Editorial Notes

[Editorial Notes] A new social contract: Need to reform Labour markets

85% of the Indian workforce is informally employed and have almost no protection in the labour laws.
By IASToppers
August 22, 2020


  • Introduction
  • India and Employment
  • Impact of COVID-19
  • Challenges
  • Way Forward
  • Conclusion

A new social contract: Need to reform Labour markets

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India is facing an unprecedented and worsening health crisis due to COVID-19. The knock-on effect of the crisis has resulted in the worst economic performance in our independent history. The Prime Minister has urged industrialists to think big and partner with the government in putting India back on the path to growth.

India and Employment:

  • Unemployment or poor work conditions is one of the most chronic social problems in India.
  • Over 85% of employment in India is in the informal sector.
  • The Labour laws in the country to protect workers covers only the formal sector.
  • India’s labour participation rate is very low by world standards, especially the female labour participation rate, which is further falling.
  • There has been an exodus of the unemployed from the labour markets in the recent years which is the real reason for a fall in the labour participation rate.

Impact of COVID-19:

  • The national lockdown halted economic activity and wiped out livelihoods, especially of informal workers.
  • As per the Centre for Monitoring the Indian Economy (CMIE), between mid-March and mid-April, 120 million people lost their jobs, with unemployment rising to an all-time high of 27%.
  • India witnessed reverse migration on an unprecedented scale — some 10 million people abandoned cities to return to their native villages.
  • Things are improving now as CMIE reports unemployment is down to around 9%.
  • The economic activity has restarted in cities and labour has begun returning from villages.
  • The crisis highlighted three problems which must be addressed: Labour regulation, living conditions for migrant labour in cities, and the strength of our rural economy.


1. Labour regulation laws:

  • India has stringent labour laws to protect workers, which covers only the formal sector i.e. under 15% of employment.
  • 85% of our workforce who are informally employed, have almost no protection, whereas employers have almost complete flexibility.

2. Poor living conditions:

  • Living conditions in our cities is the second challenge.
  • The migrant labourers live in slums like areas with no or poor basis amenities and hygiene.
  • Further, India is still having 70% of its population residing in rural areas.

3. Lack of connectivity:

  • Indian policies for long have aimed at getting firms to invest in less-developed districts.
  • The current government has an ambitious goal of doubling farmer’s incomes.
  • But the gap between the richest (urban) and poorest (rural) districts still keeps growing.
  • This is because of lack of infrastructure, connectivity and technology at the rural spaces.

Way Forward:

1. Labour regulation laws:

  • India needs to balance right between flexibility and protection for labour in all sectors.
  • The laws framed must have a minimum level of protection and to every employer a minimum level of flexibility.
  • This calls for a new social contract to define a well-calibrated social security system.
  • This demands good faith and strong leadership by industry, labour and government.

2. Enhance living conditions:

  • India must encourage the migration of people to higher productivity occupations in our cities.
  • This must be followed by assuring them clean, affordable and accessible housing in our cities.

3. Corporate farming model:

  • The easiest way to grow farmer incomes is by having them grow more value-added crops.
  • Fruits and vegetables have great export potential, and exports must be consistently encouraged.
  • However, it must be supported by the corporate farming model as the gestation period of five to seven years for the first crop cannot be afforded by an average farmer.
  • The Atma Nirbhar agricultural reforms, which permit contract farming, and open up agricultural markets, are major medium-term reforms.

4. Infrastructural development:

  • India needs to encourage agro-processing near the source.
  • Fostering entrepreneurship in rural and semi-urban areas would combine nicely with local processing
  • India needs to invest even more massively in rural connectivity to connect producers to markets.
  • Digital connectivity coupled with road connectivity can level the playing field for economic growth.


India must work to fundamentally reform our labour markets, provide cities with healthy living conditions, and create economic opportunities in rural India. The task is huge and needs collaboration between all levels of government (Union, state, and city) and dynamic private sector to make substantial progress. India must exploit the unprecedented health and economic crisis to build a new social contract as our commitment to India@75 in 2022.

Mains 2020 Editorial Notes

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