While economists disagree on the extent of rigidity in India's labour regime, there is a broad consensus on the need to simplify labour laws
The Bharatiya Janata Party (BJP)-led government seems to have brought in a new sense of urgency in overhauling India’s archaic labour regime.
Labour reform has always been a political hot potato and despite several attempts in the past to amend them, India’s labour laws have remained mostly unchanged over the past three decades. That seems to be changing now, with the Narendra Modi-led BJP appearing keen to bite the bullet of labour reforms. Already, the BJP-ruled state of Rajasthan has approved amendments to three labour legislation—the Industrial Disputes Act (IDA), the the Contract Labour (Regulation and Abolition) Act and the Factories Act—seeking to whittle down the stringent requirements of those laws.
These moves at labour reforms have expectedly earned the BJP bouquets from industrialists and brickbats from trade unionists. The debate on labour laws has been fairly contentious even within the economics profession. There have been sharp differences of views on the extent to which the supposed rigidities in labour laws such as the IDA actually curtail investments, industrial efficiency and employment. Nonetheless, there is considerable agreement among scholars on the need to rationalize India’s labour laws.
While much of the debate on labour laws focuses on the IDA, which requires companies above a minimum threshold size to seek state approval for retrenchments, the rot in India’s labour regime is much wider and deeper.
From independence till the early 1980s, the number of labour laws increased to reach roughly a 100, and many more judge-made laws were added to the roster. Several of these laws actually ended up contradicting each other. In this period, the country’s workforce was divided into two categories: organized and unorganized. The labour regime emphasized protection for the organized minority using distortionary cutoffs to decide which employers fall within the ambit of regulation. It put restrictions on the type of work a worker could be asked to do, and encouraged litigation rather than arbitration. This was a golden period for the labour bureaucracy, trade unions, and their political masters who enjoyed an outsized role in the industrial life of the nation.
A slowdown in growth in the unionized sectors such as textiles, accompanied by rising labour militancy since the late 1970s, made this regime untenable. The turning point was perhaps the Mumbai mill strike of 1982 led by Datta Samant that ended in failure and signalled the collapse of union power. For the first time, the state did not intervene in a major industrial dispute.
A wish to dent Samant’s growing political clout in Mumbai might have caused the governments in Maharashtra and at the centre, led by Samant’s adversary, the Congress party, to avoid intervening in the strike, but there were broader changes under way. Starting from the 1980s, the state reduced monitoring of labour practices, allowing de facto liberalization of labour laws even as de jure rigidities in labour laws remained. Unions lost clout across industries. These changes were a part of Indira Gandhi’s grand design in the 1980s to raise growth by adopting a pro-business and anti-labour stance in practice even as she maintained her pro-poor and pro-worker rhetoric in public, wrote Princeton University political scientist Atul Kohli in his 2012 book, Poverty Amid Plenty in the New India.
The state was more willing now to relax labour restrictions but chose to retain the jaded laws. Starting from the 1980s, the new labour regime has made minor relaxations in existing laws, reduced monitoring, and allowed de facto liberalization by encouraging informal or contractual employment, which bypass unions. Thus, while India ranks below almost all Organisation for Economic Co-operation and Development (OECD) countries when it comes to flexibility in regular employment, its score is close to the median OECD score when it comes to flexibility in contractual and temporary employment, a 2008 OECD working paper by Sean Dougherty pointed out.
Unsurprisingly, the share of contract workers has grown dramatically in Indian industries, jumping four-fold since the 1980s, according to the conservative estimates of the Annual Survey of Industries (ASI). But that has led to new problems. As contract workers are not part of regular collective bargaining, they are more likely to resort to wildcat strikes and militant action, a 2011 International Labour Organization (ILO) working paper by labour economist K.R. Shyam Sundar said. Several instances of conflicts have arisen where contract workers form a majority and face unequal wages compared to regular workers in similar roles. The July 2012 attack by workers on a manager in Maruti Suzuki India Ltd’s Manesar plant may have attracted most attention but the auto industry in general has been beset by industrial unrest over the past few years. The industry, which saw the greatest surge in the share of contract workers over the past decade, has become a byword for industrial conflict today.
The absence of transparent labour market reforms has ended up creating lopsided growth within India’s organized sector, with companies reluctant to employ regular workers. The unrest among contract workers is one key reason why the new labour regime appears unstable. The fact that India today has a curious mix of improbably stringent laws and extremely lax implementation is another. Such a regime has bred a culture of weak governance, hurting the prospects of both employers and the employed, argued a 2006 research paper co-authored by India’s chief statistician T.C.A. Anant, historian P. Mohapatra, and economists R. Hasan, R. Nagaraj and S.K. Sasikumar.
