Labour Regulations and Laws in Indian Manufacturing Industry for MSMEs

Article Authored by Ms. Sunita Sapra, COO, KARAM Industries

Labour regulations governing MSMEs in India are obtuse at worst and convoluted at best. In India an enterprise that employs up to 10 workers is a micro-enterprise; one employing between 10 to 50 workers is a small enterprise; while one employing between 50 to 250 workers is a medium enterprise. While the classification of MSMEs based on the number of workers they employ is straightforward, the myriad regulations that kick in when MSMEs hire more workers are convoluted.

Archaic Labour Laws

India is a modern democracy, an innovation hub, its economy enjoys an enviable growth rate despite a downturn, and many argue it is a potential superpower. Yet its industry is hobbled by irrelevant labour laws.

A microenterprise is a manufacturer that employs up to 10 people, yet when its workforce grows from 6 to 7 workers, the manufacturer falls under the purview of the Trade Unions Act. What makes the transition from 6 to 7 workers so remarkable that a micro-enterprise must pay consideration to the Trade Unions Act is unclear. Similarly, as an enterprise adds additional workers it becomes subject to greater regulation. Such regulation, designed to safeguard the interests of workers, actually hampers the growth of MSMEs. Owners of MSMEs, even when presented with ripe opportunities for expansion, remain afraid to do so should the business climate turn sour and their enterprise be forced to adhere to debilitating regulations.

Consider the Industrial Disputes Act; the act doesn’t allow a manufacturing firm with more than 100 workers to layoff any of them without prior government approval. The Act, rather than safeguarding the interests of workers, disincentivizes firms from expanding. A manufacturing firm that doesn’t fall under the purview of the Industrial Disputes Act may not expand even when presented with opportunities. This is because should its workforce grow beyond 100, it will be hobbled by additional regulation.

The Industrial Disputes Act is an important reason why many small enterprises don’t have any ambition to grow into medium-sized ones. The clause in the Industrial Disputes Act that a manufacturing firm with more than 100 workers can dismiss them after receiving permission from the government appears to make it practical. In reality, however, such permission is rarely if ever granted.

The Goal of Regulation

The industrial disputes act is just one example of how India's pernicious labour laws disincentivize businesses from expanding.Thankfully the government is aware thatlabour laws and regulations, crafted during the colonial era and at the peak of the license raj are nearly irrelevant today. This awareness is growing at a time when,gradually, the Indian economy is shedding its socialist past and embracing freer market economics. The recent merger of several PSU banks is a sign that even greater competitive zeal is being infused into the economy. Labour reforms are not too far off. Already the government plans to consolidate 44 central laws regulating labour into 4 sets of labour codes that grant greater freedom to MSMEs in hiring and dismissing workers.

Regulation is essential, yet over-regulation hampers businesses. Without regulation workers  are likely to be exploited and made to work under hazardous conditions, yet when businesses are burdened by over-regulation they lose the incentive to take risks and labour isn’t presented with new opportunities for employment. As a result of over-regulation, workers and businesses both suffer.