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1 Labour Laws in India Labour is highly protected and Indian labour laws do not allow hire and fire policy. As per existing laws under the Industrial Disputes Act 1947, no employer cannot close an establishment or declare lock out or retrench any labour without taking prior approval of the concerned government authority if the establishment employed more than 100 laborers on permanent basis in the previous 12 months. Various researchers in the past had concluded that this clause stood in the way of further organised employment and led to growth of more capital-intensive industries. Therefore, this protection was counterproductive and acted against the overall interest of the workers. Labour figures in the Concurrent List (for both Centre and States) of distribution of legislative powers in the Constitution. As both Centre and States can legislate in this area, India has perhaps the largest number of legislations on labour in the world. There are over 47 labour related laws enacted by the Central government dealing with industrial relations, social security, industrial safety and health, child and women labour, minimum wages and bonus, labour welfare, emigration, employment exchange and miscellaneous issues (Annex-1). There is a considerable degree of overlap among these acts. Many studies have suggested simplification of rules and procedures and to group these acts under five or six broad and comprehensive acts dealing with basic issues. The National Common Minimum Program (NCMP) states, “The UPA rejects the idea of automatic hire and fire. It recognizes that some changes in labour laws may be required but such changes must fully protect the interests of workers and families and must take place after full consultation with trade unions. The UPA will pursue a dialogue with industry and trade unions on this issue before coming up with specific proposals. However, labour laws other than the Industrial Disputes Act (IDA) that create an Inspector Raj will be reexamined and procedures harmonized and streamlined.” At present, amendments to 13 acts are being examined by all stakeholders viz. centre and state governments, trade unions and industry associations. These are indicated in Annex2. It may be observed from the table that even amendments of simple issues relating to definitions and scope have taken much longer period than expected due to existing parliamentary procedures for amendment of an act. In some cases like a Bill relating to workers’ participation in management is lying in the Parliament for 15 years since 1990 without any discussion or debate due to lack of interest by political parties. In order to achieve a consensus among various stakeholders, the present Union Minister for Labour and Employment Mr. K. Chandrasekhar Rao held a meeting with professionals and chambers of commerce and industry on the 29th March 2005 and another meeting with trade union leaders on the 31st March 2005. But, the discussions in 1
these meetings remained inclusive. While professionals, government advisers and industrialists supported flexible labour laws for employment on the ground of globalisation and general liberalisation of the economy, trade union leaders wanted more protection, strict enforcement of labour laws and more benefits for labour. To quote the Minister “Friends, you would appreciate the rationale for having less rigidity in labour laws which has now become a virtual necessity. The protection, which was available to the domestic industry from products and services sourced overseas, is no longer there or is fast reducing. Also the earlier policy and procedures with regard to industrial licensing has given way to a regime more determined by market forces than administrative actions. Efficiency, cost cutting and consumer satisfaction are increasingly becoming the bywords or hall marks of present day business” (Rao 2005b). The Minister indicated that the government has open mind although it considers that there is an urgent need for effecting requisite labour reforms. He has convened another meeting with the State Labour Ministers on the 22nd April 2005. Thereafter, the minister would prepare a draft proposal for consideration by the government. Thus the reforms are constrained by the political economy although there is close interactions between research and policy planning. This aspect is discussed in details in section 2.5 dealing with backward looking approach. 2 Labour Markets in India In various five-year plans, employment generation was viewed as a by-product of development and growth, and not as a goal to be pursued independently of economic development. 1970s and 1980s witnessed the emergence of various employment generation and self-employment programs as a part of poverty alleviation programs. Although level of employment expanded over the years, the growth rate of employment still lags behind that of labour force. Open unemployment is not a major problem in India. Out of a labour force of 406 million, 397 million were employed leaving 9 million openly unemployed in 2000. However, employment is characterised by very low quality of employment and low levels of productivity. About 31 per cent of the employed live blow the poverty line. There is no significant growth of regular employment. Organised employment as a proportion of total employment declined from 9 per cent in 1993-94 to 7 to 8 per cent in 1999-2000. Significant employment is taking place in services sectors and small and medium enterprises. Main growth was observed in casual or contractual employment. Selfemployment has not also increased significantly in the period from 1993-94 to 19992000. Educated unemployment at 14.7 per cent is much higher than normal unemployment at 2.2 per cent. Labour and employment Comprehensive data on employment and unemployment are collected by the National Sample Survey Organisation (NSSO) through quinquennial surveys. As per the results of the latest Round (55th in 1999-2000), the rate of employment growth decelerated from 2.7
per cent per annum in 1983-1994 to 1.1 per cent per annum in 1994-2000 (Table-1). The decline in the employment growth rate in the 1990s was associated with a higher growth in GDP indicating a decline in the labour intensity of production. Some of the important findings emerging from the 55th Round (1999-2000) are: (i) (ii) (iii) (iv) The decline in the growth rate of employment was associated with a sharp decline in the growth rate of the labour force. As in the past, the share of casual labour in total employment went up. The number of unemployed increased from 20 million in 1993-94 to 27 million in 1999-2000. The decline in the employment growth in 1994-2000 was mainly attributable to a stagnation of employment in agriculture, resulting in a drop of the share of agriculture in total employment from 60 per cent in 1993-94 to 57 per cent in 1999-2000. On the other hand, employment growth in all the sub-sectors within services, such as trade, hotels, restaurant, transport, storage, communication and financial and business services, (except community, social and personal services having negative growth rate) exceeded 5 per cent per annum (Table-2).
