A MULTITUDE OF LABOUR LAWS AND THEIR REFORM

Ch. 8 of India’s tryst with Destiny

J. Bhagwati and A. Panagaria (2012)

I. INTRODUCTION

 According to (B&P), development of the Indian economy will require3 key

transformations –
a. Movement of workers out of agriculture into industry and services;
b. Progressive shift of workers from informal to formal sector within industry
and services
c. More rapid urbanization ie shift of workers from informal to formal sectors
likely to be in urban area
i. industrialization and modernization go hand in hand with
urbanization.

 Despite a significant decline in the output share of agriculture in the GDP,

a. The employment share of it in India has remained high and
b. Employment in the industry and services remains small, informal firms
characterized by low productivity.

 Urbanization has proceeded very slowly in India, i.e.

a. From 17.3% in 1951 to 31.1% in 2011.
b. This is only a 14-point shift in 60 years or a little above 2% in a decade!
c. The pace seems to have slightly accelerated in the 2000-2011 to a 3.3%.

II. FLIGHT OF THE INDIAN ENTREPRENEUR FROM LABOUR

 According to B&P, at the heart of this slow progress along all 3 dimensions is the
flight of the Indian entrepreneurs in the formal sector from low skilled labour.
i. ironic – India- labor abundant - with nearly 470 million workers,but
increasing reluctance of Indian entrepreneurs to employ unskilled
workers.

 No. of workers in pvt sector establishment ( with 10 or more workers ) :- rose

from 7.7 million( 1990-91) to 9.8 million (2007-08)
 And in pvt sector manufacturing from 4.5 to 5 million only in same period.
This small change taken in backdrop of more than 10 million people joining the
workforce every year.
3 KEY FACTORS BEHIND THIS DISMAL PICTURE:-

1. SLOW GROWTH OF MANUFACTURING

 Common feature of the fast-growing low-income countries has been –

a. The rapid expansion of manufacturing, pulling unskilled workers from
agriculture to industry.
b. This pattern characterized the rapid growth in Taiwan and South Korea in the
1960s and the 1970s and in China more recently.
c. Today’s industrial economies, such as UK, Germany and US also exhibited
similar pattern.
 But this pattern has failed to emerge in India despite rapid growth.
a. The share of manufacturing in GDP actually fell from 16.8% in 1981-82 to
15.8% in 2008-09.
b. In short, the minimal growth of manufacturing has been behind the slow
movement of the workforce out of agriculture.

2. POOR PERFORMANCE OF LABOUR INTENSIVE MANUFACTURING

 According to B & P, even with a stagnant share of manufacturing, some impetus

to gainful employment of unskilled could have come from a shift in the output
composition of organized-sector manufacturing in favour of unskilled labour and
against capital- and skilled labour-intensive activities.

 In a study, Das et. al (2009), found that in organized manufacturing –

a. labour intensive industries (e.g. food, textiles, beverages, apparel, furniture etc.)
formed only 12.94% of the total gross value added between 1990-91 and 2003-
04. It has further declined since then.
b. In fact, some of the fastest growing industries between 2003-04 and 2010-11
have been either capital intensive or skill intensive (e.g. automobiles, petroleum
refining, engineering goods, , pharma, finance and software)
  What about exports? Ie :-changing composition of India’s merchandize exports
leads to shift towards capital intensive goods.
a. Capital intensive or semi-skilled labour intensive, products (e.g. Petroleum
products, chemicals and related products, gems and jewellery etc) accounted
for
i. 41% of total commodity exports of India in 1991
ii. By 2007-08 it had increased to 65%.

b. On the other hand, readymade garments which are among the most
unskilled or low skill intensive products, saw their share decline from 12% to
just 6% during the same period.

c. While China dominates the world market in the readymade garments

category, India has scarcely kept pace with the much smaller Bangladesh.

i. India had more than 40% lead over Bangladesh in 2002, by 2007 she was only
5.7% ahead of its smaller neighbour
ii.. When compared to China, India fairs poorly in both US and world markets. India’s
export as proportion of Chinese exports fell from 1/3rd to less than 1/7th b/w 2001 and
2009.

