safety risks, especially in hazardous industries which have a high incidence of fatality. Without any enforcement and legal recourse, these changes would dispossess workers of their legal rights and lead to inhumane conditions at work, inadequate means of livelihood and discrimination, leading to a modern form of serfdom.

This will also set the tone for pro-business reform that turns a blind eye to ethical business responsibility and provide an imperfect competition to lower the standard of working conditions. Almost two weeks after the changes, it was reported that a German footwear company, VonWellx, owned by Casa EverzGmbh, announced the shifting of its production plant from China to Agra. This news may be applauded in the industry just like the investment summits. However, time will unfold its actual success rate. As many scholars have said, the government may justify such retrograde measures as necessary to revive the economy, but the fact is that they infringe on fundamental and human rights and violate International Labour Organisation conventions. With these changes, states are promoting unregulated and unsteady markets and passing on the entrepreneurial risk to the workers who are bereft of even basic means of survival.

Instead of focusing on labour laws, Uttar Pradesh, Madhya Pradesh and Gujarat should focus on improving their ranking in the Human Development Index and other social indicators.

This will promote inclusive growth and create employment opportunities, as it has been observed that higher human capital development is correlated with higher economic growth rate in modern economics.

—The writer is Assistant Professor (Economics), Centre for Labour Studies, School of Management and Labour Studies, Tata Institute of Social Sciences, Mumbai. The views expressed here are personal

Lead picture: UNI

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