LABOUR LAws

Introduction:
According to Bhagwati and Panagaria, the Indian economy's development require 3 key
transformations:

(1) Movement of workers from agriculture to industry and services

(2) Shift of workers from informal sector to formal sector in industry and services
(3) Rapid urbanization (shift of worker to formal sector from rural to urban area)
Thus industrialization and modernization follows urbanization.

.In agriculture, the output share in GDP decreases but the employment shareremain highin
India whereas the employment in industry and services remains low and the informal firms have
low productivity.
Urbanization in India has slow speed as it was 17.39% in 1951 and 31% in 2011.

Flight of the Indian entrepreneur from labour:

This slow progress is the shift of Indian entrepreneurs from low skilled labour to formal sector and it is
an irony that country with 470 million workers, entrepreneurs refuses to employ unskilled labour which
leads to unemployment. To get an idea of number in all private sector manufacturing with 10 or more

worker rose negiigibie

1990-91 2007-08
All 7.7million_ | 9.8 mlnOn
Private 4.5 mion_ million
Net 10 million

According to author, there are 3 factors of poor picture

(1) Slow growth of manufacturing

(2) Poor performance of labour intensive manufacturing
in production
(3) High and rising capital intensity
manufacturing: A rapid expansion of manufacturing and shifting unskilled labour
from
Slow growth of
for eg. Taiwan
agriculture to industry is the common feature for any fast growing low income country
in China also. UK, Germany, Us
and South Korea's rapid growth in 1960 and 1970 respectively and
today's industrial economies) also follows the pattern.

in GDP decreases from 16.8% to 15.8% in

But this pattern was failed in India as share of manufacturing
1981-82 to 2008-09. ( minimal growth of manufacturing is the reason ).

The manufacturing sector has a stagnant share,

Poor performance of labour intensive manufacturing:
to organised sector, and to unskilled
this can be improved by giving a push to this sector by shifting
labour so that manutacturing sector grew as well as unemployment decreases.
In a study by Das, Wadhwa, and kalita (2009) found that in organised sector, labour intensive industries
food, textiles, beverages, apparel, furniture ) has only 12.94% of total gross value added between
1990-91 and 2003-04 thus labour intensive industries are not so important in overall
manufacturing
And then their share increases to 15.9% in 2000-01 and again decreases to 12.91% in 2003-04 and
further declined.

Capital intensive or skill intensive industries are some fastest growing industries between 2003-04 and
2010-11( automobiles, petroleum, refining, engineering goods, telecommunication, pharma, finance
and software).

EXPORTS:

India's merchandise exports shows a shift towards capital intensive goods. Capital intensive goods or
semi skilled goods ( petroleum, chemicals, gems and jewellery, engineering goods ) has 41% of exports
in 1991 which increased to 65% in 2008 while readymade garments ( mostly unskilled or semi skilled )
has a decline from 126-6% in 2008. Thus low skilled goods are not so important in India. Whereas China
takes the world market in readymade garments. On comparing with China and Bangladesh, India lack
behind in exports of clothing and accessories( which is labour intensive).

High and rising capital intensity in production: Keeping the structure of production same, by shifting
the unskilled labour towards labour intensive technologies can increase the employment but India did
the opposite as it shifts towards capital intensive technologies.

Hasan, Mitra, and Sundaram (2010) show that labour capital ratio (LfiK) is low than other
countries with same level of development and factor (LK) endowments which mean that India is
using more capital intensive technologies.
Comparing India and China, it was found that in 1980-2000;
(1) The capital stock per worker is high in India than China which mean that in India, on
putting high capital, the output is low.
(2) While the employment in China shows a rise in these sectors, it was constant in India.
Other study by Thus, Rani, and Unni (2004), chaudhary (2002), Das, Wadhwa and Kalia (2009)
shows a declining trend in capital labour ratio (kfil) in Indian manufacturing.

Link to firm size distribution:

The shift from unskilled labour is linked with the firm size distribution

Mazumdar (2003), Mazumdar and Sarkar (2008) finds that;

(1) Mostly workforce is employed in small enterprises
(2) While medium and long enterprises has almost negligible workforce
Hasan and Jandoc (2010) shows:
(1) 84% workers in India was employed in small enterprises in 2005
(2) 10.5% workers in India was employed in large enterprises in 2005
(3) While comparing with China, it was 2.5% in small and 52% in large scale firms.

