tpr labour reforms hemal shah 2013 s01

8/12/2019 TPR Labour Reforms Hemal Shah 2013 S01

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Research Report

August 2013

lorentJmZPhoto:

Towards greater labour marketflexibility: Issues and Options Florent

Hemal Shah

JmZPhoto:

Takshashila Scholar


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Indias massive informal sector also has negative consequences on the informally-employed

workforce. Only about 7 percent of the workforce is covered by social security (lanning

!ommission" #$$%&. 'he rest of the ) percent have no direct access to unemployment insurance"

skills or training programmes" which also makes them less employable. *ages are lower as the

minimum wage legislation would be too e+pensive for small informal businesses to implement"

making poverty a widespread issue. In fact" as shown on 'able %" the share of informal ,obs in theformal sector companies is on the upward trend (apola and ahu" #$%#&.

'o put this in perspective" evidence has found that the average sie of the informal economy as a

percentage of gross national income in #$$$ was /% percent in developing countries" )0 percent in

transition countries and %0 percent in O1!2 countries (chneider" #$$#&. In general" richer

countries tend to have small informal economies" and vice versa. 3n economy with a 4%$"$$$

higher per capita 52 is associated with having 0 percent less output a!ributed to the informal

economy (63I2" #$$&.

Table (9 -istribution of informal workers in India

Informal workers in Informal workers inTotal percent of

6ear informal workers inInformal sector 4ormal sector

the economy

(%%%:&& 672% 76% *2706%

#&&!:&' 673% 6738% *2768%

#&&%:(& 472% 70*% *272*%

9ata 5rom Paola an" Sahu #2012& 7 41

Our current labour regulation framework is8

%9 Archaic8 'he current legislation that governs employment regulation is the Industrial

2isputes 3ct (I23& %/7" the clauses for which were conceived under the :ritish ;a,

#9 Restrictive8 In %7


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T,3SH,SHIL, R/S/,R;H R/8ORT #&()S&(

'hough many studies have looked into this issue" it may be worth revisiting the age-old debate of

labour market reform to e+plore the scope of modernisation and fle+ibility with reference to the

current political economy.

Aistorically" reforms suggested by analysts and businessmen have been drastic in nature" mainly

pertained to the formal sector" and failed to consider stakeholders with vested interests in aninfle+ible labour market. *hile those interests are not entirely unreasonable" it might be interesting

to collate a few reforms that have a workable Bgo-between approach for most stakeholders @

employers" employees" trade unions and the government. 'his paper a!empts to bring forth a

workable approach @ or a middle ground @ by taking into account the perceived short-term interests

of those in favour of status quo and those who tend to favour immediate reform. 3 middle approach

could further this decades-long impasse assuming that marginal progress is be!er than a stalemate.

#9 TH/ 7//- 4OR , +OR3,0L/ ,88RO,;H

'he push for labour market reform is not new. 3 host of international and Indian economists"

,ournalists" and analysts have wri!en and discussed this sub,ect for years. 2iscussing the benefits

of a fle+ible labour market" >allon and Cucas (%%& argue in their paper that employment in

organised (formal& manufacturing would have been %7. percent higher in the absence of ,ob

security regulations. 'his agenda was brought forth in the *ashington !onsensus and reinforced

subsequently" to promote labour market fle+ibility as part of Dmarket fundamentalism.E

harma (#$$


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;eal wage growth was also not responsible for poor ,obs growth (Fagara," %/G apola" %/&.

5oldar (#$$$& shows that employment in organised manufacturing sector grew at /.$) percent per

annum during the first half of %$s despite the same statutory labour regulations.

2ebroy (#$$& captures the current e+tent of convoluted labour legislation and nature of

restrictions. Ae also discusses the #7$$-pages long recommendations in #$$# by the econdFational !ommission on Cabour" which pushes for innumerable changes in labour market

regulation. 'he restrictions imposed by !hapter H-: of the Industrial 2isputes 3ct (%/7& are

mentioned in almost all studies as highly restrictive to businesses in the formal sector" and a ma,or

disincentive for informal businesses to formalise.

3 more recent study by 2ebroy (#$%#& further reviews the unchanged state of labour regulation in

India but throws in a di erent perspective by acknowledging that big changes may be politicallyff

di cult to bring about given political constraints. Ae also notes that rigidity in labour laws is ,ustffi

one of the many problems that discourage formalisation. Cabour market reform has not been an

uncontroversial task. 5iven that" a less-sensitive angle would be to e+amine the e+tent to whichdi erent Indian states have made amendments where possible to labour legislation and observe theff

results of those changes.

