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The Indian economy in the recent years has attempted to leapfrog towards a five trillion-dollar economy by 2024-25, simplifying the environment around and maintaining business-friendly compliance and regulatory processes for augmentation of Ease of Doing Business, thereby promoting entrepreneurship, innovation and wealth creation in India, which facilitates investments by domestic as well as foreign producers. The Indian Government, in the recent years, has implemented numerous schemes and regulations to facilitate ease of doing business in India, re taxation, incorporation of companies, strengthening laws for protection of minority investors, cross-border trade and commerce and enforcement of contracts, obtaining permits related to registering property and construction, resolving insolvency and so on, which are immediate determinants of the flow of Foreign Direct Investments.
However, another prominent deciding factor, for Foreign Investors to invest in an economy, is the flexibility of its economic, trade and labour policy. So far as India’s Labour Laws are concerned, there are currently approximately 100 State and 40 Central Laws in India. This multiplicity in labour laws have been a concern for Foreign Investors, which is vastly responsible for liming investment interest, as it creates a complex web of compliance and regulatory barriers, thereby making the procedural system cumbersome and repetitive. Therefore, to counter these shortcomings, strengthen and simplify the labour legislations, and ensure a better use of technology to promote the ease of doing business in the country, the Government of India has initiated consolidation of 29 national labour legislations into four major central labour laws (“The New Labour Codes”) relating to wages (The Code on Wages, 2019), social security (The Code on Social Security, 2020), industrial relations (The Industrial Relations Code, 2020), and occupational safety and health (The Occupational Safety, Health and Working Conditions Code, 2020).
FDI vis-à-vis Labour Law Flexibility in India : Where India Failed
The era of economic liberalisation witness sagacious approach adopted by the Indian Government to promote trade and commerce in the Country, encouraging domestic and foreign producers to invest in India, realising its potential to offer an assortment of business and investment-friendly advantages such as liberalisation of country’s investment policies, accompanied by various privileges including, but not limited to, tax exemptions, a fast growing consumer base, cheap labour, a conducive business environment etc. and implementation of schemes and measures to augment ease of doing business in India. As per the World Investment Report, 2021 issued by United Nations Conference on Trade and Development (UNCTAD), India was recognisedas the fifth-largest recipient of FDIs amounting to US$ 81.72 billion. Furthermore, amongst South Asian Countries, India has been a more preferable destination for FDIs than China as it offers a large and diverse labour pool and a competitive advantage with its lower wage structure, wherein the average minimum wage for contract workers in India is US$148 per month (Rs 10,000) and US$234 in China.
However, despite offering such a competitive advantage in terms of Labour and enforcing numerous measures to promote ease of doing business, India has still failed to attract FDIs to its full potential on account of India lacking flexibility in terms of Location Advantages, which is a fundamental determinant of FDIs in a country. The OLI framework offered by John Dunning in 1977 provides a three pronged criteria that a firm takes into consideration before undertaking FDI, i.e.Ownership (O), Location (L) and Internationalization (I). Determinants such as Ownership advantages and Internationalization advantages are often not so much in scope and influence of policymakers in the host countries as location advantages, which include market size, tax and investment incentives etc. and an often overlooked, in the case of India, institutional determinant i.e. the flexibility of labour laws.
Labour Laws in India are regulated by both Parliament and State Legislatures by virtue of them being placed in the Concurrent List in the Seventh Schedule of the Indian Constitution, resulting which India has currently over 200 State and Central Laws governing resolution of industrial disputes, prescribing standards for working conditions of labours, social security, wages and various other aspects concerned with labour and employment, which potential foreign investors consider cumbersome, repetitive, create a multiplicity of compliance and regulatory barriers as well as force private investors to sub-scale and create unfavourable conditions to enter into Indian markets as opposed to providing ease of doing business. The rigidity in various legislations centered around labour costs, wages, limitations on employment, job security etc. were some of the factors imposing additional costs on foreign investors doing business in India, something a profit-maximising firm primarily attempts to avoid, and posed a greater challenge to the Indian economy to scale as well as provide satisfaction to its labour force.