Thus the absence of medium and large scale firms lead to poor performance in export and also the
reason thats why growth has not inclusive as South Korea, Taiwan, China did.
The neglect of labour and land market reforms:

The reforms are limited to capital markets that is why the reforms can't produce more from medium
and large scale firms in labour intensive sector. There are some regulations in labour and land factor
markets which discourage the growth particularly of unskilled labour intensive products and generallyof
manufacturing.
The post reforms removed 4 important layers of regulation in product and capital market:

(1) Investment licensing: preventing large firms from investing outside in capital intensive has
eliminated
(2) Protection: agriculture was heavily prevented and also preventing firms from exploiting large
world markets
(3) Link to world market and foreign firm exchange opened
(4) The reservation policy which states that all labour intensive products come under small scale
has been ended. Labour intensive can be in large scale also.

It is been expected that these reforms will lead to a boom in labour intensive export but this didn't
happen because the dominant factor is a "highly inflexible labour market", which inc the cost of labour
in formal sector. Also three other factors are:

(1) Absence of bankruptoy laws which allows anyone to exit in case of failure (recently a
bankruptcy law has been enacted but it still need fine tuning)
(2) Highly distorted land market
(3) Poor infrastructure

A multitude of labour laws:

Under the Indian constitution, the labour is a subject on which laws can be enacted by states and centre
and there are 200 laws in total for labour. But confusion created due to the multitude of laws such that
Indian labour laws can't be implemented 100% without violating 20% of them.

There are some acts:

Trade unions ac, 1926: the act states that firm with 7 or more workers should allow to form a
trade union and trade union leads to strikes, inc in wages, and other disputes. Thus a firm can
minimise their labour related problems as long they are smaller.
Employees state insurance act, 1948: manufacturing factories which has 10 or more workers
irrespective of whether it is using power, comes under this act and employees hired at a wage
up to 10000 per month should provide benefits (sickness, maternity, disability, old age,
employment injury etc)
Factories act 1948: manufacturing units with 10 workers using power and with 20 workers
even
if not using power, comes unded this act. This act decides the maximum hours of work
per week
to 48 and require a paid holiday for each 20 days of work, neglect the work of children under 15
age and ban the employment of women for more than 9 hours per day and between 7 pm and 6
am.

In addition, demands extends to keep factory premises cean, every 14

whitewashing months
and repainting every 5 years, proper disposal of waste, separate restrooms for men and women,
 water supply, worker safety, use of goggles against light and infra red and ultra voilet
drinking
radiation, fire precautions.
The requirements inc with number of employees, for eg
(1) At 150 workers: lunchroom must be provided
(2) At 250 workers: availability of canteen in factory
(3) At 30 women: daycare centre

Other reforms are:

maternity benefit act (1961), the
minimum wages act (1948), the payment of bonus
act (1965), payment of gratuity act (1972), workmen's compensation act (1923).

Industrial dispute act, 1947: Industrial disputes is defined any dispute or difference between
as

employers and
employers or
between employers and workmen between workmen and workmen
or
which is connected with the employment or non employment or with the condition of labour of any
person.

IDA covers al industrial disputes regardless of its size. IDA has the objectives:

Promotion of measures for securing and preserving8 good relation between the employers and
workers
Investigation and settlement of industrial disputes
Prevention of illegal strikes and lockouts
Relief to workmen in the matter of give up or absence
Promotion of collective bargaining

Why IDA considered to be biased against the employertt

1: The legislation defines an industrial dispute as any removal, clearence, completion, or scarcity of a
worker in a firm of any size.

consult the
Having so defined dispute, the 1DA power to
regulate, labour employer relations on the
labour department generaly on the concerned state with authority over the firm.

The 1" stepinin settling dispute

a is
settlement rather referring to labour courts but workers less
are
because labour courts rule in favour of workers with soft emotions that firms
interesting settlement
have deep pockets which worker do not.

2 Section 9A of IDA requires that employer must give 3 week notice to workers on any change in their
Working condition with 50 or more workers.

3 : Chapter V-B of IDA states that an industry with 100 or more workers can't rearrange or remove their
workers even if it is not profitable and therefore industry forced to close the unit.

This chapter was first applicable to 300 workers but then reduced to 100 workers.

