Academic journal article Indian Journal of Industrial Relations

Transition to Labor Law Reform: State-Level Initiatives & Informal Sector Labor Relations

Academic journal article Indian Journal of Industrial Relations

Transition to Labor Law Reform: State-Level Initiatives & Informal Sector Labor Relations

Article excerpt

Restrictive, Archaic, Convoluted Labor Laws

For India to transition to a modern economy--from agriculture to industry, informal to formal sector, and shift to urbanization--she must realize her true growth potential by focusing on the creation of good quality jobs and infrastructure. One of the key enablers is the modernization of the labor market, which is regulated by extremely restrictive laws. This forces businesses to remain small, and in turn operate in the informal sector. About 450 million informal employees who make up 93 percent of the total workforce stand to benefit from reforms to labor laws and improve business productivity.

Informal or unorganized sector workers, by definition, are those employed in enterprises that use power and employ fewer than 10 people or do not use power and employ fewer than 20 people (Debroy & Bhandari, 2008). Common occupations include small farmers, fishermen, beedi packers/bonded laborers, migrant workers, contract and casual laborers (Planning Commission, 2001). Informal workers are often characterized as low-skilled, poorly paid and seldom covered by social security provisions. This paper uses the terms 'informal' and 'unorganized' interchangeably.

Indian labor legislation is convoluted, archaic, and restrictive in nature. About 50 Central laws overlap with 150 State regulations. The clauses of the Industrial Disputes Act (IDA) of 1947, one of the major regulations, were conceived under the British Raj. In 1976, the introduction of Chapter V-B to IDA decreed that firms employing 300+ people should seek government permission to effect lay-offs, retrenchments and closures. This was further restricted to firms with 100+ workers in 1982, making hiring or firing new workers extremely difficult even if they are inefficient (Sharma, 2006). The Trade Unions Act is as old as 1926 and Workmen's Compensation Act from 1923.

The 1970 Contract Labor Act allows firms to employ contract workers for tasks of permanent nature but the arbitrariness of the law allows the government to ban contract use if similar establishments use regular workers for that same task (Bhagwati & Panagariya, 2013). The 1948 Factories Act limits the maximum hours of work per week to 48, requires paid holiday for each 20 days of work, bans the employment of women for more than nine hours a day, among other things (Bhagwati & Panagariya, 2013).

Adverse Effects

Stringent labor regulations affect industrial development, thereby economic growth and jobs. Firms are disincentivized from expanding and harnessing the economies of scale and forced to remain informal. The World Bank's (2013a) World Development Report focusing on labor issues directly links larger, formal sector firms to a range of positive factors. Surveying businesses in 102 countries, the report found that larger firms (with more than 100 workers) are likely to be more productive.

For instance, value added per worker in India's informal manufacturing sector is on average about one-tenth that in the formal manufacturing sector (Sharma, 2009). The World Bank report also found that larger, formal sector firms innovate more, and compete in export markets, especially in the presence of foreign competitors. They are also likely to pay higher wages and control for worker characteristics like age or education through a wage premium. However, India misses out on capitalizing on such economies of scale. For example, about 84 percent of manufacturing firms in India are micro and small firms, employing less than 49 people. A miniscule 6 percent of ("medium size") firms employ between 50 and 199 people. Only 11 percent employ over 200 people ("large size"); in China large sized firms account for 52 percent (Hasan & Jandoc, 2012).

On the other hand, economic growth in India has not brought about sufficient jobs. For instance, overall employment, which experienced a steady annual growth of around 2 percent from 196190 (when average growth was about 3. …

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