3. HIGH AND RISING CAPITAL-INTENSITY IN PRODUCTION

 Indian firms seem to have moved more and more towards capital intensive
technology rather than away from it.
 Even in terms of international comparison, (Hasan, Mitra & Sundaram 2010),
the labour-capital ratios in majority of manufacturing industries in India are
lower than in other countries at a similar level of development and factor
endowments. Comparing India and China (19 manufacturing industries) it was
found that in the period 1980-2000 –
a. The capital stock per worker is consistently higher in India than in China, and,
b. Whereas, employment in these sectors shows a steady growth in China, it has
been stagnant in India.
 There are other studies too, Rani & Unni (2004), Chaudhury (2002), and again
Das,
Wadhwa & Kalia (2009) that find a declining trend in capital -labour ratio in the
Indian manufacturing.

III. LINK TO FIRM-SIZE DISTRIBUTION

 The flight from unskilled labour is intimately linked also to the firm-size
distribution that our policies have produced.
 Mazumdar & Mazumdar and Sarkar have drawn attention to the fact that:
a. employment in India is concentrated heavily in the small enterprises.
b. . While the large enterprises have some presence,
c. the medium sized enterprise are entirely missing (problem of the missing
middle).
 Hasan and Jandoc analysed that
a. - 84% of the workers in manufacturing in India were employed in firms with
45 or less workers in 2005 while Large firms employing 200 or more workers
accounted for only 10.5% of manufacturing workforce.
- In contrast, in China, small firms employed 25% and large firms employed52%
of the workers respectively in 2005.
 Upon disaggregating by sectors, Hasan and Jandoc find that
a. firm-size distribution is skewed towards even smaller enterprises in labour
intensive sectors (e.g. apparel sector has 92.4% workers in firms with 49 or
less workers).
b. This contrasts sharply with that in China, where medium and large-scale firms
account for a gigantic 87.7% of apparel employment.
c. In the more capital intensive auto and auto-parts sector in India, large scale
firms employed 50.3% all workers in the sector in 2005.
d. The absence of medium and large firms in apparel is clearly linked to the
poor export performance of the sector.

 B&P feel that the reason why growth has not been as inclusive in India as in
South Korea, Taiwan and China is absence of large-scale firms in the labour
intensive sectors in India.

IV. THE NEGLECT OF LABOUR AND LAND MARKET REFORMS

 Q. Why have the reforms not done more to produce medium and large scale
firms in the labour-intensive sectors?
 a. B&P feel that the most plausible explanation is that the reforms have been
principally confined to product markets
b. However, multiple layers of regulation in the remaining two major markets,
labour and land, continue to discourage the growth of manufacturing and of
unskilled labour-intensive products.
c. Past reforms removed 4 imp. layers of regulation in the product and capital
markets:
i. Investment Licensing eliminated
ii. Protection which prevented foirms from exploiting large world markets
removed
iii. Door to foreign firms with state of the art know how and knowledge of
world market has been opened
iv. Small scale industries reservation policy which reserved all labour
intensive products for exclusive manufacture by small enterprises has
been effectively ended.

 Many analyst had expected that reforms especially the practical removal of small
scale reservation policy would pave the way for the emergence of large scale firms in
labour intensive sector, but this did not happen as:-
a. According to B&P cause is highly inflexible labour market, which makes the cost
of labour in the formal sector excessively high.

 In addition there are 3 complementary factors impeding the emergence of the

large scale labour intensive manufacturing –
a. Absence of bankruptcy laws permitting smooth exit in the case of failure
b. Highly distorted land market
c. Poor infrastructure

V. A MULTITUDE OF LABOUR LAWS

 Under the Indian law, labour is a ‘concurrent’ subject, meaning that both the
centre and the state can enact laws in this area. ie around 52 central government
laws and 150 state level laws in India. Hence in all 200 labour laws.
 This multitude of laws according to B&P are not always consistent with each
other and you cannot implement 100% of Indian laws without violating 20% of
them.
a. this multitude is quite burdensome and counterproductive despite appearing to
protect the interests of the workers and therefore in need for reform. For eg:
i. Trade Union’s act 1926, requires firms with 7 or more workers to form a
trade union, this fact gives firms an incentive to stay with 6 or fewer
workers.
ii. Since a trade union leader can be an outsider, prospects for disputes and
strikes rise with formation of unions, firms can thus minimize labour
related problems as long as they are smaller than 7 workers.