The absence of transparent labour market reforms also means that several old laws with outdated provisions continue to apply to an industry struggling to modernize, even if many of those laws are honoured only in their breach. As Bibek Debroy, professor at the Centre for Policy Research, argued in a Seminar article, unlike some countries where courts disregard statutes which have not been enforced long enough, our courts do not follow such a principle (known in legal parlance as ‘desuetude’). Therefore, the outdated provisions of our labour laws continue to hold as long as they are not repealed.
To drive home his point about how archaic our labour laws are, Debroy cited sections 20 and 43 of the Factories Act.
Section 20 says, ‘(i) In every factory there shall be provided a sufficient number of spittoons in convenient places and they shall be maintained in a clean and hygienic condition. (ii) The state government may make rules prescribing the type and the number of spittoons to be provided and their location in any factory and provide for such further matters relating to their maintenance in a clean and hygienic condition. (iii) No person shall spit within the premises of a factory except in the spittoons provided for the purpose and a notice containing this provision and the penalty for its violation shall be prominently displayed at suitable places in the premises.’
According to Section 43, ‘The state government may, in respect of any factory or class or description of factories, make rules requiring the provision therein of suitable places for keeping clothing not worn during working hours and for the drying of wet clothing.’
“It is no one’s case that welfare provisions should not exist," wrote Debroy. “But are welfare provisions enacted in 1948 still relevant?"
There are countless other absurdities and infirmities in labour laws. The Industrial Disputes Act (IDA) restrains employers from changing the profile of workers. The Contract Labour Act tries to restrict contractual work to non-core activities in an era where outsourcing has obliterated the distinction between core and non-core activities.
While economists agree on the need to simplify and rationalize labour laws, they disagree on the extent to which rigidities in acts such as the IDA have harmed industrial growth and employment.
The empirical evidence on the impact of the IDA is also rather weak. One of the most widely cited empirical studies on labour rigidities is the 2002 state level study by Timothy Besley and Robin Burgess of the London School of Economics. The duo found that across Indian states, ‘pro-worker amendments to the Industrial Disputes Act are associated with lowered investment, employment, productivity and output in registered manufacturing.’ This study was later cited in several influential publications including those published by the World Bank, to highlight the case for labour reforms. A 2004 research paper by economist Sudipta Dutta Roy arrived at diametrically opposite findings, which suggested that the job security-related amendments to the IDA in the 1970s and early 1980s had no discernible impact on employment.
Both these studies, however, suffered from serious methodological problems, pointed out Aditya Bhattacharjea of the Delhi School of Economics in a 2006 research paper. The methodology used by Besley and Burgess misclassified amendments to the IDA, Bhattacharjea showed. The econometric specification used by the duo was also problematic, Bhattacharjea argued. Dutta-Roy’s estimates were confounded because of other developments that took place around the time the job security-related amendments were made.
Bhattacharjea argued that the reality of labour markets differs significantly from what appears on the statutes, given that implementation is lax, and enforcement is often weak. Anant et al also make a similar point in the 2006 paper cited earlier. They argue that despite de jure rigidities in labour laws, Indian firms have enjoyed de facto flexibility in labour laws, and especially so in the post-liberalization era.
Still, even those who question the labour rigidity argument acknowledge that the Indian labour regime is a tottering house that has been crumbling under the weight of its own contradictions. Most scholars agree that a move towards a more minimalist labour regime, with greater flexibility and better enforcement can serve the interests of both employers and the employed better. Even though there is disagreement on the precise impact the IDA has had on Indian industry, it is nobody’s case that a plethora of outdated rules should be used to regulate the labour market of Asia’s third-largest economy.
As Debroy argues elsewhere, the reason for labour rigidity lies in the multitude of laws and the great scope for corruption such laws provide rather than in that one Act alone. “What makes organized labour markets rigid?," asks Debroy. “Contrary to popular perception, it’s not just the Industrial Disputes Act of 1947. The 45 central statutes, assorted rules, orders and regulations, and 29 inspectors are much more responsible and this inspector raj also plagues the small-scale sector. Flexibility requires harmonization, standardization, friendly inspections, and reduced avenues for bribery and corruption. Other than inspectors, no one should object to such reforms, least of all the Left. By equating labour market reforms with the ‘hire and fire’ of IDA, we therefore do a disservice to the cause of labour market flexibility."
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