PublicationsImpact of Labour Laws on India’s Foreign Direct Investment

October 11, 20200
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ABSTRACT

The paper aims to analyse how labour laws have acted as one of the major concerns for potential foreign direct investors in India. The papers aim to analyse various laws that have affected domestic as well as foreign investors in the country. It also discusses how this concern has been one of the reasons why China has been preferred as a better investing zone that India. Further, the paper also tries to establish and support the intent of the government of India to bring out reforms in such laws to attract FDI.


INTRODUCTION

Foreign Direct Investment (FDI) is one of the major monetary sources for economic development for a country. Every country is taking initiatives to attract FDI. South Asian countries especially India and China, have been seen as the most favourable recipients of FDI, as they offer comparatively cheap labour. Furthermore, when the comparison is drawn deeper India offers cheaper labour in comparison to China as the average minimum wage for contract workers in India is US$148 whereas US$234 in China.[1]

The reason for the comparison being drawn between them, through the lens of contract workers is that, in both the countries, the majority of the employment is in the form of contract workers. India despite having such an advantage in addition to the US-China trade war, has failed to attract various investor companies, which are labour intensive, from investing in the country due to its numerous outdated labour laws. This paper aims to analyse why the Indian Government is keen on reforming its labour laws.

India, at present, has more than 200 labour law, that is regulated by the State and Central Government[2]. The regulation of labour laws in the country is quasi-federal and gives both the State and the Centre the power to regulate such laws thereby giving effect to such numerous legislations. Potential Foreign Investors have also claimed that the procedural systems in India with respect to various labour laws are cumbersome and repetitive.[3] The labour laws in India are not only numerous but are also outdated and bias which creates unfavourable conditions and acts as barriers from investments flowing in the country.


INEFFECTUAL AND DESPISED LABOUR LAWS

The most inefficient labour laws which have been pointed out by various investors, banking sectors, and economists are The Industrial Disputes Act, 1947, The Trade Unions Act, 1926, and The Contract Labour (Regulation and Abolition) Act, 1970.

The Industrial Disputes Act is regarded as the most constraining legislation due to various provisions of the Act. Chapter V of the Act provides that any entrepreneur or firm who has recruited more than 100 employees is willing to fire an employee or worker has to take permission from the government before taking such a decision, such a provision hampers the quick decision making of a firm thereby affecting its efficiency. A firm is deprived of changing its structure according to the supply and demand forces of the economy by such a provision and hampers its existence.

Another major challenge is the dispute resolution mechanism provided by the Industrial Disputes Act (IDA), the Act provides that an industrial dispute can either be referred to the Industrial Tribunal under Section 10 of the IDA or the parties can enter into an arbitration agreement and refer it to an arbitrator under Section 10A of the IDA. Presently 14000 cases are pending in the industrial tribunals, such pendency along with burden has affected the efficiency of the tribunals, thereby on an average taking 8-12 months to resolve an industrial dispute.[4]

The costs faced by employers during such pendency in terms of costs for litigation and hindrance in the production cycle,(in cases of disputes with the majority of employees) have been huge. Such provisions have forced various industries to either opt for more capital-intensive technologies or contract out increasingly larger volumes of work to smaller enterprises wherein the provision of Government provisions did not apply.[5] Such measures resorted by firms already established in India have forced various foreign investors from restricting their investment in India. The costs faced during such pendency have been proved to far more expensive than the costs saved due to cheap labour to the investors who have already invested.

The second most disputed labour legislation is The Contract Labour (Regulation and Abolition) Act, 1970. In India majority of the relationship between employers and their workers is through contract labour and therefore making this legislation very important. The percentage of contract workers to total workers in manufacturing as a whole increased from about 12 per cent in 1990 to about 35 per cent in 2015.[6]

The legislation though provides firms to recruit contract labourers for permanent tasks, it also gives power to the State and the Central Government to notify the firms from prohibiting such a relationship as they deem fit. A power of such nature, in India, is unilaterally exercised by the corrupt government officials to fill their own pockets. All related notifications from the government hamper the working of various firms as they are largely dependent upon contract workers and therefore affecting their efficiency and effectiveness.