Table-1: Employment growth rates in 1972-2000 (per cent) Growth of population Growth of labor force Growth of employment (% per annum) (% per annum) (% per annum) 1972-1978 2.27 2.94 2.73 1977-1983 2.19 2.04 2.17 1983-1988 2.14 1.74 1.54 1987-1994 2.10 2.29 2.43 1994-2000 1.93 1.03 1.07 Source: Planning Commission, Government of India. Period Table-2 Sectoral Employment in 1983 to 2000
Employment (per cent to total) Sector 1983 19871988 19931994 19992000 1983 to 19871988 1.8 7.4 3.6 2.9 12.1 4.9 3.2 4.7 3.6 2.9 Annual growth rate (%) 19871988 to 19931994 2.6 1.0 1.2 7.2 -1.4 3.0 3.5 4.5 4.1 2.5 1983 to 19931994 2.2 3.7 2.3 5.3 4.2 3.8 3.4 4.6 3.6 2.7 19931994 to 19992000 0.02 -1.9 2.6 -3.6 5.2 5.7 5.5 5.4 -2.1 1.1
Agriculture Mining & quarrying Manufacturing Electricity, gas, water Construction Trade, hotels, restaurant Transport, communication Financial, real estate Community/social services All Sector
63.2 0.7 11.6 0.3 3.0 7.6 2.9 0.9 9.8 100
60.1 0.9 11.9 0.3 4.4 8.3 3.0 1.0 10.1 100
60.4 0.8 11.1 0.5 3.5 8.5 3.1 1.1 11.1 100
56.7 0.7 12.1 0.3 4.4 11.1 4.1 1.4 9.2 100
Working Groups on Labour and Employment A Special Group constituted by the Planning Commission under the chairmanship of the then Member Mr. Montek Singh (presently working as the Deputy Chairman of the Planning Commission) on targeting ten million employment opportunities per year over the Tenth Plan period (2002-2007) recommended that over and above the employment generated in the process of growth, there is a need to promote certain labour intensive sectors. These sectors are agriculture and allied activities, small and medium industries, information technology, construction, tourism, financial sector, education and health etc. With proper policy initiatives taken in these labour intensive sectors, an additional 20 million jobs will be created in the Tenth Plan. The Report also identified programs for achieving the ten million employment opportunities per year. Another Task Force on Employment Strategies and Employment Monitoring at state level was set up by the Planning Commission under the Chairmanship of the then Member Dr.S.P. Gupta with representatives from states and major central Ministries. The Task Force (Gupta 2002) suggested establishing cluster of industries and encouraging development of agro-based and food-processing industries.
