IE 2 - Unit 1 - Labour Laws - Pangaria and Bhagwatii PDF

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A MULTITUDE OF LABOUR LAWS AND THEIR REFORM Ch. 8 of tryst with Destiny J. Bhagwati and A. Panagaria (2012) INTRODUCTION 1. According to Bhagwati and Panagaria development of the Indian economy will require3 key transformations a. Movement of workers out of agriculture into industry and b. Progressi...

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A MULTITUDE OF LABOUR LAWS AND THEIR REFORM Ch. 8 of India’s tryst with Destiny J. Bhagwati and A. Panagaria (2012) INTRODUCTION 1. According to Bhagwati and Panagaria (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 and c. More rapid urbanization. 2. The last will follow from a shift of workers to formal sector manufacturing and services, which are likely to be in urban rather than rural areas. a. Even if the industry is located in or near rural areas, its growth will almost surely be accompanied by urbanization of the region. b. In other words, industrialization and modernization go hand in hand with urbanization. 3. Recall that despite a significant decline in the output share of agriculture in the GDP, a. The employment share of agriculture in India has remained high and b. Employment in the industry and services remains predominantly in small, informal firms characterized by low productivity. 4. It is also equally noteworthy that 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%. FLIGHT OF THE INDIAN ENTREPRENEUR FROM LABOUR 1. 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. 2. It is ironic that in a labour abundant country with nearly 470 million workers, all evidence indicates extreme and even increasing reluctance of Indian entrepreneurs to employ unskilled workers. 3. To get an idea of the numbers in all private sector manufacturing establishments with 10 or more workers rose negligibly.

1990-91

2007-08

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7.7 m

9.8 m

Pvt

4.5 m

5m

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10 million

4. According to B&P there are 3 key factors behind this dismal picturea. Slow growth of manufacturing b. Poor performance of labour-intensive manufacturing c. High and rising capital-intensity in production SLOW GROWTH OF MANUFACTURING 1. It may be recalled that 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. 2. 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. POOR PERFORMANCE OF LABOUR INTENSIVE MANUFACTURING 1. 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 intensive manufacturing and against capital- and skilled labour-intensive activities. 3. 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 (at four digit level; 31 out of 94) between 1990-91 and 2003-04. b. In all likelihood it has further declined since then. 4. 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, telecommunications, pharma, finance and software) 5. What about exports? a. The changing composition of India’s merchandize exports corroborates the shift towards capital intensive goods.

b. Capital intensive or semi-skilled labour intensive, products (e.g. Petroleum products, chemicals and related products, gems and jewellery and engineering goods,) accounted for i. 41% of total commodity exports of India in 1991 ii. By 2007-08 it had increased to 65%. c. 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. d. While China dominates the world market in the readymade garments category, India has scarcely kept pace with the much smaller Bangladesh. e. India had more than 40% lead over Bangladesh in 2002, by 2007 she was only 5.7% ahead of its smaller neighbour [Note: Since then exports from Bangladesh have exceeded that of India in readymade garments, it may be noted though that in all the textiles India is still the 3 rd largest exporter in the world behind China and EU]. HIGH AND RISING CAPITAL-INTENSITY IN PRODUCTION 1. An alternative avenue to raising gainful employment of the unskilled could have been a shift towards labour-intensive technologies within each production sector while maintaining the same structure of production. 2. But Indian firms seem to have moved more and more towards capital intensive technology rather than away from it. 3. Even in terms of international comparison, (Hasan, Mitra & Sundaram 2010), the labour-capital ratios in the vast majority of manufacturing industries in India are lower than in other countries at a similar level of development and with similar 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. 4. 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. LINK TO FIRM-SIZE DISTRIBUTION 1. The flight from unskilled labour that we have identified so far is intimately linked also to the firm-size distribution that our policies have produced. 5. Mazumdar (2003) & Mazumdar and Sarkar (2008) have drawn attention to the fact that

6.

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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 (2010) show that a. 84% of the workers in manufacturing in India were employed in firms with 45 or less workers in 2005. b. Large firms employing 200 or more workers accounted for only 10.5% of manufacturing workforce. c. In contrast, in China, small firms employed 25% and large firms employed 52% 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 distribution 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. The absence of medium and large firms in apparel is clearly linked to the poor export performance of the sector. Furthermore, B&P feel that the reason why growth has not been as inclusive in India as in South Korea, Taiwan and China remains absence of large-scale firms in the labour intensive sectors in India. THE NEGLECT OF LABOUR AND LAND MARKET REFORMS

1. Why have the reforms not done more to produce medium and large scale firms in the labour-intensive sectors? 2. B&P feel that the most plausible explanation is that the reforms have been principally confined to product markets (with some limited attention paid to capital markets); 3. However, multiple layers of regulation in the remaining two major markets, labour and land, continue to discourage the growth of manufacturing in general and of unskilled labour-intensive products in particular. 4. Many analyst had expected that reforms especially the practical removal of small scale reservation policy (as of March 2000 large scale industry can enter even the reserved categories if they are willing to export 50% or more of their output), would pave the way for the emergence of large scale firms in labour intensive sector, but this did not happen, why?