Even if such notifications are not sent, the inspection and administrative hurdles involved in maintaining a relationship with contract labours hamper the working of a firm, thereby making it very unattractive and undesirable for foreign investors to bring investment in the country. The Contract Labour (Regulation and Abolition) Act, 1970 does not allow user enterprises to use contract labour at will to tackle uncertain demand for their products and therefore hampers the flexibility of the firm to tackle economic forces of demand and supply adding to the unfavourable factors of bringing FDI in the country.

The third most disputed labour legislation is The Trade Unions Act, 1926. The Act stipulates that any seven or more members can form a trade union and apply for registration as a trade union. A partial amendment has been introduced which provides that at least 10% of the employees (at least 7 members) or 100 employees whichever is lesser are required to form a trade union. These provisions allow the formation of at least ten unions in an establishment with a size of 70 workers, and upwards of ten unions if the size exceeds 1100 workers. The existence of multiple trade unions in an establishment results in union rivalry, thereby affecting industrial harmony.

The Act along with The Industrial Disputes Act provides the trade unions, the right to strike against the employer to collectively bargain for their rights giving rise to more industrial disturbances and affecting the working of a firm[7]. With the apprehension of cropping up of multiple trade unions, Indian entrepreneurs especially in the unorganized sector, limit their size of operations and resort to engaging informal employment.[8] Such entrepreneurs are forced to take such decisions due to existing establishment whereas foreign investors willing to invest take these as unfavourable conditions and avoid investing in the country.


PARTICIPANTS OF THE ECONOMY AND THE LAW

The impact of these labour laws also extend to such nature that the workers and employers engage through the instrument of economic coercion on each other through strikes and lockouts for the fulfilment of their needs, i.e., the employees want fair wages and better perks whereas the employers want less cost of production, and productive labour for lower wages.[9] Such an engagement though in the short term may fulfil individual needs but in the long run seem to hamper the industrial growth and harmony of the country, thereby making it very unattractive for foreign investors.

Foreign Investors also believes that the labour laws in India are very biased towards the employees, and such inference is also supported by the Supreme Court decision Workmen of M/S Firestone Tyre & Rubber Company of India v. Management of M/S Firestone Tyre & Rubber Company of India[10], where it was held that “the Industrial Dispute Act is social welfare legislation created for the employees and in case of two conflicting views, the tribunal shall prefer the one favouring the employee”.

The Supreme Court also in the case of All India Bank Employees Association v I.T.[11] held that “the right to strike has been recognized by necessary implication in the industrial legislation in India and express statutory provisions have been made to regulate it in the Industrial Tribunal Act”, and the Act has been held by the Supreme Court itself to be for the benefit of the employees.


ANALYSIS AND CONCLUSION

The problems which are being faced by foreign investors and local investors have become a matter of great importance for the country because of its direct relation with the economic development of the country. India, at present, has an opportunity to attract various foreign investors owing to the US-China trade war, and the Central Government has plans on taking complete advantage of such a situation and has thereby set up various law commission with the objective of improving the ease of doing business in the country to promote their initiative program ‘Make in India’, and attract foreign investors.

The Indian Government has proposed new labour legislation that would merge the present 44 central labour laws into four categories wages, social security, industrial safety & welfare, and industrial relations.[12] The proposed legislation tries to meet the demands of employers who had petitioned the government to rationalize labour laws as well as of the labour unions while trying to extend the provision of minimum wages to all workers regardless of wage ceiling and sector of employment.[13]

The present government has finally realised that law-making power can no longer be used a tool to ensure votes for their political parties and that such acts of the government of pleasing each specific group to secure votes is hampering the economic growth of the country. The present laws have been finally been identified as cumbersome and ineffective, and the government has proposed reform in these laws to meet its objective of becoming a five trillion-dollar economy through various new legislations.