Annex-1: Details of various acts on labour in India
Subjects 1. Industrial relations 2. Social security Acts 1. The Industrial Disputes Act 1947 2. The Plantations Labour Act 1951 3. The Trade Unions Act 1926 4. The Weekly Holidays Act 1942 5. The Employees State Insurance Act 1948 6. The Employees Provident Fund and Miscellaneous Provisions Act 1952 7. The Maternity benefits Act 1961 8. The Payment o9f Gratuity Act 1972 9. The Workmen’s Compensation Act 1923 10. The Employer’s Liability Act 1938 11. The Fatal Accidents Act 1855 12. The Dock Workers (Safety, Health and Welfare Act) 1986 13. The Mines Act 1948 14. The Factories Act 1948 15. The Personal Injuries (Emergency Provisions) Act 1962 16. The Personal Injuries (Compensation Insurance) Act 1963 17. The Child Labour (Prohibition & Regulation) Act 1986 18. The Equal Remuneration Act 1978 19. The Children (Pledging of Labour) Act 1938 20. The Minimum Wages Act 1948 21. The Payment of Bonus Act 1965 22. The Payment of Wages Act 1936 23. The Working Journalists and other Newspaper Employees (Conditions of Service) and Misc. Provisions Act 1955 24. The Working Journalists (Fixation of Wages) Act 1958 25. The Iron Ore, Manganese and Chrome Ore Mines Labour Welfare Fund Act 1976 26. The Iron Ore, Manganese and Chrome Ore Mines Labour Welfare Cess Act 1976 27. The Building and other Construction Workers (Regulation of Employment & Conditions of Services) Act 1996 28. The Building and other Construction Workers Welfare Cess Act 1996 29. The contract Labour (Regulation and Abolition) Act 1970 30. The Inter-State Migrant Workers (Regulation of Employment and Conditions of service) Act 1979 31. The Cine Workers Welfare Cess Act 1981 32. The Cine Workers Welfare Fund Act 1981 33. The Beedi and Cigar Workers (Conditions of Employment) Act 1966 34. The Beedi Workers Welfare Cess Act 1976 35. The Bonded Labour System (Abolition) Act 1976 36. The Limestone and Dolomite Mines Labour Welfare Fund Act 1972 37. The Iron Ore Mines Labour Welfare Cess Act 1961 38. The Emigration Act 1983 39. The Foreign Recruitment Act 1874 40. The Employment Exchange (Compulsory Notification of Vacancy) Act 1959 41. The Apprentices act 1961 42. The National Services Act 1972 43. The Industrial Employment (Standing Orders) Act 1946 44. The Labour Laws (Exemption from Furnishing Returns and Maintenance of Registers by Certain Establishments) Act 1988 45. The Motor Transport Workers Act 1961 46. The Sales Promotion Employees (Conditions of Services) Act 1975 47. The Cine Workers and Theatre Workers (Regulation of Employment) Act 1981
3. Industrial safety and Health 4. Child and Women Labour 5. Wages and Bonus
6. Labour Welfare
7. Emigration 8. Employment exchange 9. Miscellaneous
Annex-2: Progress of Amendments of Selected Acts on Labour Reforms
Name of the Act 1. The Payments of Wages Act Progress As in November 2004 The Act ensures that wages are paid by the employers within prescribed time limit. Presently the Act is applicable to workers drawing wages up to Rs.1600 per month. For enlarging the scope of the Act, it was proposed in 2002 to enhance the ceiling from Rs.1600 per month to Rs.6500 per month. The Payments of Wages (Amendments) Bill 2002 was approved by the Cabinet, but could not be presented to the Parliament as the previous government lost the general election in May 2004. It has been approved again by the new Cabinet and is waiting to be moved in the Parliament in the forthcoming sessions. The Payments of Bonus Act 1965 provides for payment of bonus to the employees of the factories and establishments employing 20 or more persons and allows a maximum bonus of 8.33% to eligible employees. As per the last amendments in 1995, the Act is applicable to employees drawing wages not exceeding Rs.3500 per month and the calculation of bonus ceiling is fixed at Rs.2500 per month. The Second National Commission on Labour in 2002 recommended increasing these ceilings to Rs.7500 and Rs.3500 respectively. The proposal to amend the Act in the light of these recommendations is still under examination of the government. The Act was amended in April 2000 and the amended provisions were notified on the 14th May 2001. By this amendment the amount of compensation payable on death has been raised from Rs.50, 000 to Rs.80, 000 and amount of compensation payable for permanent disablement has been raised from Rs.60, 000 to Rs.90, 000. At present the Act is payable to every factory, mine, oilfield, plantation, port and railway company, every shop and establishment employing 10 or more workers on any day in the preceding 12 months. The amount of gratuity payable to an employee was raised to Rs.350, 000 in 2000. The Emigration (Amendment) Bill 2002 proposing compulsory insurance for anybody going abroad has lapsed consequent on the dissolution of the 13 th Lok Sabha (lower house of Parliament) in May 2004. It is now proposed to reintroduce the Bill. A revised Cabinet note has been circulated to the concerned Central Ministries and all State governments for comments. Government is contemplating to bring forward amendments in the Act for reduction of number of returns and simplification of returns and registers prescribed under the Act. Works started in 2000 and still consultations are being held with different Ministries. The second National Commission on Labour in 2000 had recommended an umbrella legislation to provide protection to workers in the unorganized sector. Government considered the proposal to formulate the Unorganised sector Workers Social Security Scheme and launched a pilot scheme in selected 50 districts in January 2004. The Scheme could not take off for want of statutory backing. The Bill has been redrafted by the present government and has been circulated to all Ministries, States and Trade Unions for comments. At present the Act is applicable to any factory (i) where 10 or more workers are employed on any day in the preceding 12 months and any part of manufacturing is carried on with the aid of power and (ii) where 20 or more workers are employed on any day in the preceding 12 months and any part of manufacturing is carried on without the aid of power. The previous government decided to amend the Act for proving extra safeguards to workers and