5. According to B&P, the true explanation, or the dominant cause; is highly inflexible labour market, which makes the cost of labour in the formal sector excessively high. 6. 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 [Note: Recently a bankruptcy law has been enacted – but according to some it still needs fine-tuning] b. Highly distorted land market and c. Poor infrastructure A MULTITUDE OF LABOUR LAWS 1. Under the Indian law, labour is a ‘concurrent’ subject, meaning that both the centre and the state can enact laws in this area. 2. The governments have made ample use of this power. There are 52 central government laws and perhaps around 150 state level laws in India. Hence in all 200 labour laws. 3. This multitude of laws according to B&P are not always consistent with each other and it is often said in lighter tone that you cannot implement 100% of Indian laws without violating 20% of them. 4. If nothing else this multitude is quite burdensome and many times, on the balance counterproductive despite appearing to protect the interests of the workers and therefore in need for reform. 5. For example, 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. 6. Furthermore, 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. 7. The general point is that most acts not only add cost to the employer they also generate considerable paper work a. e. g. firms are expected to maintain registers for attendance, of dates and time of washing and painting the premises, leaves granted with wages, provision of health care etc. b. All this information and more is to be filed with the authorities of half yearly and annual returns. 8. What makes it ironical that given than there are more than 200 laws, they often are not aware of all the laws and despite all good intentions are often in violation of some or the other labour law. 9. This often opens the door to corruption by labour department inspectors.

Industrial Disputes Act IDA - 1947 1. One of the most important labour laws is the Industrial Disputes Act (IDA) 1947. 10. It covers all disputes regardless of the firm size. 11. The disputes typically involve a. an employer or one or more workmen in his establishment but b. It may involve two or more workmen or two or more employers 12. It also states the conditions under which a. employers can alter the tasks assigned to workers, b. conditions under which workers can be laid off or retrenched c. And the rules regulating strikes. 13. According to B&P the IDA stacks the deck disproportionately against the employers, and therefore a. It may affect their willingness to hire regular labour. b. It may increase their inclination to hire contract workers. 14. Why is IDA considered to be biased against the employer? a. First, the legislation defines an industrial dispute as any dismissal, discharge, termination or retrenchment of a worker in any firm of any size. b. Having so defined dispute, the IDA confers the power to regulate, labouremployer relations on the labour department (generally of the concerned State) with jurisdiction over the firm. i. Although the first step in settling a dispute is reconciliation, failing which the matter is referred to labour courts, ii. 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. iii. An attempt to reform the IDA for its anti-employers bias through alternative legislation in 1950, failed and no subsequent attempt was made to reform it. c. 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. d. 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 to close the unit. i. This chapter, first introduced was applicable to 300 or more workers, in 1982 it was amended to reduce the threshold to 100.

ii. 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 1. Contract workers are indirect employees of an establishment: they are hired, supervised and paid by a contractor, who has in turn been contracted with the establishment to deliver certain services in return for specific compensation. 2. The establishment has no direct responsibility towards the contract workers. 3. 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. 4. The Contract Labour Law is aimed at regulating the misuse of contract labour and protecting the interests of the contract worker. 5. The act applies to establishments employing 20 or more workers , and to contractors employing 20 or more workers. 6. However, a key provision gives the government the power to a. prohibit an establishment from using contract labour for work of perennial nature or work that is central to manufacturing process (or whatever the principal work of an establishment) and b. To deny the use of contract labour for a task if other similar establishments use regular workers for the same task. c. Many states have used this provision to ban the use of contract labour in entire sectors. WHY SCEPTICS OF THE ADVERSE IMPACT OF LABOUR LAWS ARE WRONG 1. 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. a. As the firm size rises from 6 (beyond which T. Unions can be formed) towards 100 (where IDA chapter V-B becomes applicable), at no point is the saving in manufacturing cost sufficiently large to pay for the extra cost of satisfying the labour laws. b. B&P feel that it is only at very large scale (they don’t say at what level) will the cost saving become big enough to pay for the cost of labour laws. c. Under the circumstances we will end up with either tiny or very large firms with missing middle, as has been the case with India. 2. But when it comes to labour intensive sectors, very few firms seem to find it attractive to operate on any scale other than tiny.

3. 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. 4. 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. 5. Their arguments are as follows e. First, they blame the lack of adequate literacy among potential workers. i. 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. ii. According to B&P this claim is false as 1. For one thing, tailors, who are currently employed in small establishments, are surely capable of performing the same task in large factory setting. 2. Secondly, net enrolment rate (NER) for primary school, was 91.6% in 2011, while the gross enrolment rate (GER) was 110.6%. 3. According to the World Bank Education Statistics, June 2016. (NER may be defined as the ratio of children of the official primary school age who are enrolled in primary school to the total population of the official primary school age) 4. Similarly in 2007-08, the GER for class IX & X was 58.2% and 33.5% for class XI and XII. f. 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. i. 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. ii. According to B&P, once again the basic premise behind these arguments are faulty. 1. First of all there is no reason why men cannot be employed for the job and 2. While it is desirable to amend the Factories act to permit the women to work nights shifts (Note: recently the act has been amended), there is no reason why women can’t work the day shift and men the night shift. g. 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. i. While it cannot be denied that infrastructure is a weak point in India, it is not a binding constraint everywhere in India. ii. Hence infrastructure or rather the lack of it in some parts of the country cannot by itself explain the absence of large scale labourintensive manufacturing in every state. h. Fourth, some argue that the reason why the small firms have not grown because they don’t have access to adequate credit. i. 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. ii. 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. i. Fifth, it is argued that when interviewed for business environment surveys, firms rarely point to labour market rigidities as the key problem. i. 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. ii. Most large firms in the sector typically come from either the services sector or capital-intensive manufacturing sector. 1. Service firms are not subject to some of the constraining laws such as chapter V B (as their employees do seldom qualify as ‘workmen’ under IDA 1947. 2. 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 and even lay off through voluntary retirements with golden handshakes. iii. 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. j. 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. i. According to B&P, however, the fact is that firms have chosen not to enter labour ...