b. Most acts add cost to the employer and also generate considerable paper work
i. Employees State Insurance Act 1948- For employees hired at wage upto
Rs 10000 a month, act provides benefits related to sickness, maternity,
disability, old age care, funeral etc. Extends to all manufacturing,
agriculture, commercial, industrial establishments with 10 or more
workers
ii. Factories Act 1948- limits max hrs of work per week to 48, work without
a day rest to 10 days, requires paid holiday for each 20 day of work ;
demands of factory premise kept clean ie washing and painting the
premises, proper disposal of waste, uninterrupted supply of drinking water
; provision of workers safety by using fencing of machines, goggles against
UV radiation, precaution against fire etc ; 150 workers- lunchroom, 250-
canteen, 30 women- daycare centre required ; each factory to maintain
registers for attendance, of leaves granted with wages, provision of health
care etc.
c. Given than there are more than 200 laws, firms often are not aware of all the
laws and this may lead to non compliance and violation of law and also opens
the door to corruption by labour department inspectors. ( see pg 140 141)

 Industrial Disputes Act IDA – 1947

a. One of the most important labour laws as it covers all disputes regardless of
the firm size. ie -The disputes typically involve an employer or one or more
workmen in his establishment but It may involve two or more workmen or two
or more employers
b. It also states the conditions under which
- employers can alter the tasks assigned to workers,
- conditions under which workers can be laid off or retrenched
- And the rules regulating strikes.
 c. According to B&P the IDA stacks the deck disproportionately against the
employers, and therefore may affect their willingness to hire regular labour
and increase their inclination to hire contract workers.

d. Reasons why IDA considered to be biased against the employer-

i. First, the legislation defines an industrial dispute as any dismissal,

discharge, termination of a worker in any firm of any size.
- the IDA confers the power to regulate, labouremployerrelations on
the labour department)with jurisdiction over the firm.
- Although the first step in settling a dispute is reconciliation, failing
which the matter is referred to labour courts. Since labour courts
overwhelmingly rule in favour of workers on the theory that firms
have deep pockets and workers do not, the workers and unions have
little interest in the reconciliation.
ii. Secondly, Section 9A of IDA requires that employer give 3 week notice
to workers of any change in their working conditions (with 50 or more
workers),and the workers have a right to object to these changes, which
may culminate in an industrial dispute.
iii. Third, and most importantly, Chapter V-B of IDA effectively makes it
impossible for an industrial establishment with 100 or more workers to
lay off or retrench workers even if it is unprofitable and is, therefore
forced toclose the unit.
- Establishments subject to regulation have to seek permission from
the labour department for layoffs or retrenchment and the
concerned departments rarely give such permissions.

 Contract Labour (Regulation and Abolition) Act, 1970

a. Contract workers are indirect employees of an establishment: they are hired,
supervised and paid by a contractor. The establishment has no direct
responsibility towards the contract workers.
- While at times the contract labour may be justified be on economic
grounds, establishments in India also prefer contract workers to
avoid the burden imposed on them by the onerous labour laws.
 b. The Contract Labour Law is aimed at regulating the misuse of contract
labour and protecting the interests of the contract worker.
- The act applies to establishments and contractors employing 20 or
more workers
- However, a key provision gives the government the power to
i. prohibit an establishment from using contract labour for work of
perennial nature or work that is central to manufacturing process
ii. To deny the use of contract labour for a task if other similar
establishments use regular workers for the same task.
iii. Many states have used this provision to ban the use of contract labour in
entire sectors.

VI. WHY SCEPTICS OF THE ADVERSE IMPACT OF LABOUR LAWS ARE

WRONG

 As already mentioned, burdensome labour laws explain why entrepreneurs in

sectors such as apparel, in which labour costs account for more than 80% of the
total costs, chosen to stay tiny.
- As the firm size rises , at no point is the saving in manufacturing cost
sufficiently large to pay for the extra cost of satisfying the labour
laws.
 B&P feel that it is only at very large scale will the cost saving become big enough
to pay for the cost of labour laws.
- Under the circumstances we will end up with either tiny or very large
firms with missing middle, as has been the case with India.
- The alternative to go very large (say more than 1 lakh workers in an
apparel factory) does not appear to be an easy alternative given the
restrictive nature of the India’s labour laws.

 Nonetheless, some analyst remain sceptical of the argument that labour-market

rigidities are at the heart of the absence of mid and large-size firms in labour
intensive sectors. Their arguments are as follows –

a. First, they blame the lack of adequate literacy among potential workers.
According to them, even the so called ‘unskilled’ tasks such as cutting, sowing,
stitching etc. require a level of literacy that is lacking in India.
  According to B&P this claim is false as –
- tailors, who are currently employed in small establishments, are
surely capable of performing the same task in large factory setting.
- Secondly, net enrolment rate (NER) for primary school, was 91.6% in
2011, while the gross enrolment rate (GER) was 110.6%.
- Similarly in 2007-08, the GER for class IX & X was 58.2% and 33.5%
for class XI and XII.