One instance of a problematic legislation is concerned with termination and employment of resources in case of a restructuring or mergers, which foreign investors consider themselvestangled in. These are covered under the Industrial Disputes Act, Shops and Establishment Act of the respective states of establishments, Standing Orders Act and the relevant service contracts binding upon the employees. In case of a merger/acquisition, including but not limited to the process of divestment of an undertaking and redeployment of resources, although the provisions provide for a robust mechanism for movement of employees to protect their interest and provide security, however, create a plethora of procedural conditionality for the employers. In case of divestment of a unit or an undertaking, which entails the change of ownership of a company on account of acquisition by another company including sale of its assets and transfer of employees, any redeployment or transfer of employees would require consent to be obtained and notices to be given to such employees in terms of Industrial Disputes Act. Furthermore, in case an employer hiring hundred or more personnel decides to sack an employee, the ID Act in Chapter V provides for permission to be sought by the government to carry out such termination, making the process of employment and termination more cumbersome for the employer, hence, hampering quick decision making and smooth execution of the business. The legislations not only deprive the employers of smooth business operations qua the demand and supply forces, but also entail a problematic and ineffectual dispute resolute mechanism burdening the employers with a heavy cost of litigation, impairing the production cycle, creating an exit barrier for businesses and forcing them to contract out production activities to smaller enterprises, thereby restricting investment interest.
The rigidity in these legislations and a bias towards the employees was also reflected in another problematic legislation i.e. “The Contract Labour (Regulation and Abolition) Act, 1970”, which restricts the employers to recruit contract labours at will and as per production demand, and further vests the power in the hands of the State and Central Government to prohibit such recruitment on contract if it deems fit, creating unfavourable and rigid conditions for foreign businesses to execute their operations in a smooth manner. Furthermore, a majority of employment relationships in India are contractual, amounting to 35% of the total work force in the country. However, despite a huge proportion of contract labours, the legislations governing them are scarred by multiple and hectic labour compliances causing an increase in labour vulnerability, since contract labour have been denied basic protections (such as assured wages) and are not entitled to be regularized in cases where contract labour is prohibited by the government
These legislations, and others, governing labour and employment in India blow a dent on the intent of the government to propel India to a trillion dollar economy, for the laws governing the pivotal aspect of economic development are not conducive to meet the dynamic growth of the economy, impose numerous restrictions on decision making as per changing demands of production, thus, making them rigid and imposes additional costs on foreign investors. Profit-maximising firms have been refraining from investing in a market regulated by such rigid regulations, and are looking to invest in economies which offer them more freedom and flexibility to conduct their business. India’s labour market has always been ambiguously regulated resulting in impaired labour relations, labour productivity and a lack of social security, thus, failing India as an attractive FDI destination.
Author: Priya Sharma (Legal Intern) and Ajay Kacher – Legal Associate, in case of any queries please contact/write back to us via email firstname.lastname@example.org. or at Khurana & Khurana, Advocates and IP Attorney.
Gonsalves Oliver, ‘The Labour Market in India : Structure and Costs’ <The Labor Market in India: Structure and Costs – India Briefing News (india-briefing.com)> accessed 11 June 2022.
SarnaRitash, ‘The Impact of Core labour standards on Foreign Direct Investment in East Asia’<The impact of core labour standards on Foreign Direct Investment in East Asia (jil.go.jp)> accessed 11 June, 2022.
List of Central Labour Laws under Ministry of Labour and Employment, Ministry of Labour and Employment.
MohantyPrasanna, ‘Labour reforms: Contractual workers’ hiring on rise in organised sector; is informal the new formal?’<https://www.businesstoday.in/latest/economy-politics/story/labour-law-reforms-contractual-workers-organised-sector-informal-sector-indian-economy-213098-2019-07-19> accessed 11 June, 2022.
Steel Authority of India Limited vs. National Union Water Front Worker’s, Supreme Court, AIR 2001 SC 3527.