The Economic Package of Rs 20 Lakh Cr 10% announced by our PM in a momentous speech , purported to help India to not just survive but also help India relies its full potential, has been the hot potato for the past couple weeks. The package had 4 cornerstones of Land, labour, Liquidity and Law to rescue farmers, MSMEs and the downtrodden.

Over the coming days, in Press briefings by the finance ministry, the entire package was laid out in full detail. Much of it contained on rural employment and how MSMEs would be propped up. The Impact on labour Laws, however was not explained threadbare. Read on to make sense of the context, purpose, and the proposed changes to these laws and their shortcomings.


There are over 200 state Laws and 50 central Laws in India. While there is no universal consensus on the definition of labour Laws, they exist mainly to prevent exploitation of labourers, provide them safe working conditions, acceptable wages and terms of service etc. The Chart below is a map of all the major Labour laws and Acts.

Types of labour laws

Historically, Labour laws have faced a lot of flak for being too inflexible. Because of the litany of compliances and rules, firms (those above 100 workers) hesitate to hire new workers because terminating their employment requires govt approval. Workers were increasingly hired without formal contracts. This inhibited both growth of firms and workers getting jobs without the stipulated perks.

Organised sector prefers non contractual labour

There is also the massive administrative cost of Implementing these laws and often breeding corruption and rent seeking by govt officials who appraise these firms. Many firms make the argument of simplifying India’s Labour laws so that firms can expand and thin out their workforce depending on market conditions. This would also help to formalize the 90% informal workforce and they would get better social security benefits and wages.


Changes sought under the ordinance

In the wake of the migrant crisis, several states have amended or suspended existing labour laws. These laws are aimed at giving more leeway to firms. In theory, the abolishing of this laws will generate more employment and formalize more workers. However as past experience of states engaging in labour laws relaxation suggests, dismantling worker protection laws does little to attract investments and improving working conditions. They must also pass the test of constitutional validity and must also uphold workers’ rights. A look at the recent proposed changes:

  1. One aspect of the migrant crisis has been that net labour importing states have faced labour shortage and this in turn has driven up wages. These states have prevented the labourers from returning home and force them to stay where they are. Karnataka Govt did so by cancelling migrant trains back to their native areas. This decision, though reversed could likely have violated the fundamental right to move and reside as per one’s own free will.
  2. Reports indicate that the Gujarat govt considered a directive which would allow factories to initiate disciplinary action against migrant labourers who have returned to their home state. Compelling people to work violates the right against exploitation and forced labour or the threat of imprisonment.
  3. The UP Govt ordinance which suspended the operation of all labour laws in the state for the next 3 years (exception of Bonded Labour, Payment of Wages and Safety and Security of workmen). This has been called out to creating an enabling environment for exploitation and drive down wages and further Informalise the workforce. This might lead to abolition of Trade Unions, even though freedom of associating is a fundamental right.
  4. The MP Govt proposed making the Factories Act applicable to factories hiring beyond 50 workers, up from the previous no. of 10. This act regulates occupational safety and health conditions. Though this announcement would relieve small firms from registering under this Act, this would push a large number of factories out of the purview of this Act and put at risk workers safety.

Thus, the legal side of addressing labour interests is a much thornier issue. While every Crisis presents an opportunity for labour reform, it must not be done clumsily and in a hasty manner. Abolishing of critical labour laws in the pretext of enabling the country’s enterprises will defeat the intended motives of labour rights protection etc and most employment will effectively turn Informal.


Many experts say that the most effective solution right now is to address it from the economic angle. As most governments of the world have done, the Central govt can partner up with the Industries and allocate 3% to 5% of the GDP towards sharing the wage burden or providing safety nets. The accompanying panaceas of the stimulus package promising loans, credit guarantees, moratoria for loans, productive capacity expansion, revenue loss sharing etc will do little if the health of the workers is not protected. The following chart shows what countries around the world have done to provide monetary assistance to the workers and is a doable solution in India’s case as well.


Labour laws in different countries

Another solution is to dial down the practice of engaging workers through contractors to work along with permanent skilled workers. These workers account for over 50% of the workers and it drastically cut down employer costs (since they are paid lesser than permanent workers). This practice was decried as an unfair one by labour unions. A study by Bain and Company revealed that it is in the long term interest of the company to pay better wages to employees. Employee costs constitute just 20% of their total costs and paying them on par with permanent workers would only marginally impact profits. The study by Bain also proved the hypothesis that firms that treat their workforce as long term asset perform better than those who consider the workers as burden when sales are down.

A comprehensive integrated framework of labour laws will that is light on compliance but also armed with teeth for swift action against the errant enterprises would achieve the twin objectives of spurring the growth of workers and protecting the employees, rather than having multiple disjoint and overlapping laws. One such measure is already in the offing as in November 2019, the Center introduced the Industrial Relations Code, which will subsume Industrial Disputes, Trade Unions and Employment Standing Orders Acts. This will create many more opportunities for consultation and deliberation with all stakeholders and achieve the twin objectives of workers and industrial interests.