Reforming the Labor Market

Data Source: World Bank


India’s young population gives the country an edge over nearly every other major Asian economy for the foreseeable future. From a purely statistical standpoint, India appears to have a comparative advantage in labor.  Over a quarter of the world’s workers are Indian (nearly 500 million workers, according to the International Labor Organization), and an additional 300 million Indians will enter the eligible labor force by 2025. As a result, India will benefit from a labor surplus, at a time when the global economy is facing a labor shortfall. India’s labor market will thus be a great asset to the country’s economic strength.

Yet, India has failed to properly utilize this advantage thus far. Myriad laws bar India’s labor force from achieving its true potential. Laws like the Industrial Disputes Act (IDA, enacted in 1947) constrain businesses who want to hire or fire employees. The IDA requires that any firm that has over 100 workers must obtain permission from the government in order to fire or hire employees, severely constraining India’s manufacturing potential. For over a decade, economists have highlighted the necessity of reforming these laws, to little or no avail.

Data Source: World Bank

Modi Government and Labor

The election of Narendra Modi in May 2014 brought hope to Indian observers that a strong, reform-oriented prime minister would take the difficult steps necessary to address the nation’s labor problems. However, these challenges remain steep. For instance, gender equity in the labor market has yet to be achieved. While 80% of men 15 years of age or older are active in the labor force, only 27% of women are. Additionally, a large portion of the Indian workforce remains outside the reaches and benefits of the organized economy. By some estimates, at least 400 million Indians are working in the informal economy. According to the data supplied by The US Bureau of Labor Statistics, up to 80% of the workers in India’s manufacturing industry, including the contract workers, are unregulated and remain outside the organized sector.

The BJP election manifesto briefly discussed the importance of labor to Modi’s vision for jumpstarting the Indian economy. The manifesto described the desire to review the country’s labor laws and set up a pension and health insurance safety net for laborers across the nation.

State-led initiatives

The Modi government has adopted a policy allowing two states led by BJP governments—Rajasthan and Madhya Pradesh—to adopt labor reform initiatives. Rajasthan and Madhya Pradesh have enacted radical labor reforms, such as streamlining the process of hiring and firing employees, allowing the states to establish a more competitive business environment. However, reforms at the state level alone are insufficient. It is necessary to expand these reforms to the national level to make India’s labor market globally competitive.

At Hudson Institute’s August 2014 conference, two experts examined the issue of labor in India. While some labor reforms had been announced at the time, the efforts were primarily contained to the state level. Hudson Institute President Dr. Kenneth Weinstein observed that the reforms being carried out in Rajasthan could potentially be useful as a model for the rest of India. These included revisions to the Factories Act, Industrial Disputes Act (IDA), and the Contract Labor Act. The Factories Act dealt with factory safety conditions but instead stifled factories with regulation. With reforms to the Contract Labor Act, contract laborers would have wages and benefits on par with regular workers.  By enacting these reforms, Rajasthan is creating a stable, prosperous business environment.

The potential of implementing such reforms, while also improving workmen’s compensation to enhance the labor markets was highlighted by Takshashila Institute expert Mukul G. Asher. Emphasizing India’s favorable demographics, he suggested several different initiatives that the Modi government should undertake to improve India’s labor market. These include: allowing women to work at night, shifting labor from agriculture to non-agricultural occupations like manufacturing, and continuing Rajasthan-like reforms. This would simultaneously improve benefits for workers by ensuring a minimum pension, modernizing the Industrial Training Institutes (ITIs), and rethinking the MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) to include non-agricultural training programs to encourage labor mobility.

Shramev Jayate

On October 16, 2014, Modi announced the first set of initiatives to be implemented in the labor market. Resembling Mukul Asher’s recommendations, the program will increase the number of apprentices that the ITIs will train. Among the initiatives announced in Modi’s Shramev Jayate program for labor reform includes simplifying some of the regulation processes as well as providing employees new access to benefits. The regulations have also been streamlined for various compliance processes. Instead of filling out 16 different reports for each of the labor laws, employers now only need to complete a single report. The inspection process will also be detailed online for transparency’s sake. Finally, the program will make it easier for employees to access their savings held by the government. However, these reforms are relatively minor in scope. 

In June 2015, the government announced it was preparing a bill for the upcoming parliamentary session concerning labor reform. If passed, it would be the largest reform of the country’s economy since India opened up in 1991. In line with recommendations proposed at Hudson’s August 2014 conference, the Modi government has decided to use the examples of Rajasthan and Madhya Pradesh in drafting the reform bill. This includes changing regulations to make firing and hiring easier for companies and increasing the severance package for workers, among other reforms in the bill. The three largest labor laws, the Trade Unions Act, Industrial Disputes Act, and the Industrial Employment (Standing Orders) Act, will be merged together to form a single code for industries to follow. Indeed, all 44 central laws for labor will be merged into four different codes for labor including wages, social security, industrial relations, and safety and welfare.

Challenges & Opportunities

Modi’s reforms in the labor market have been incremental in part due to the potential backlash that the government could face from unions across the country. Indeed, some BJP officials have expressed doubt as to whether the central government should take the political risk of reforming the labor markets. The bill will face opposition not just from labor unions but also from political parties from the Congress to those on the left of the spectrum. In order to reduce this opposition the Modi government is working to bring states and trade unions around to support the reform bill. India’s labor market faces several challenges: outdated regulations, gender inequality in the workforce, laborers who remain outside the formal economy, and political pushback against potential reforms. At the same time, the Modi administration has several opportunities to properly utilize India’s laborers to further grow the country’s economy. With a comparative advantage in labor, measures to improve women’s participation in the labor markets, promoting labor mobility between agriculture and non-agricultural occupations, initiatives like the Shramev Jayate, and a labor reform bill, the government has many opportunities to address these challenges. The next four years will show whether Modi can harness India’s economic strength through labor market reform.