 The Indian Government has proposed The Code of Wages Bill, 2019 which rationalizes various sections of central labour laws on service conditions. The government has proposed The Code on Occupational Safety, Health and Working Conditions (OSHW), 2019, which proposes one license, one registration, and one return for establishments. Once an establishment is registered under the Code on OSHW, it will not require any other registrations for labour law compliance.[14]

The proposed bill also seeks to consolidate 13 labour laws, including the Factories Act, 1948, and the Contract Labour (Regulation and Abolition) Act, 1970. Further, they have also proposed The Industries Relations Code, 2020 through which the trade unions must serve notice at least 14 days before going on a strike. Furthermore, it also proposes to amend the law on layoff, by providing that ‘establishments with less than 300 workmen can layoff, or close without government approval. The earlier limit was 100.

The above-proposed legislations are clearly indicative of the intent of the Indian government to make the labour laws effective and less cumbersome. These laws have been proposed to express the Indian government’s intent to transform into an economy that is pro-business and investor-friendly. This is done with the aim to promote Foreign Direct Investment.

REFERENCES-

  1. Gonsalves Oliver, ‘The Labor Market in India: Structure and Costs’ (India Briefing, 17 January 2019) <https://www.india-briefing.com/news/labor-market-india-structure-costs-18264.html/> accessed 30 September 2020
  2. Mitra Devashish, ‘India’s labour laws: Protecting to hurt’ (Ideas For India, 14 January 2015) <https://www.ideasforindia.in/topics/macroeconomics/indias-labour-laws-protecting-to-hurt.html> accessed 30 September 2020
  3. Exim Bank, ‘Comparison of Labour Laws: Select Countries’ (Exim Bank Research Brief, No. 75, August 2013) <https://www.eximbankindia.in/Assets/Dynamic/PDF/Publication-Resources/ResearchPapers/11file.pdf> accessed 30 September 2020
  4. Nadagoudar Suresh, ‘A critical study of adjudication of industrial disputes with special reference to working of labour courts and industrial tribunal at Hubli’ <http://hdl.handle.net/10603/95282> accessed 30 September 2020
  5. Mohanty Prasanna, ‘Labour reforms: Contractual workers’ hiring on rise in organised sector; is informal the new formal?’(Business Today, 19 July 2019) < https://www.businesstoday.in/current/economy-politics/labour-law-reforms-contractual-workers-organised-sector-informal-sector-indian-economy/story/365777.html> accessed 30 September 2020
  6. Singh Paramvir, ‘Design and Validation of dynamic metrics for object-oriented software systems’ <http://hdl.handle.net/10603/10463> accessed 30 September 2020
  7. 1976 AIR 1775
  8. (1961-62) 21 FJR 63
  9. ‘Govt planning new labour legislation by merging 44 laws under 4 categories’ (Economic Times, 12 June 2019) <https://economictimes.indiatimes.com/news/economy/policy/govt-planning-new-labour-legislation-by-merging-44-laws-under-4-categories/articleshow/69744758.cms> accessed 30 September 2020
  10. ‘Govt to move full steam ahead on labour reforms with new Bill’ (Business Standard, 9 June 2019) <https://www.business-standard.com/article/news-ians/govt-to-move-full-steam-ahead-on-labour-reforms-with-new-bill-119060900096_1.html> accessed 30 September 2020
  11. Jha Somesh, ‘Modi Govt proposes major labour law changes for ease of compliance’ (Business Standard, 24 July 2019) <https://www.business-standard.com/article/economy-policy/modi-govt-proposes-major-labour-law-changes-for-ease-of-compliance-119072400056_1.html> accessed 30 September 2020

[1]Oliver Gonsalves, ‘The Labor Market in India: Structure and Costs’ (India Briefing, 17 January 2019) <https://www.india-briefing.com/news/labor-market-india-structure-costs-18264.html/> accessed 30 September 2020

[2]Devashish Mitra, ‘India’s labour laws: Protecting to hurt’ (Ideas For India,  14 January 2015) <https://www.ideasforindia.in/topics/macroeconomics/indias-labour-laws-protecting-to-hurt.html> accessed 30 September 2020

[3]Exim Bank, ‘Comparison of Labour Laws: Select Countries’ (Exim Bank Research Brief, No. 75, August 2013) <https://www.eximbankindia.in/Assets/Dynamic/PDF/Publication-Resources/ResearchPapers/11file.pdf> accessed 30 September 2020