2. The Payment of Bonus Act 1965
3. The Workmen’s Compensation Act 1923
4. The Payment Gratuity Act 1972
5. The Emigration Act 1983
6. The Labour Laws (Exemption from Furnishing Returns & Maintaining Registers by Certain Est.) Act 1988 7. The Unorganised Sector Workers Bill 2004
8. The Factories Act 1948
9. The Employees Provident Fund And Miscellaneous Provisions Act 1952 10. The Employees State Insurance Act 1948 11. The Minimum Wages Act 1948 12. The Mines Act 1952 13. The contract labour (Regulation) Act 1970
introduced the Factories (Amendment) Bill 2003 in the Lok Sabha on the 29th July 2003. The Bill lapsed due to the dissolution of the 13 th Lok Sabha. The Bill is under examination by the new government. At present, the Act is applicable to any establishment employing 20 or more workers. A comprehensive amendment is under examination by various ministries, states and trade unions. At present the Act is applicable to all factories and workers getting wages up to Rs.7500 per month are eligible to receive benefits under the Act. The proposed amendments for extending facilities under the Act are under examination by the government. The Act was enacted primarily to protect the interests of the workers in unorganized sectors and provides for enforcement of minimum wages by both central and state governments. The Act is undergoing thorough amendment process and is under examination by the centre, states and trade unions. Draft amendments are under examination by the centre, states and trade unions. The new government has decided not to pursue with the earlier proposal to exempt certain activities like sweeping, cleaning, courier service, security, export oriented units, Special Economic Zones, information technology etc. from the purview of the Act. Amendments, if any, would now require fresh approval by the centre, states and trade unions.
Labour Regulations, Investment, Employment and Poverty
Any strategy to improve the condition of the poor hinges on improving the labour market, since income from work and quality of work are the main determinants of the living conditions of the poor (World Bank 1996). India is endowed with an abundant and technologically skilled labour force, and is ranked first for both these criteria in the Global Competitiveness Report (GCR). However, India’s labour market has low degree of labour market flexibility in terms of deployment of human resources, work practices, and wages. Various studies (Anant 2005, Debroy 1997; Fallon and Lucas 1993; ILO 1999; OECD 1995; Surendra Nath 2005) suggest that such rigidities constrain the effective redeployment of labour during the process of industrial restructuring and changes in demand and technology, and act as a disincentive for employment creation. An industry survey and discussions with industrialists also identify labour regulation as the second highest obstacle to the operation and growth of business (World Bank 2000). Average labour intensity in unregistered manufacturing increased from an average of 59.3 per cent over 1988-9 to 1990-1 to 62.4 per cent over 1993-4 to 1995-6 (World Bank 1998). Hence, had labour markets functioned more flexibly, pensions been more mobile, and legislation been more conducive, the organized sector might have occupied a more prominent share of the work force. Formal sector employees might have grown more rapidly and been more mobile, and the benefits of more formal employment shared across a larger number of employees, including women, who have been unable to participate fully in the labour market. Rigid labour laws and high protection of labour encouraged increasingly capital-intensive industries (Gangopadhyay and Wadhwa 1998). Labour legislation and public sector employment gave employment protection and relatively high wages to the few employed in the formal sector, which constitutes only 8 per cent of total labour force. In addition, labour mobility across sectors was hindered by the pension system in the formal sector, pensions are not mobile across jobs and many years of work are needed before an employee becomes eligible for a pension. Labour regulation has been identified by many researchers (Stern 2001 and Sachs et al. 1999) as an important factor influencing the investment climate in India. As Besley and Burgress (2004) show, policy choices of the Indian state governments as regards labour legislation strongly affected