:esley and :urgess (#$$/& show that states that amended the I23 in a pro-worker direction

e+perienced lower output" employment" investment and productivity in formal manufacturingG

informal manufacturing output also increased. Aowever" there have been some criticisms levelled

against their failure to account for sub,ectivity in grading the states (2ebroy #$%#& and failing to

account for labour laws other than the I23 (:ha!achar,ea" #$$


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In light of this" it may be worthwhile identifying labour market reforms which are realistically

doable8 e+ploring components of the labour market that could be usefully reformed" with lesser

resistance" finding more ways to boost ,ob creation" taking cues from di erent state reforms"ff

developing the informal sector" and eventually e+plore the future prospect of formalising the

informal economy to increase productivity. >inding a go-between" workable" approach is probably

the second-best step in the right direction considering Indias urgent need to boost livelihoods in theface of economic and political challenges" like8

2.1 Rising fiscal deficit8 3lthough post %% saw employment rates declining" there was still good

news in terms of rising growth rates. In #$%%-%# growth rates fell as low as a decade ago (/.

percent&" even lower than the #$$0 financial crisis. 'he ?elkar report (#$%#& on fiscal consolidation

also warns of adverse consequences in light of the widening fiscal deficit (


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oor outcomes from the Fational ;ural 1mployment 5uarantee 3ct is a case in point (*right and

5upta" #$%%&. 'he presence of about two doen parties in the coalition with varied interests also

adds to the di culty.ffi

2.$ %endenc! to preserve the status &uo8 In #$$0" economist aul Handenberg wrote a paper for

the International Cabour Organisation on the possible adoption of Bfle+icurity in India. >le+icurityis a combination of fle+ibility in labour laws to enable industry to manoeuvre itself out of a

depleting fund situation by hiring and firing employees by means of individual contracts (and lesser

regulation&. 'his is combined with adequate social safety nets for the millions of workers who are

dependent on such ,obs. 'his idea" which has been candinavias success story for long" was

quickly dismissed by the Cabour :ureau as unworkable in the Indian conte+t. 'his is because it

would only apply to < percent of the total workforce of India" and not to the other ) percent in the

informal sector @ highlighting the lack of compelling narrative for such discussions in India. 'he

discussion should rather be about how to bring the ) percent under the system and apply a concept

like fle+icurity.

2.' (tri)ing trade unions8 Hirtually" all ma,or Indian political parties have a trade union wing.

D'his means political parties (more so in a coalition& are reluctant to legislate on labour fle+ibility"

since this would antagonise their own trade union wingsE (2ebroy" #$%#&. >or instance" in >ebruary

#$%# and #$%)" millions of trade union members organised a national strike (3ll India :andh& to

demand permanent ,obs and elimination of contract labour.

)9 8OLI;6 ;O7SI-/R,TIO7S

>or decades" the 6nion government has not been able to make a case to make labour markets more

fle+ible due to several bo!lenecks8 trade union resistance" problematic legal drafting of

amendments" tendency of the 6nion government to pass the buck on to tates" passing reformsthrough small enclaves" or problems with inspections (2ebroy" #$%%&. 'he policy recommendations

below are an a!empt to address these issues by taking a more workable approach @ through a

middle ground @ to sensitively initiate the development of the labour market to pave the transition

to fle+ibility and security in future. 'he reforms narrative must increasingly shift to the informal

sector to boost social security reforms" sustainable livelihoods creation" tate competition" and

engaging with trade unions e ectively.ff

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3.1. *ncreasing contesta#ilit! in the la#our mar)et+

How can competition and choice boost social security and livelihood opportunities?

