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Bridging Research and Policy Project ⏐ 2006
Global Development Network

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47 Nakhimovsky prospekt, Suite 919, 117418, Moscow, Russia • Tel./Fax: +7 (095) 332 44 25, 332 44 15 • Fax: +1 (202) 478 19 68 • http://www.eerc.ru/, eerc@eerc.ru

The impact of research on policymaking: the case of labor market and external sector reforms in India
TARUN DAS* Executive summary India is a success story of economic reforms. Because of its vast size, it also provides a good example of having a wide network of research institutes, and effective linkages between development researchers and policy planners. The case study of India makes a critical appraisal of theses linkages attempted since 1990 in external sector reforms and with much lesser success vis-à-vis the labour markets. Linkages between research-policy-implementation are very complex in a democratic set-up like India. The case supports the findings of other studies on BRP that the political institutional context is the most important factor determining the scope and extent of linkages among research, policy and implementation. Reforms in the external sector were most comprehensive and met lesser resistance from the political parties as the working class was not affected adversely by these policies. They included: liberalisation of exchange rate and exchange control regime, liberalisation of foreign investment and technology transfer, removal of licenses and quantitative restrictions on imports along with rationalisation and reduction of import duties. On the other hand, progress of privatization and labor reforms was slow and the scope was very limited due to political economy constraints. Despite various studies done in India indicating substantial benefits from liberalization of labor markets over a medium and long term, Indian labor laws still remain highly restrictive. Most of these studies were ignored by the trade unions and left parties. Lobbying foreign direct investment in some sensitive sectors such as real estate and retail trade wasn't easy though many studies had indicated substantial benefits in terms of higher growth and employment that would follow afterwards. For ideological reasons, the left parties and trade unions did not allow majority equity holding by foreign investors in insurance and natural resource based sectors such as mining and plantations. Policy & politics: left parties are in the game Although Foreign Direct Investment (FDI) regime was significantly liberalized and foreign equity up to 100% was allowed in many sectors in industry and infrastructure, government’s intention for increasing FDI limits in some other sectors faced severe protests from the left parities. For example, the then Finance Minister announced in the Union
* Ministry of Finance, India

Budget for 2004-05 that FDI limits would be raised in civil aviation up to 49% of total equity, in telecom up to 74%, in banking up to 74% and in insurance up to 49%. FDI limit was raised from 40% to 49% in civil aviation, from 49% to 74% in telecom and banking, but FDI limit could not be raised from 26% to 49% in insurance due to opposition by the left parties, which provide political support to the present coalition government. The Pension Bill 2004, which proposed the entry of foreign players in domestic pension and provident funds, could not be passed and the ordinance on the proposed changes in this sector was allowed to lapse simply because of the reservations expressed by the left parties. Similarly, political economy constraints created stumbling blocks for reforms in privatization of public enterprises and liberalization in labour laws, despite various researches advocating for these reforms to enhance investment, productivity and employment. Left parties held the view that privatization may be allowed only in loss-making enterprises, and government should not sell profit-making enterprises. Many times, government has to back track on privatization due to pressure from political parties. The Rajiv Gandhi government’s Cabinet decision in 1985 to sell off the stateowned Scooters India Limited to a private company Bajaj Auto had to be canceled following protests by opposition parties. The decision on privatizing Indian Airlines announced by the Finance Minister Yaswant Sinha in 2001 was rolled back. The Vajpayee government’s cabinet decision on privatizing National Aluminum Company had to be put abeyance due to pressure from the trade union leaders and one of the coalition partners. The Man Mohan Singh government’s cabinet decision on privatizing the Bharat Heavy Electricals in 2005 also met the same fate. Trade unions play an important role in labour reforms. Today practically every political party has its trade union wing. Although trade unions represent only the organised labour, which constitutes hardly 8 per cent of total labour force, they are very vocal, and the vulnerability of Indian politics to capture by vested interests is great. Trade unions wield a reinforced political power. Besides casting their votes in elections, they influence politics and government policies between elections and act as strong pressure groups 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.
© GDN, 2006

The research was supported by the Global Development Network, Norwegian Agency for Development Cooperation and Japan Bank for International Cooperation. All opinions expressed in this Policy Brief are those of the authors and not those of the GDN and other donors.