manufacturing performance. Manufacturing has played a major role for improving economic growth in the East Asian countries. For example, the share of manufacturing in GDP in Malaysia improved from only 8% in 1960 to 26% in 1995, whereas that in India increased from 13% to 18% in the same period. East Asian countries had also experienced sharp reduction of poverty. The study by Besley and Burgress (2004) based on state level panel data for the period 1958-1992exploits two important facts: (a) labour regulation only applies to the registered manufacturing sector and (b) the Indian constitution empowers the state governments to amend central legislation. The principal central legislation is the Industrial Disputes Act of 1947. This Act has been extensively amended by the state governments since 1950s. Besley and Burgress (2004) read the text of each amendment and classified these as proworker (+1), neutral (0) and pro-employer (-1). Besley and Burgress (2004) then show that pro-worker labour reforms are closely associated with an increase of urban poverty but do not affect rural poverty. This is due to the fact that labour legislation applies basically to the registered manufacturing units, which exist primarily in urban areas. Moreover, they observe that the adverse affects are large. For example, the state of West Bengal, which is ruled by the communist parties for the last three decades, had passed large number of pro-worker amendments during his period. Had it not taken these labour policies, its urban poverty ratio would have been 11 per cent lower in 1990. These results suggest that attempts to redress the balance of power between capital and labour can end up actually hurting the poor in the medium and long term. Besley and Burgress (2004) further observe that a pro-worker labour legislation is associated with lower per capita manufacturing output. This is due to the fact that pro-worker legislation led to less output in registered manufacturing sector. States with more pro-worker labour regulation tend to have less investment in the registered manufacturing sector, and larger informal manufacturing sectors. As organised trade unions are able to extract more wages and benefits in the registered sectors, capitalists prefer to remain in the unorganised sectors where labour has no power. These results on labour regulations are mirrored in the relationship between urban poverty elasticities and labour regulation. States that had more proworker legislation had been less effective in reducing poverty at a given
level of growth. States, which enacted pro-employer labour legislation, achieved significantly higher growth rates.
Labour Legislation and Reforms
The main rigidities in the labour laws include a very wide scope for initiating industrial disputes (which can be initiated on the basis of ‘interests’ rather than ‘rights’), long procedures for settlement of industrial disputes, inflexible provisions relating to change in conditions of service (instead of being part of the collective bargaining process), and provisions enabling government interventions in areas such as lay off, retrenchment and closures. Mr. Mukesh Ambani, Vice-Chairman of Reliance Industries, India’s largest private sector company, recently declared in a meeting with World Bank staff that Reliance could increase its textile and garments business tenfold, from its current $ 0.5 billion to $ 5 billion- provided labour laws, which he considered the single biggest barrier to India’s industrial growth, were eased. The principal legislation covering employment security is the Industrial Disputes Act (IDA) 1947 (which provides for settlement of disputes in the case of termination) and the Industrial Employment Act 1946 (which sets rights and obligations of employees and employers relating to service rules). Industrial sickness is dealt with under the framework provided by the Industrial Disputes Act 1947 (and the 1976 Amendment), the Companies Act 1956, and the Sick Industries Companies Act 1985. The IDA was amended in important ways in 1976 and 1982. Chapter V-B of the IDA makes it obligatory for firms employing 100 or more workers to obtain prior official permission for layoff, retrenchment and closure. As Datta Choudhury (1994) observes, “government permission is seldom given” due to socio-political reasons. Framework impedes large-scale industrial restructuring, relocation or exit of an enterprise without specific approval of the government. In the private sector, these rigidities are circumvented by the setting up of smaller units, which are beyond the purview of labour legislation, or the increasing use of contract labour. Also the implementation of labour laws, in particular labour welfare laws, results in the ‘Inspector Raj’ syndrome, which affects Small
Scale Industries (SSIs) disproportionately. For example, SSIs are constrained by excessive regulatory burdens and disclosure requirements-80 per cent therefore operates without incorporating. As many as 165 labour legislations exist in India, including 47 Central Acts (Debroy 1997), and substantial need exists for harmonizing and rationalizing them. For example, as the Acts have evolved, definitional variations have developed in concepts such as employee, workman, wages, factory, child labour and industry. The term ‘wage’ has been defined in 11 different ways in as many labour laws. Court case laws also differ among different states causing further confusion. The greater part of labour legislation is in the Concurrent List of the Seventh Schedule of Article 246 of the Indian Constitution, giving both Central and state governments the power to legislate for items that are on this list. Statelevel