*hile the formal sector is characterised by a rigid labour market" the ) percent of the Indian

workforce in the informal sector work under e+tremely fle+ible conditions. Aowever" social

security coverage is minuscule or non-e+istent. In India" social security in the formal sector isorganised around the following key laws8

Table #: 2inistry of Labour < /mployment =#&()>

%. The /mployees? State Insurance ,ct@ (%! /hich coers 5actories an"esta-lishments /ith 10 or more emloees an" roi"es 5or comrehensie me"ical

care to the emloees an" their 5amilies as /ell as cash -ene5its "uring sickness an"

maternit an" monthl aments in case o5 "eath or "isa-lement7

#. The /mployees? 8roAident 4unds < 2iscellaneous 8roAisions ,ct@ (%'# /hich

alies to seci5ic sche"ule" 5actories an" esta-lishments emloing 20 or more


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emloees an" ensures terminal -ene5its to roi"ent 5un" suerannuation ension

an" 5amil ension in case o5 "eath "uring serice7 Searate la/s e.ist 5or similar

-ene5its 5or the /orkers in the coal mines an" tea lantations7

). The /mployees? ;ompensation ,ct@ (%#) /hich re;uires ament o5comensation

to the /orkman or his 5amil in cases o5 emloment relate" in


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3.1.1 *dentif!ing di culties to scale up social securit! in the informal sector+ffi 3lthough

informal workers" especially contract employees" are supposed to be covered by social security

schemes under the 1mployees rovident >und Organisation (1>O&" implementation is often a

problem because of several reasons8

3 statutory body under the Jinistry of Cabour and 1mployment" the 1>O provides and regulates

social security schemes such as the 1mployees rovident >und (1>&" 1mployees ocialInsurance (1I& and 1mployees ension cheme (1&. Aowever" there is not much incentive for

small" unregulated (informal& enterprises to adopt 1>O schemes mainly due to cost and

administrative burdens.

4igure !9 8ercentage of workers in informal employment to the

total workforce in each segment@ (%%%&&

,griculture

Informalworkers

%%9!"4ormal

workers &9$"

Trade@ Hotels O costs %$-#$ times more e+pensive than any public or

private government securities mutual fund in the world"E e+plains abharwal (#$%#b&. Ae

recommends starting with the %# percent employee contribution and gratuity to fi+ that.

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Joreover" the perceived value for money is fairly less for low-wage workers as the 1> has often

been criticised for poor customer service. 'he 1I" on the other hand" is also blighted with poor

hospital facilities and lack of sta (abharwal" #$%#b&. 3 look at the 1I budget for #$%%-%# andff

estimates for #$%#-%) show that contributions have been steadily increasing" but e+penses have

been increasing too (1I!" #$%#&.

'here has been a net surplus at the end of all years" which shows a growing capacity to

accommodate more people in the formal sector in future. Aowever" poor service is unacceptable

especially when their accounts continue to show a net surplus (;s. 07.07 crores in >L #$%#-%)&.

Table )9 Salary d eductions for /m ployees with .ros s 2onthly +ages of Rs9 '@'&&

/mployer /mployees2onthlyTotal 2onthly Total

=" cost> =" cost> ="> =Rs9>

.ross Salary %:%00

-eductions

Proi"ent Fun" 3768 12 1%768 62

PF .enses 1761 1761 *

PS 733 733 4

S! 478% 178% 67 3

Pro5essional Ta. 371 371 18

+a-our =el5are 0736 0736 0782 40

Statutor onus 733 733 4

>ratuit 471 471 26

Total -eductions !%9( #@*&'

7et Salary #@*%'

A"at e" 5rom Sa-har/al #2 012-& The Economic Times 9ec 2 2012

!ollusion between businesses and labour inspectors is another adverse consequence of poorly

managed social security schemes. 3 primary survey conducted in ?arnataka highlighted several

issues8 creating bank accounts for provident funds proved di cult" unregistered firms often dontffi

give their e+ employees contributions back" or dont deposit the contributions to the > o ceffi

(;a,eev" #$$&. Aere collusion becomes an optimal strategy8 small" unregistered firms do not en,oy

economies of scale and often have to cut back on contract wages and benefits. Jore often than not"

they maintain more than one log @ one for the labour inspector and other for the company. In such

cases" the inspector often colludes with the company in e+change for a bribe. 'herefore" for

fle+ibility to work" implementation of e+isting laws is important in order to set a precedent forfuture laws.

1

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3.1.2 Encouraging contesta#ilit! and monitoring in social securit! provision+ 'o reducerent-

seeking" improve value for money in contributions" and increase social security coverage for

informal workers" competition in the pension sector is key. *ith the e+tension of the Fational

ension ystem (F& to all Indian citiens" including the unorganised sector @ and the ension

>und ;egulatory and 2evelopment 3uthority (>;23& as regulator of the pension sector @employers should be encouraged to allow employees to opt into the scheme of their choice.

