Labour, Jobs and Employment – Harmonization of labour laws, gender gap, unemployment, etc.

Three thresholds in Industrial Disputes Act that need revision


From UPSC perspective, the following things are important :

Prelims level : Industrial Disputes Act 1947

Mains level : Paper 2- Threshold limits in IDA and issues with it.

Sometimes the measures we come up with end up doing exactly the opposite of what they were supposed to do. This might be the case with some provisions in the Industrial Dispute Act. This article deals with 3 such provisions in the IDA. So, what are these provisions? How the issues caused by these provisions could be resolved? Read to know more…

How provisions of IDA could be detrimental?

  • What made so many migrants suddenly long for their village after lockdown?
  • The answer lies in our Industrial Disputes Act (IDA), the motherboard of our labour laws.
  • IDA has encouraged short-term employment, low skills and zero security.
  • It did this by setting up thresholds which disincentivised long-term commitment of workers to entrepreneurs and vice versa.
  • It also kept firms informal and unwilling to invest in human capital.
  • This is why when the lockdown happened, it turned into a migrant crisis.

Let’s look at  3 thresholds in IDA that are causing harm

  • 1) Hire more than 99 workers, and you will have to notify the government before you can fire any one of them.
  • 2) Hire more than 20 and you open yourself up to provident fund commitments and bonus payments.
  • 3) If you want to deny workers severance pay, never keep them continuously employed for more than 240 days.

So, how IDA ends up discouraging formalisation?

  • Given these provisions in the IDA, entrepreneurs are reluctant to hire more than 99 workers for over 240 days.
  • The employers are naturally tempted to observe these thresholds and duck under the radar.
  • This is made easier by the fact that these thresholds mesh well with the fear that the middle-class — and upwards — have of a working-class takeover.
  • As a result, these thresholds have only encouraged the informal sector, where both unregistered labour and unregistered entrepreneurs dominate.
  • It has led to the proliferation of informal enterprises and low-skill workers.
  • In the first 15 years of this century itself, over half the increase in total employment has been that of contract workers.
  • This has also led to a phenomenal rise in MSMEs as the IDA has discouraged entrepreneurs from harbouring any ambitions to grow big and formal.
  • The MSMEs have, consequently, increased in number from 3.6 crore units in 2012 to about 6 crore today.
  • Since there are constraints on both the workforce size and duration of employment, upskilling and R&D naturally become early casualties.
  • India spends only 0.7 per cent of its GDP in R&D, one of the lowest in the world, while South Korea spends 4.2 per cent.

Contribution of MSME in GDP is not increasing

  • Over 94 per cent of MSMEs are in the Micro sector and their contribution to GDP is just not measuring up.
  • In 2012, MSMEs produced 37.54 per cent of our GDP.
  • But this number fell to 30.7 per cent in 2015, and in 2019 it decreased further to 29.7 per cent, though they are still working full throttle.
  • Yet, the lure to stay on the good side of the IDA thresholds is so compelling that even formal units are today outsourcing from the informal ones.
  • Over time, the IDA has succeeded in converting a large number of organised sector companies into strange, hybrid economic creatures, both fishy and foul.

But, how removal of the 3 thresholds will change the situation?

  • If the 3 mentioned thresholds are removed, every worker — regardless of factory size — is entitled to the same rights.
  • Likewise, every employer, regardless of factory size, can hire and fire workers.
  • There is greater freedom on both sides, but this freedom comes with a price that does not discourage either size or skills in an enterprise.
  • The worker can now be fired without notifying the government, but must be compensated with severance wages, regardless of the size of the firm.
  • Also, unlike the IDA, all the firms must have a formal dispute resolution board.
  • Now that the enterprises have been freed of the size threshold, entrepreneurs get no advantage in dwarfing their firms.
  • Other reforms can soon follow, such as allowing for workers’ representation in a firm’s supervisory board, as it happens in Germany.
  • Measures such as these create trust between employees and employers, and also remove the threatening spectre of a working-class strike.

Consider the question “Various provision of the Industrial Disputes Act which were enacted but with a different purpose now seems to place both the workers and employers in a disadvantageous position. In light of this statement, examine the issues with the threshold limits of the number of employees and number of employment days in the Industrial Disputes Act.”


In the ultimate analysis, the IDA does not produce winners, only losers. The workers remain skill-stunted and insecure, and the entrepreneurs, too, pull back from releasing their much-vaunted “animal spirits”. So, the IDA thresholds must go and not be merely fiddled with, as some states have done.

Back2Basics: Industrial Disputes Act 1947

  • The main purpose of the Industrial Disputes Act, 1947 is to ensure fair terms between employers and employees, workmen and workmen as well as workmen and employers.T
  • The objective of the Industrial Disputes Act is to secure industrial peace and harmony by providing machinery and procedure for the investigation and settlement of industrial disputes by negotiations.

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