amendments were actively introduced, for example by the state governments of West Bengal, Andhra Pradesh, Maharashtra, Gujarat, and Madhya Pradesh. Special provisions have been incorporated by states in the Trade Unions Act 1926 (by Gujarat, Madhya Pradesh, Maharashtra, Orissa, Uttar Pradesh, and West Bengal) and Industrial Disputes Act 1947 (by Andhra Pradesh, Karnataka, Kerala, Gujarat, Maharashtra, Madhya Pradesh, and West Bengal) (Venkata Ratnam 1999). Wage protection under the Minimum Wages Act 1948 covers 79 job categories in Orissa, while only 8 in Manipur (Anant 1998). In addition, the range of minimum wages varies from the highest in Maharashtra to almost none in Haryana. Differences among states also arise in the institutional framework and the industrial relations scenario. However, state governments are required to refer their amendments to legislations to the Centre for the assent of the President of the Indian Union. This procedure has been slow, and proposals submitted by Tamil Nadu and Andhra Pradesh a few years ago, for example, have still not been processed. To bypass this process, some states have substituted the term ‘appropriate government’ with ‘state government’ in the Industrial Disputes Act 1947. The argument about Chapter V-B of Industrial Disputes Act is indeed a valid one. Labour markets become artificially rigid; employers adopt artificially high capital intensity and circumvent the legislation. The provisions of the
Industrial Disputes Act make recourse to the government and thus to Labour Commissioners, mandatory. Given the other provisions of labour legislation, the requirement of governmental permission can be dispensed with, without adversely affecting the interest of labour. Unless this rigidity in labour markets is removed, higher growth will not necessarily translate into greater employment. What is involved is not primarily an exit policy for labour. The statute makes it impossible for companies to exit. Competition cannot function without free exit. To muddy matters further, there are at least three definitions of organised, although they do largely overlap. First, there is the standard definition through labour laws, that is, organised means non-agricultural establishments that employ 10 or more persons and use power or employ 20 or more persons and don’t use power. Second, there is a small-scale sector definition, through threshold levels of investment in plant and machinery. Third, under the Income Tax Act, there is a threshold level of turnover below which an enterprise does not pay excise duties. In generating consensus on reforms, labour market reforms have been subject to intensive debate by trade unions, political parties and professionals. Indeed, they have figured on every reform agenda since 1991, irrespective of the political parties in power. As only a small percentage (8 per cent) of the total workforce of the country is employed in the organised sector, the “hire and fire” policy, for practical purpose, operates for 92 per cent of the labour force, which is unorganised. While harmonisation and unification of labour laws are not controversial, blood pressures begin to rise the moment one talks about hire and fire policy (Khan 2005). During a meeting on labour reforms with industrialists, chambers of commerce and labour researchers on the 29th March 2005, Union Minister of Labour and Employment Mr. K. Chandrasekhar Rao (2005a) clearly indicated that “Labour is a very important, if not the most important facto of production, and he more we look after it and its welfare, the more productive it can become. In this context, I find that he manoeuvrability which we have in making our labour laws less rigid, is constrained by one very important consideration, viz. that we do not, as yet, have an adequate safety net in place for our work force in the country. Another issue, which we need to seriously ponder over, is that if labour laws and regulations have to be made more flexible, there is a need for employers also to take upon themselves corresponding greater responsibility in terms of financial compensation to
the workers, who might face greater uncertainty or be otherwise adversely affected”. The researchers’ standard argument is that inflexible labour laws make the organised labour market rigid, deter employment creation and increase capital intensity, despite India’s advantage in terms of labour cost. Simultaneously, necessary protection and adequate social security and welfare schemes donot exist for the unorganised sector or for the unemployed. The NCMP (National Common Minimum Programme) states, “The UPA rejects the idea of automatic hire and fire. It recognizes that some changes in labour laws may be required but such changes must fully protect the interests of workers and families and must take place after full consultation with trade unions. The UPA will pursue a dialogue with industry and trade unions on this issue before coming up with specific proposals. However, labour laws other than the Industrial Disputes Act (IDA) that create an Inspector Raj will be re-examined and procedures harmonized and streamlined.” Accordingly the Minister for Labour had a series of discussions with all stakeholders in the last week of March 2005. Everyone who is against reforming labour markets, particularly the trade unions and the communist and other left parties criticized the government for trying to introduce hire and