b. The second counterargument relies on the observation that female workers

have predominantly populated the large scale factories in China. According to
this argument, social attitudes and legal framework in India do not support
the employment of women in large factories.
- The argument goes that families are reluctant to send women to
work in factories and laws such as 1948 Factories Act, prohibits the
employment of women in night shifts.
 According to B&P, once again the basic premise behind these
arguments are faulty.
- First of all there is no reason why men cannot be employed for the
job
- While it is desirable to amend the Factories act to permit the women
to work nights shifts there is no reason why women can’t work the
day shift and men the night shift.

c. Third, it is argued that labour-intensive products, most notably apparel,

require just in time delivery to export destinations such as the US and
Europe, which would require first rate infrastructure and lack of it would
result in failure.
 While it cannot be denied that infrastructure is a weak point in India, it
is not a binding constraint everywhere in India.
- Hence infrastructure or rather the lack of it in some parts of the
country cannot by itself explain the absence of large scale labour
intensive manufacturing in every state.

d. Fourth, some argue that the reason why the small firms have not grown
because they don’t have access to adequate credit.
 B&P feel that this argument is falsified by the fact that both medium
and large-size firms account for much larger employment in the capital
 intensive sectors (which are likely to require much more credit) such
as automobile than in labour-intensive sectors such as apparel.
- Furthermore, unless something else, such as labour laws, have made
apparel a riskier business than automobile industry, there is no
obvious reason why the banks would discriminate against a labour
intensive industry in a labour abundant country.

e. Fifth, it is argued that when interviewed for business environment surveys,

firms rarely point to labour market rigidities as the key problem.
 According to B&P this could be a ‘selection’ problem, because the
firms that are likely to complain i.e. medium and large sized firms in
labour-intensive sectors, simply do not exist! And thus not
represented in the sample.
 Most large firms in the sector typically come from either the services
sector or capital-intensive manufacturing sector.
- Service firms are not subject to some of the constraining lawssuch as
chapter V B (as their employees do seldom qualify as ‘workmen’
under IDA 1947.
- In the capital intensive sectors, the labour cost is less than 10% of the
total cost, and the labour productivity is higher thus they can afford
to bear the cost of labour-market rigidities andeven lay off through
voluntary retirements with golden handshakes.
- Large firms in the labour-intensive sectors, in which labour costs are
80% of the total cost, and profits per worker are low, do not have
this option.

f. Sixth, some argue that while labour laws may be onerous on paper, they are
not enforced or that the firms are able to get around them.
 According to B&P, however, the fact is that firms have chosen not to enter
labour intensive sectors in India while they routinely do so in other comparable
countries suggests that they are not able to getaround labour laws in a cost-
effective manner.

g. Seventh, a final counterargument is that labour market rigidities apply to

only a tiny section of the labour force.
 In this view, the fact that more than 90% of labour force is in the informal sector
or employed informally in the formal sector implies that the bulk of the labour
market is highly flexible despite the ill designed labour laws.

 The question this argument begs is why such a small part of the labour
force has found formal employment in India and Shouldn’t we try to bring
more of the labour force into such employment?
 In conclusion B&P cite evidence on the state level, to show how state-level
labour laws affect the firm size in labour-intensive sectors
- Hasan and Jandoc, compared the firm size distributions of all
manufacturing between states with flexible labour regulations, and
those with inflexible ones and found almost no cross state
differences.
- However, when they restricted the sample to apparel, they found
that large scale firms exhibit proportionately significantly larger
shares of employees and small scale firms significantly smaller share
in stateswith flexible labour regulations.
- . B&P feel that labour laws remain highly restrictive even in the states
classified as relatively more flexible, and thus hinder the emergence
of medium-and large scale firms in greater proportion, the existence
of these state-level differences is significant.

VII. LABOUR LAWS: WHAT MUST BE DONE?

 Nearly all major labour laws in India are more than 4 decades old and under a
closed economy and licence-quota-permit raj, the producers had a captured
market where the laws had some rationale in forcing the producers to share
profits with the workers through ultra high protection.
- But with investment and import licensing abolished and trade
opened up, domestic firms are subject to intense competition, and
the ultra-high protection has only prevented the economy from
specializing in the goods in which India enjoys comparative
advantage.
 B&P feel that we need to move the economy towards specialization in labour-
intensive products, which is essential to the creation of more formal-sector jobs,
and therefore for making growth more inclusive, reform of labour law is urgent.
 Given the political difficulty in carrying out political reforms, may be one should
focus first on the more damaging laws on the book.
 - The law that is the most in need of reforms is IDA 1947.