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Peculiarities of Indian labor in larger perspective While China drastically reformed its previous employment relations within a decade of reforms, India virtually did nothing to change its labour laws even after 14 years of reforms. The only avenue of downsizing available in India is the voluntary retirement scheme, pursued both by the private and the public sector, which results in high costs and long adjustment period. The methods of recruitment are also predominantly contractual, and where that is not possible, firms resort to outsourcing. This has led to dualism within firms, slower growth of permanent employment and abnormally high share (82 per cent) of unorganised employment in total labour force. While the organized sector provided too much of jobsecurity to a few for too long, the unorganised sector provided too little to too many. 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 simply on paper leading to poor uptake of research by the policy makers. Therefore, proper linkages among researchers, policy makers and political parties are necessary for bridging research and policy. Both researchers and policy makers should make extensive efforts to inform the citizens, legislators, political parties, workers and journalists of the high costs of inaction or delays in privatization and labour reforms. These efforts will mobilize popular support in favor of privatization and labor reforms and break the opposition of vested interests. Trade unions and left parties have aversion for privatisation and hire and fire policy for labour as they feel that there are not sufficient social welfare measures for those who might be adversely affected by industrial restructuring. They also do not like entry of foreign investors in retail trade, pension and provident funds and do not like majority equity holding by foreigners in insurance and natural resource based industries because of fear of loosing jobs. They criticise China’s experience by citing that the so-called industrial revolution in China has led to an increase in personal and regional inequalities. Thy feel that the different courses of reforms taken by India and China can be explained partly by their policy history, political institutions and industrial relations framework. 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. Political institutions and one trade union policy further restricted the Chinese workers from conducting true collective bargaining. But there is no such compulsion for India, which has a long history of private entrepreneurship and mixed economy with large share of private investment. 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. 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. Politicians’ efforts to protect labour in the public sector add to inflexibility in

the labour market. Liberalisation of labour laws would certainly create more investment, including foreign investment, leading to higher output and higher employment. Similarly in the case of external sectors, further liberalisation of FDI policy is required to attract more foreign investment in mining, insurance and retail trade as these need huge investments and modern technology beyond the capacity of the domestic players. Liberalisations will generate higher quality of output and services and lower prices as have happened in many countries. Conclusion Both the case studies on reforms in external sectors and labor laws indicate that the following factors are relevant for bridging research and policy more effectively: a. Effective links between researchers and policy makers are essential for bridging research and policy. Involvement of researchers in the policy making process from the very beginning encourages policy-oriented research and visa versa. Continuous feedback between research and policy not only improves quality of research and openness and transparency of policy making, but also build ownership of both research and policy. In the case of labour reforms in India, research and policy have moved back and forth many times due to socio-political constraints. In some cases, links have not led to concrete policies, but the linkage has been able to remove distrust among various stakeholders such as employers, employees, trade unions, government and researchers. The continuous feedback loops between research, policy, implementation and monitoring has also led to setting up or strengthening the existing think tanks and intermediaries e.g. industry, trade and workers associations. Institutional credibility is important to have effective influence on policy making. The reputation of a research institute or a think tank has a sustained impact on uptake of research and policy making. It appears that research institutions, that have close links with the policy-making institutions due to funding arrangements, have major impact on policymaking process and uptake of research. Building networks of researchers and policy makers helps bridging research and policy. Academic associations have informal links with the government departments. It is better to formalize these networks and hold seminars and conferences on regular basis. Qualifications and experience of policy makers have major influence in bridging research and policy as they are better equipped to deal with professional and to understand research findings. The involvement of individual experts is also equally important for bridging research and policy. In India, the system of appointing experts as consultants for a specified period or as policy advisers on permanent basis has helped in bridging research and policy and encouraging research in new fields. The setting up working groups/ expert or specialised groups by the government has also helped bridging research and policy. However, due care should be taken while selecting members for expert groups so that members with diverse views and ideology are repre-

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The research was supported by the Global Development Network, Norwegian Agency for Development Cooperation and Japan Bank for International Cooperation. All opinions expressed in this Policy Brief are those of the authors and not those of the GDN and other donors.

© GDN, 2006

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sented in such groups in stead of picking up only progovernment members. j. Multilateral and bilateral donors have supported activities and research to a great extent leading to the uptake of their research input. Further, review of macroeconomic, sectoral development policies and poverty alleviation papers have effectively helped the government to formulate its policies. These donors must enhance their grants to research institutions for policyoriented studies. Last, not the least, since political context is the most important factor influencing uptake of research for policy planning, both researchers and policy makers

should conduct more studies to educate politicians and other stakeholders about the scope, direction and favourable impact of reforms and international best practices. It will also be highly rewarding if they have continual dialogue and involve politicians, trade union leaders and other stakeholders in the research and policy making process from the very beginning. The next phase of BRP project may try to hold seminars and workshops with all stakeholders such as researchers, government officials, trade unions, political leaders and general public.

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Bridging Research and Policy Project is coordinated by the Economics Education and Research Consortium (Moscow, Russia) and funded by the Global Development Network. This project provides researchers in the transition and developing countries with expert guidance on how to advance policymakers’ awareness of their research and how to increase its policy impact. The project was implemented in three phases. The first two phases strived to increase the understanding of research-to-policy linkages in developing and transition countries. It collected and analyzed more than 50 case studies of research utilization (Phase 1) and conducted more than 20 in-depth studies of research and policy linkages across countries and sectors. The current, third phase of the project is concerned with a synthesis of findings to date, dissemination of lessons learned and capacity building activities. The Economics Education and Research Consortium (EERC) is a non-governmental non-profit charity foundation. Its main purpose is to strengthen economics education and research capabilities in the CIS. The focus of EERC is on graduate level education http://www.eerc.kiev.ua) and research networking (http://www.eerc.ru).

The research was supported by the Global Development Network, Norwegian Agency for Development Cooperation and Japan Bank for International Cooperation. All opinions expressed in this Policy Brief are those of the authors and not those of the GDN and other donors.

© GDN, 2006

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