fire. On the other hand, industrialists in general were in favour of reforming labour markets criticized the government for not introducing hire and fire. The recently published Economic Freedom of the World 2004 has graded countries in terms of labour market flexibility. Scores are out of 10 and the higher, the better. India gets an overall score of 6.3. But for flexibility in hiring and firing, the Indian score is 2.0. The then Finance Minister Yashwant Sinha’s 2001-02 budget promised a new Industrial Relations Bill, so that the threshold for permissions would increase from 100 workers to 1000 workers. And the severance compensation would increase from 15 days to 45 days for every completed year of service. Meanwhile, the Second National Commission on Labour submitted its Report in 2002, which did not agree with proposed changes. Therefore, Chapter V-B continues and so does the debate. But in the
obsession with Chapter V-B, or other elements of IDA, reformers tend to ignore other laws that make labour markets just as rigid. Since political economy type resistance is less to these changes, those could have been implemented. In searching for an elusive consensus on IDA, government ignored the consensus that already exists in these areas. If some of these changes were implemented, labour markets would have become more flexible, the segmentation between organised and unorganised labour markets would have broken down and India would have been able to tap the comparative advantage of an abundant supply of skilled and unskilled labour. In his respect, one should mention the main recommendations of the Second National Commission on Labour, which submitted a Report in 2002. The first National Labour Commission was set up in 1929. There are 2700 pages in this Report. Major recommendations include the following: Existing set of labour laws should be broadly grouped into four or five groups of laws pertaining to Industrial Relations, Wages, Social security, Safety, and Welfare and working conditions. As regards Chapter VB (Special Provisions relating to lay-off, retrenchment and closure in the establishments employing not less than 100 workmen) of the Industrial Disputes Act, the Commission has felt that, in the new circumstances of global competition, it may not be possible for some enterprises to continue and meet the economic consequences of competition. In such cases, one cannot compel non-viable undertakings to continue to bear the financial burden for keeping the concern alive. They should, therefore, have the option to close down. However, adequate compensation needs to be given to the workers. Prior permission is not necessary in respect of lay-off and retrenchment in an establishment of any employment size. Workers will however be entitled to two months notice or notice pay in lieu of notice in the case of retrenchment. In the case of establishment employing 300 or more workers where lay-off exceeds a period of one month, such establishments should be required to obtain post-facto approval of the appropriate government. The provisions of Chapter VB pertaining to permission for closure should be made applicable to all the establishments to protect the interest of workers.
Under the socio-political pressure and the mandate of the National Common Minimum Programme, the Labour Ministry is not interested in amending the provisions of IDA. The Labour Ministry received proposals for amendments from some states such as Andhra Pradesh, Gujarat, Madhya Pradesh, Rajasthan, Maharashtra and Jharkhand. While the Ministry agreed with a few proposals for amending the Gujarat special Economic Zone Ordinance 2003, the Industrial Disputes (Gujarat Amendment) Ordinance 2003, the Andhra Pradesh special Enclaves (Services Conditions and Disputes Resolution) Ordinance 2003 and the Industrial Disputes (Maharashtra Amendment) Bill 2003 with some modifications, it expressed reservations about the rest.
Role of Trade Unions
Trade unions play an important role in labour reforms. Today practically every political party has its trade union wing. Given the flexibility of the Indian party structure, the number of trade union federations and their respective influence varies considerably over time. In 1989, the Labour Ministry listed eight major trade unions federations viz. Indian National Trade Union Congress (INTUC), All India Trade Union Congress (AITUC), Centre of Indian Trade Unions (CITU), Hind Mazdoor Sabha (HMS), Bharatiya Mazdoor Sabha (BMS), Hind Mazdoor Kamgar Party (HMKP), United Trade Union Congress (UTUC), and National Labour Organisation (NLO) besides a number of small independent unions. Due to party affiliations, politics at national and regional levels finds its reflection in trade union activity. Although trade unions represent only the organised labour, which constitutes hardly 8 to 9 per cent of total labour force, they are very vocal, and the vulnerability of Indian politics to capture by vested interests is great. To quote an observation made by a joint study on “Economic Restructuring in East Asia and India Perspectives on Policy Reform” by the Indira Gandhi Institute of Development Research (IGIDR), India and the Institute of SouthEast Asian Studies, Singapore: “Democratic regimes in South Asia are vulnerable to capture by vested interests. The less dependent the development process is on state involvement, the less damage these interests can do” (Pradeep Agarwal et. al 1995).