Contract labour (regulation and abolition) and act, 1970: Contract workers are indirect enmployees of an
establishiment as they hired, nosupervised
are
paid by a contractor which in turn provide certain
direct
services. The establishment has responsibility
justifries the use of contract under many conditions.
towards the contract workers. Economic factors
 contract aimed at misuse of contract
The labour law is regulating the labour
of the contract worker. The act applies on employing 20 or more workers.
and protecting the interests

Akey provision gives power to the govt to prohibit an establishment from using contract labour
for long term which is central to manufacturing process.
also has power deny the use of contract labour for a task which is also done
Govt
regular workers.
to by the

Why sceptics of the adverse impact of labour laws are wrong?

Labour laws explain that sector like apparel which has labour cost 80% of total cost, why entrepreneurs
chooses to stay tiny:

A s firm size inc from 6-100, due to labour laws the saving in manufacturing cost are large to pay
to satisfy their laws.
Author feel that only at very large scale the cost can be paid for labour laws. Thus we end up
with either tiny or very large firms without middle.

In the labour intensive sectors, few firms are profitable in tiny firms and the alternative to go large
1 lakh worker in apparel factory) is not so easy with the restrictive nature of the India's
(more than
labour lawS.
Some arguments are:

that there is lack of adequate lteracy among potential workers. Acc to

Some analysts blame a

them the unskilled task also require some literacy in India. This claim is false as a tailor working
in small firm can also work in factory. Also in 2007-08, the ratio for students in class 9 and 10
were: 62.6% boys, 53.2% girls and 58.2% total.
I n china, female workers have large contribution in large scale factories. Thus in India, social
attitudes, legal framework do not support the employment of women in large scale factories.
For example 1948 factories act does not allow women to work in night shifts. But this argument
Is also tauity as there is no reason why men can't be employed also there is no reason why
women can't work in night shift.
that intensive apparel, requires just in time
It(denoting
is argueda manufacturing
labour systemproducts, most probably
in which materials or components are delivered immediately
before they are required in order to minimize storage cost ) delivery to export destinations such
as the US and Europe, which requires first rate infrastructure and lack of it result in failure while
the infrastructure of India is weak but its not weak everywhere in India.
small don't access to credit to grow but it is not true
as both
Some that
argue
firms have
medium and large size firms account for larger employment in capital intensive sector which
require more credit than in labour intensive sector. Also labour laws made apparel a riskier
business than motors so its obvious that bank will favour the capital intensive sector in a labour
abundant country.
I t is argued that in surveys, firms rarely point to labour market rigidities as key problem. Acc to
author, this is due to selection problem as medium and large firms which can complain does not
in labour sector and not represented in sample. Capital intensive sector has low
exist intensive
labour cost and high profit whereas labour intensive sector don't.
 Some argue that labour laws are not
enforced or that
the fims are able get around them. Acc
to
to author, the fact is that firms have chosen not to enter labour intensive sectors in India while
they routinely do so in other comparable countries this suggests that they are not able to get
around laws in cost effective manner.
The labour market rigidities apply only to tiny section of labour force. In fact more than 90% of
labour force is in informal that bulk of the labour market is highly flexible despite the ill labour
laws.

Labourlaws: what must be done?

All labour laws in India are more than 4 decades old as contract labour 1970 act was last major labour
act. To move the economy towards specialization in labour intensive products, reform of the labour laws
is urgent.

The law in most urgent need of reform is the 1947 IDA. This act is very against the employers which
decreases the incentive for employment intensive sector's expansion. Changes needed in IDA:

The definition of retrenchment for purposes of industrial disputes needs to be specific. The IDA
defines retrenchment as the discharge of surplus labour or staff by the employer for any reason
whatsoever, otherwise than by way of punishment inflicted as a measure of disciplinary action.
The words' for any reason whatsoever implies that the discharge of labour force may
befor
any reason such as (1) economy (2) rationalisation in industry (3) installation of a new labour
saving machinery but the only thing provided is that it should not as a punishment.
IDA allows every single industrial dispute to go to labour court. This verdict should be replaced
by one under which an independent authority is authorised to deliver a time bound and final
verdict.
Section 9A of IDA, which imposes a heavy burden on an employer wishing to reassign a worker
to an alternative task, needs to be replaced by one that gives the employers greater flexibility.
While the IDA prohibits strikes by public utility services without notice, no such restrictions
apply to strikes in other industrial establishments nor does the law require a secret ballot by
trade union members before a strike is called.
Chapter V-B of IDA,1947 which makes it almost impossible for an employer of a factory with
100 or more workers to lay off workers under any circumstances, need to be cancelled. This
chapter was added in 1976 so the IDA existed for 29 years without it. We need to return to pre
1976 IDA along this dimension.

The 1926 trade union act also needs to be modified.