[4] Suresh Nadagoudar, ‘A critical study of adjudication of industrial disputes with special reference to working of labour courts and industrial tribunal at Hubli’ <http://hdl.handle.net/10603/95282> accessed 30 September 2020

[5]  Devashish Mitra, ‘India’s labour laws: Protecting to hurt’ (Ideas For India,  14 January 2015) <https://www.ideasforindia.in/topics/macroeconomics/indias-labour-laws-protecting-to-hurt.html> accessed 30 September 2020

[6] Prasanna Mohanty, ‘Labour reforms: Contractual workers’ hiring on rise in organised sector; is informal the new formal?’(Business Today, 19 July 2019) < https://www.businesstoday.in/current/economy-politics/labour-law-reforms-contractual-workers-organised-sector-informal-sector-indian-economy/story/365777.html> accessed 30 September 2020

[7] Paramvir Singh, ‘Design and Validation of dynamic metrics for object-oriented software systems’ <http://hdl.handle.net/10603/10463> accessed 30 September 2020

[8] Devashish Mitra, ‘India’s labour laws: Protecting to hurt’ (Ideas For India,  14 January 2015) <https://www.ideasforindia.in/topics/macroeconomics/indias-labour-laws-protecting-to-hurt.html> accessed 30 September 2020

[9] Suresh Nadagoudar, ‘A critical study of adjudication of industrial disputes with special reference to working of labour courts and industrial tribunal at Hubli’ <http://hdl.handle.net/10603/95282> accessed 30 September 2020

[10] 1976 AIR 1775

[11] (1961-62) 21 FJR 63

[12] ‘Govt planning new labour legislation by merging 44 laws under 4 categories’ (Economic Times, 12 June 2019)  <https://economictimes.indiatimes.com/news/economy/policy/govt-planning-new-labour-legislation-by-merging-44-laws-under-4-categories/articleshow/69744758.cms> accessed 30 September 2020

[13] ‘Govt to move full steam ahead on labour reforms with new Bill’ (Business Standard, 9 June 2019) <https://www.business-standard.com/article/news-ians/govt-to-move-full-steam-ahead-on-labour-reforms-with-new-bill-119060900096_1.html> accessed 30 September 2020

[14] Somesh Jha, ‘Modi Govt proposes major labour law changes for ease of compliance’ (Business Standard, 24 July 2019) <https://www.business-standard.com/article/economy-policy/modi-govt-proposes-major-labour-law-changes-for-ease-of-compliance-119072400056_1.html> accessed 30 September 2020

CITE THIS WORK

Legal Maxim (October 26, 2020) Impact of Labour Laws on India’s Foreign Direct Investment. Retrieved from https://www.legalmaxim.in/impact-of-labour-laws-on-indias-foreign-direct-investment/.
Impact of Labour Laws on India’s Foreign Direct Investment.” Legal Maxim – October 26, 2020, https://www.legalmaxim.in/impact-of-labour-laws-on-indias-foreign-direct-investment/
Legal Maxim October 11, 2020 Impact of Labour Laws on India’s Foreign Direct Investment., viewed October 26, 2020,<https://www.legalmaxim.in/impact-of-labour-laws-on-indias-foreign-direct-investment/>
Legal Maxim – Impact of Labour Laws on India’s Foreign Direct Investment. [Internet]. [Accessed October 26, 2020]. Available from: https://www.legalmaxim.in/impact-of-labour-laws-on-indias-foreign-direct-investment/
Impact of Labour Laws on India’s Foreign Direct Investment.” Legal Maxim – Accessed October 26, 2020. https://www.legalmaxim.in/impact-of-labour-laws-on-indias-foreign-direct-investment/
Impact of Labour Laws on India’s Foreign Direct Investment.” Legal Maxim [Online]. Available: https://www.legalmaxim.in/impact-of-labour-laws-on-indias-foreign-direct-investment/. [Accessed: October 26, 2020]
AUTHOR DETAILS
https://i1.wp.com/www.legalmaxim.in/wp-content/uploads/2020/10/Shresth_Photo.jpg?resize=160%2C160&ssl=1

Name: Shresth Agarwal

Affiliation: Jindal Global Law School, Sonipat

Designation/ Academic Year: 4th Year Law Candidate

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