Trade unions wield a reinforced political power. Besides casting their votes in elections, they influence politics and government policies between elections and act as a strong pressure group through strikes and demonstrations. As neither political parties nor union leaders are stake holders in the industry in real sense of the term, the focus of their interventions in labour reforms is their limited private interest which clashes with interests of consumers and unemployed.
While China drastically reformed its previous employment relations pushing the workers to a more insecure regime and transferring substantial bargaining power to the employer within a decade of reforms, India virtually did nothing to change its labour laws even after 14 years of reforms (Saha 2005). In the absence of labour reform, the only avenue of downsizing was voluntary retirement schemes (VRS), pursued both by the private and the public sector, which resulted in high costs and long adjustment period. The methods of recruitment were also predominantly contractual, and where that was not possible, firms resorted to outsourcing. This led to dualism within firms, slower growth of permanent employment and abnormally high share (82 per cent) of unorganised employment in total labour force. China made significant reforms in labour markets within a decade of initiating reforms. As for the labour relations within an enterprise, the reform went deeper by transferring the bargaining power mostly in favour of the employer, while the enterprise union and the state machinery are expected to protect the workers’ interest under the general guidelines for labour welfare and protection. The employer has freedom in hire and fire and to make his employees work according to a mutually agreed contract. This particular provision of allowing firm-specific contracts to govern the employment relation has reduced the state’s role drastically. In practice, things can go wrong, if the state agencies do not play their roles properly and workers are forced to accept unfair terms. China’s long history of extreme employment security might have compelled them to reverse almost all the previous provisions. In the absence of domestic private entrepreneurs, liberalised labour market was perhaps necessary to attract foreign investors (Henley 2004). But it has made redistribution of surplus within the Chinese enterprises biased in favour of employers (Ostrovisky 2003).
China was successful in creating a new labour market, which enhanced mobility of labour. Although this led to mass layoffs and open unemployment, sustained high industrial growth especially in the coastal regions helped their redeployment. In spite of harsh working conditions led by competition, workers seemed to have benefited from wage growth, significant new job creation and opportunities for self-employment (Saha 2005). In sum, China’s manufacturing sector experienced a sort of industrial revolution, which reduced people’s dependency on agriculture. Despite various studies done in India indicating such benefits from liberalisation of labour markets, Indian labour laws still remain highly restrictive due to political economy constraints. India has not achieved remarkable improvement in manufacturing growth. Although industrial output has grown at a faster rate than before, employment growth has decelerated in the recent years. This suggests that labour reforms are necessary to allow for larger investments in manufacturing. Manufacturing growth is crucial for the absorption of semi-skilled and unskilled workers and to reduce the dependency of labour on agriculture, which employs 58% of labour force but contributes only 20% of GDP. The different courses of reforms taken by India and China can be explained partly by their policy history, political institutions and industrial relations framework. In the case of China, the history of extreme employment security compelled a complete reversal of labour policy to attract foreign capital, which was very important, as there was very little entrepreneur class within the country. Political institutions and one trade union policy further restricted the Chinese workers from conducting true collective bargaining. Hence, they suffered on the redistribution front (Chen et.al.1996, Kanbur and Zhang 2005). Currently the median age of the Indian working population is, at 24.3 years, one of the lowest among the large nations. India is likely to add 83 million to its working age population of 675 million by 2010 according to the estimates by the United Nations. However, existing restrictive labour laws have been a deterrent to employers forcing them to prefer capital-intensive options for production, even if they would have otherwise preferred labour-intensive options due to low wages in India (Ahya and Sheth 2005). Despite various well-researched studies, which recommended initiating a structural approach to labour market reforms, the government has avoided confronting the issue
of unemployment head on (Aya and Sheth 2004). Politicians’ efforts to protect labour in the public sector add to inflexibility in the labour market. Only 8% of Indian labour force are employed in the organised sector and almost 60% of manufacturing output comes from unregistered companies. A large number of factories remain outside any regulations. Although certain industries took the advantage and grew in terms of size, profit, skill and technology, most others existed for bare survival. A prolonged regime of import substitution damaged their business instincts. While the organized sector provided too much of job-security for too long, the unorganised sector provided too little to too many. Unfortunately, political parties preferred retaining this dualism in order to preserve their vote banks in organised labour force. Consequently, good research works and policy prescriptions on labour reforms remained on paper leading to poor uptake of research by the policy makers.