'he F" unlike the 1>" runs on a defined contribution mechanism whereby a pensioner gets back

the amount proportional to his contribution" rather than a fi+ed return. 'he F also en,oys a

higher rate of return than the 0.# percent under 1>. F scheme is web-enabled and removes the

human interface that could invite rent-seeking" thereby inviting choice and contestability" and

incentivising 1>O to reform alongside (3sher" #$%%&.

In addition" the government should look into investing and encouraging formal sector organisations

modelled after private companies" like 'eamCease ervices" Ja >oi ;andstad" Janpower and so

forth" in the informal sector. >or instance" besides e+tending a traditional human resources service"

such organisations are also dedicated to improving their people supply chain by identifying and

matching contract labourers @ temporary sta @ a sensitive sub,ect amongst the trade unions.ff

!ontract labour is often e+ploited in Indias formal sector @ formal businesses employ short-term

informal labourers absent social security provisions. 'he presence of such organisations would

ensure that contract labourers get a fare wage for their services in addition to social security" as

temporary ,obs are still be!er than no ,obs.

'here is an increasing need for these organisations to set up shop in the informal sector. 'hegovernment should incentivise small privately run organisations on a similar model to ensure safe

contractual labour coupled with social security in the informal economy. 'his could help narrow the

wage and benefits gap with the formal sector and also encourage informal workers to move to the

formal sector" where productivity is higher (as cited before&. Joreover" 3adhaar-linked benefits

system could play a role in not only safe delivery of social security payments but also encourage

financial inclusion.

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3.1.3 ,easi#ilit! of formalisation and #oosting livelihood opportunities+ 'he Jinistry of

>inances #$%) 1conomic urvey acknowledges that" Dwhile industry is creating ,obs" too many

such ,obs are low-productivity non-contractual ,obs in the unorganised sector" o ering lowff

incomes" li!le protection" and no benefits.E >ormalisation is a desirable step" but without adequate

skills and training amongst transitioning workers it would mean coming under e+pensive social

security packages" especially where employers dont o er the F option. >ormalisation wouldff also mean the application of innumerable labour statutes" which could increase costs substantially.

'he financial inability of small informal employers to provide social security and comply with

labour regulations would result in either unemployment or mechanisation" or both. Joreover"

ma,ority formal sector ,obs are in the public sector rather than the dynamic private sector" as >igure

shows.

Aowever" these data may not be perfectly reliable due to wide ,ob di erentials and lack of trackingff

of active and inactive members in the 1>O (ai and Joorty" #$%)&. 'here is an imminent need for

be!er dataG professionalism in the 1>O and Cabour Jinistry should be a priority on this front.

4igure '9 -istribution of Cobs in 4ormal Sector

=in Lakhs>

300

2%0

*$9**

*9! $9!$

9&' %#9! %9)

200

!9'#

Priate

1%0

100 (%&9' (%'9'% (%)9(! (&9&* ((9 (&9 (*$9*!

Pu-lic

0

0

1**1 1**8 2000 200% 2006 2008 2009ata 5rom Paola an" Sahu #2012&

mall firms should be brought into the formal sector when statutory costs decline and service

quality of social security mechanisms improve. It is important to remember that enterprises often

consider the formality-informality trade o seriously8 formalisation would entail entry costs andff

operating costs (Coaya" %7&.

1

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1ntry costs of doing business in India involve %# procedures" #7 days" / percent of income per

capita and paid-in minimum capital of %/$ percent - as opposed to procedures" %# days" /.

percent and %).) percent respectively in the O1!2 (*orld :ank" #$%)c&. Operating costs @

comple+ ta+es" labour regulations" property rights" contract enforcement @ are also high.

'hese factors e+plain why a whopping ma,ority of enterprises in India choose to remain informal.:ut there are also costs related to informality8 penalties and corruption" limited access to public

services" missed opportunities on e+pansion" limited access to finance and cooperation with formal

enterprises (Ishengoma and ?appel" #$$


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'hat amendment also encourages contract farming" unlike other states like Jaharashtra where

farming activity is restricted" and output could be sold only via government-organised mandis.

5u,arat has also been upbeat in making small amendments to labour regulation that has resulted in

reducing rural and urban unemployment. It has even managed to keep its informal sector smaller

than the national average (Airway and hah" #$%%&.