 B&P assert that with Chinese wages reaching levels where it might be forced out
of the labour-intensive sectors, India is well positioned to become the
manufacturing hub of the world.
- However, if the costs of employment remain what they are, the
opportunity may be seized by a large number of smaller countries
such as Vietnam, Cambodia, Bangladesh are quite well positioned to
compete with India.
 Several Changes in the IDA will be enormously helpful:-
a. First, the definition for the purpose of industrial disputes need to be
tightened.
i. The IDA defines retrenchment as ‘the termination by the employer of
a service of a workman for any reason whatsoever’ other than –
1. a punishment inflicted by way of disciplinary action
2. voluntary retirement
3. Retirement upon reaching the age stipulated in the contract.
4. Termination due to non renewal of a contact on its expiry or
5. failure of the worker to meet conditions stipulated in the
contract.
ii. Under the above definition, even a discharge of employees due to
declining sales or unanticipated change in technology would be
interpreted as retrenchment.
iii. Also, the Indian courts have gone on to interpret as retrenchment the
discharge of an employee on probation and non confirmation of an
employee failing a test required for confirmation.
iv. This provision has naturally resulted in the multiplication of industrial
disputes as well as in disincentives to hire workers.
v. A tighter definition of retrenchment would clearly bring down the
number of such disputes and encourage more hiring of workers.
b. Second, the IDA allows every single industrial dispute to go to the labour courts
and tribunals.
i. This practice should be replaced by one under which an independent
authority is empowered to deliver a time-bound and final verdict in a
designated class of cases.
ii. At least in cases in which the basis of retrenchment is not in dispute.
c. Third, Section 9A of the IDA, which imposes a heavy burden on an employer
wishing to reassign a worker to an alternative tasks needs to be replaced by one
that gives the employer greater flexibility.
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i. At least, the employer should be given the right to reassign the
workers within a broad set of pre-specific tasks especially in cases
such as technical obsolescence.
d. Fourth, while the IDA prohibits strikes by public utility services without notice,
no such restrictions apply to strikes in other industrial establishments except
during the time that conciliation or arbitration proceedings are underway.
i. Nor does the law require a secret ballot by trade union members
before a strike is called. This encourages wild cat strikes.
ii. Change in the IDA in this regard is necessary.
e. Fifth, chapter V-B of the IDA 1947, that makes it nearly impossible for an
employer of a factory with 100 more workers to lay off workers under any
circumstances needs to be repealed.
i. Interestingly this chapter was added only in 1976, i.e. the IDA had
existed for 29 years without it.
ii. B&P feel that we should return to the pre 1976 situation.
iii. Government could begin by changing the law for a handful of labour
intensive sectors in which there are only a few large firms in the first
place.
iv. If even this change is politically difficult, then it could start with
exemption for apparel factories with 100 to 500 workers, which
account for tiny proportion of employment in the sector.
5. Besides the laws discussed above there are certain others that must also be
modified.
a. For example, the 1948 factories act, should be revisited.
i. B&P feel that the small firms are unlikely to have the staff and the
expertise to understand and ensure fulfilment of the myriad
regulations in the Act.
ii. Consequently, there is a need for an alternative set of fewer and more
manageable regulations applicable to firms with less than 50 workers.
b. The 1926 Trade Unions act should also be modified.
i. Originally it allowed any 7 workers to form a union BUT in 2001 an
amendment to the law introduced the qualification that those
forming trade unions should minimally include 10% of the WF or 100
workers .
ii. But even this amendment leaves a room for a large number of trade
unions in a large firm.
iii. As a result, e.g. Neyveli Lignite Corporation Ltd. has as many as 50 TUs
and associations.
iv. This organizational feature makes the collective bargaining process
highly problematic since an agreement reached with one union does
not automatically apply to another.
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v. A reform is required that would limit the number of trade unions to a
manageable level.
4. Till now we have discussed the formal sector. What about the workers in the informal
sector?
5. Is there any way to provide minimal social protection to workers in the informal
sector (Such firms typically have less than 10 workers)?
a. In B&Ps view the solution has to be indirect and lies in the labour-market
reforms as social protection of such a large number of workers seems to be
impractical .
b. According to them, if
i. the labour reforms are implemented they would accelerate the
growth in formal sector employment
ii. Investment in skill creation will make workers employable in better
paid jobs
iii. This would accelerate Tract II redistributive programme.
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