By: Stirling Smith

Two Paths for Labour Law in India


This blog post was originally published on the Ethical Trading Initiative’s blog. Views expressed are personal and not necessarily those of ETI. 

A famous Indian nationalist, Gokhale (1866 – 1915) once remarked: “What Bengal thinks today, India thinks tomorrow.”

There is a new version. “What Gujarat does today, India does tomorrow”. That’s because India’s Prime Minister, Mr Narendra Modi, was for more than a decade the Chief Minister of Gujarat. In his successful election campaign last year, one of his big selling points was the “Gujarat model” of development, including a business friendly environment. And the state seems determined to be a laboratory for national level change.

So moves by the state government to change labour law should be of interest to anybody sourcing from India, because they could go nationwide eventually. I wrote about this last June, just after Mr Modi became PM.

So no surprise that the Gujarat state assembly has passed the Labour Laws (Gujarat Amendment) Bill, 2015. It isn’t law yet, but could be soon.

First off, they have proposed to amend the Industrial Dispute Act empowering the state government to ban strikes in “public utility services” for up to three years. This is against ILO principles and the government can define public utility services anyway it likes. It could include any business in one of the Special Economic Zones the government is promoting.

Secondly, when workers are laid off, less compensation can be reduced in those Special Economic Zones.

Third, payment of wages by cheque instead of cash becomes compulsory for any establishment employing more than 20 persons.

Time for a short history lesson. During the Industrial Revolution in Britain, many employers paid their workers with coins minted by the employer themselves. Frequently featuring their own head, rather than the king.  The system was called “truck” and of course meant that workers could only use shops that accepted their employer’s coins and so they would have to pay whatever prices those shops chose – for rubbish quality. The first law against this abuse was passed in 1831 and it was subsequently strengthened and renewed. And as we often find, legislation in former British colonies copies very closely laws in the UK.

So the old Truck Act lives on in Indian labour law. Workers should be paid in real legal tender. Cheques or bank payments don’t count.

How ridiculous! How unmodern! How inflexible! How unnecessary in the internet age!

Trouble is, half of Indian adults don’t have a bank account. Only 0.3% of Indian adults use mobile money services. So maybe payment in cash is needed for a teeny bit longer.

It’s not all bad news. The government is proposing a threefold increase in the minimum wage for construction workers. But unless there is proper inspection, how is this going to be enforced? (See also my blog from last year about the law on building safety)

The Bill removes all penal sanctions against employers, so the only penalty for breaking the labour law is going to be a fine. And employers can self-certificate that they are following the law.

This blog has regularly featured reports on the already very low level of compliance with existing labour law in India. These new moves in Gujarat are unlikely to make a massive difference on the ground, but they give a message to employers that they can continue to violate the law with impunity.

Burdens on business?

The reason given for these changes is to encourage business and foreign investment in particular. But are all these labour laws really holding back foreign companies from doing business in India?

A recent survey by the Indo-German Chamber of Commerce found that the biggest obstacles for German companies in India were:

  • the Indian bureaucracy 58%
  • lack of infrastructure 52%
  • corruption 45%
  • lack of skilled workers 35%; and
  • tax disputes 32%

Labour law hardly gets a mention. So the justification for these changes is bogus.

An alternative route

There has been another election in India – the Aam Admi Party swept to power in Delhi’s state elections in February. Its name means “common man” and they set up open house to hear complaints about public services.

One was held on labour. 500 workers turned up. It was revealed that the Minimum Wages Advisory Board, meant for reviewing and revising the floor level wage structures, had not met for 20 years. Stories poured out about the corruption and violation of laws by government inspectors. Huge funds for “labour welfare” were unspent. The Delhi labour minister ordered a clamp-down on inspectors and employers, and hiked the minimum wage.

So, Gujarat or Delhi – which way will India go?

Either way, any company sourcing from India needs to keep a very close eye on these changes to labour law.