3 bigger problem that restricts livelihood opportunities is also the lack of skills that are relevant to

the market place. *elfare programmes like the J5F;153 have resulted in massive e+penditure

of ta+payer money and widening the fiscal deficit" but only creating a class of mostly young people

without skills to contribute to Indias economic progress or their own development (;amakrishnan

and 3sher" #$%#&.

On the other hand" 'eamCease (#$$& recognises how Deducated unemployment and shortage of

competently skilled labour co-e+ist"E and therefore the importance of training labour in di erentff

skills and professions to avoid a mismatch as industry grows. 3dditionally" there is also a perceived

preference for white-collar ,obs in India" ignoring the importance of vocational skills that may bemore suited to some workers circumstances.

'he tate of 5u,arat has entered into an agreement with 'eamCease to set up the first ever

vocational education university that aims to address the skills gap via its ## community colleges

that o er short associate degree programmes in con,unction with employers and increased access toff

technology.

uch initiatives could also benefit from scaling up knowledge economy aspects of skills

development and talent building8 Din which generation and application of knowledge" in all its

varied aspects" are used as an integral part of generating income and wealth in the economy" and inhousehold consumption and production activitiesE (3sher" #$%)&. 3nother way to boost such

practices is to e+pand the number of internship opportunities o ered to young students orff

graduates. 'his would enable organisations to reduce the time and cost of matching in the long run

and tackle both educated unemployment and skills shortage (3sher" #$%)&.

It may therefore be safe to conclude that if labour laws and regulatory practices are not made

compatible with economic and social structures prevailing currently @ and with evolving structures

@ welfare cannot be advanced.

1

8


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3.2. olitical econom! of economic freedom+

Can federal freedom encourage friendlier regulation for workers and businesses?

3nother point of leverage for boosting productive livelihood opportunities is by making marketsmore fle+ible. *hile there are many ways of doing this" our aim will be to identify the low hanging

fruit that could be e+ploited to make a marginally significant di erence. *hile keeping within theff

decree of 6nion labour regulation" there are some spaces for individual tates to make amendments

and conte+tualise labour market laws in ways best suited to them in terms of increasing livelihoods"

boosting productivity" fle+ibility" and maintaining stakeholder security. ositive outcomes from

such an e+ercise would enhance the a!raction of informal employers and workers to transition to

the formal sector.

3.2.1 Moving legislation from Concurrent to (tate -ist+ Indias labour legislation is asub,ect in

the !oncurrent Cist" which means that both the 6nion and the tate could enact laws pertaining to

the relevant category.

'here are8

%. Cabour laws enacted and enforced by the 6nion government

#. Cabour laws enacted by 6nion but enforced by both 6nion and tate governments

). Cabour laws enacted by the 6nion but enforced by the tate government

/. Cabour laws enacted and enforced by the various tate governments which apply to

respective tates (Jinistry of Cabour and 1mployment" #$%%&

'his simply means that as far as the tate governments are concerned" they can make amendmentsto some 6nion statutes" and also add new tate statutes to a certain e+tent. 'he ?erala Cabour Caws

3ct of #$$#" that is the simplification of returns and registers of small establishments" is one

e+ample (2ebroy" #$%%&.

'he #$$/-$ 1conomic urvey by the Jinistry of >inance also notes that" DCabour being a sub,ect

in the concurrent list" tate-level labour regulations are also an important determinant of industrial

performance. 1vidence suggests that tates" which have enacted more pro-worker regulations" have

lost out on industrial production in general.E tate empowerment over labour legislation would

mainly serve a twofold purpose.

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On the one hand" states could safely e+periment with incentives that suit their respective political

economy in terms of boosting livelihood opportunities. On the other hand" they could incite

competition with other states to perform be!er if the results are positive.

'he following items appear under the eventh chedule (3rticle #/


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It is thus important to note that tate initiatives in making amendments highlight the political will

to boost fle+ibility for employers and ,ob opportunities for employees. Jore importantly"

successful initiatives to leverage opportunities via 6nion legislation show how individual tates are

be!er at dealing with their political economy issues. 'he continuous change in rankings on

'eamCeases labour ecosystem inde+ and sub-indices easily indicate how competition drives

di erent tates to do be!er than their peers. In addition" considering the challenges that the 6nionff faces in initiating and implementing market-friendly legislation" it would make sense to make a

case to move labour from the !oncurrent Cist to the tate Cist.

3.2.3 Evidence of improving emplo!ment and enterprise+ :esley and :urgess (#$$/&show that

states that Damended the I23 in a pro-worker direction e+perienced lower output" employment"

investment and productivity in formal manufacturing.E Informal manufacturing output also

increased. tates like 3ndhra radesh" ?arnataka" ?erala" ;a,asthan and 'amil Fadu" were

considered to have more fle+ible regulation than 5u,arat" Aaryana" Jaharashtra or un,ab.

Aowever" as mentioned before" :esley and :urgess (#$$/& failed to account for sub,ectivity in

grading the states (2ebroy" #$%#& and for labour laws other than the I23 (:ha!achar,ea" #$$


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*hile the 6nion government was debating to introduce Holuntary elf-!ertification (H!& in the

%%th

>ive Lear lan" 5u,arat had already gone ahead with it (Airway and hah" #$%%&. H! allows

firms to register their compliance of labour regulation and avoid the inspector ra, and unnecessary

litigation in e+change. 'hese certificates could be issued by Dthird party inspections with regulatory

compliance certified by e+ternal recognised agencies.E (2ebroy" #$%%&. un,ab" ;a,asthan and

Jaharashtra are also trying to capitaliseon H! but there is often a tendency to pass such reformsin small enclaves" like special economic ones" to prevent rocking the boat too much.

5u,arat has also amended the I23 to allow retrenching workers but only at a higher compensation

of / days pay. *orkers can also be hired on Dfi+ed termE @ di erent from contract workers @ toff

satisfy work needed to be done for short periods. 3nother popular reform that has increased

fle+ibility for production units is to limit the number of registers to two (Airway and hah" #$%%&.

:ut that same proposal to limit the number of registers to two" returns to one" and permit use of

electronic formats" has been si!ing in the ;a,ya abha since #$$ but no action has been taken so

far (2ebroy" #$%%&.

Aowever" tate freedom could also be used adversely. 'here are instances where reduction of tate

intervention could boost ,ob opportunities8 especially restrictions like the hops and 1stablishments

3cts that prevent employing women outside of Bregular work hours adversely a ectingff

establishments like call centres (2ebroy" #$%#&. ometimes" tate freedom could also lead to

Boversimplification (2ebroy" #$%#&.

>or e+ample" the >actories 3ct for which tates have the leeway to make rules" has seen Dobtuse

and unwarrantedE intervention" with obsolete ideas @ some states decree that factories must be

whitewashed and plastic paint wont doG earthen pots filled with water are required over water

coolersG red-painted buckets with sand are required over fire-e+tinguishers.

In some tates" factories are not allowed to use modern computerised records necessitating the use

of manual muster rolls (2ebroy" #$%#&. 'his could be for the fear of substituting technology for

,obs. Aowever" eliminating such rigid rules and instead training people to use technology could

result in boosting good quality ,obs productivity rates" which is the need of the hour.

2

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3.3 olitical econom! of resistance and dialogue+

How can trade unions accept reasonable reforms?

everal 6nion reform initiatives" especially reforms to simplify business practices like maintaining

a limited number of registers" have met with strong resistance from the trade unions. >igure

shows the growth of union membership over time. One e+planation is that unions see reforms as

dilution of their rights. 3nother e+planation is that such perceived dilution @ emanating through the

lanning !ommission or the rime Jinisters !ouncil on 'rade and Industry" as opposed to the

Jinistry of Cabour and 1mployment @ invites further resistance on their part (2ebroy" #$%%&. In

#$%%" #"/)"##% man-days were lost due to strikes and lockouts" however this figure fell down to

%0"70 in the first quarter of #$%) (Cabour :ureau" #$%)&.

4igure $9 Trade union membership surAey: #&(#

() =maDor unions onlyE in millions>

!&

3373

)&

2embership in#&&

#&1871

;laims filed by unions in 2arch#&()

1472

(&676

*71

37*

3

7

4

372

&

02S ,IT1; H2SI7T1;9ata 5rom 'inistr o5 +a-our an" usiness Stan"ar" #2013&

It is also interesting to note three things contrary to conventional wisdom8

One" instead of strikes" lockouts have become more common (;oy %0/ in :ha!achar,ea #$$


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Fational unions like the IF'6!" 3I'6!" AJ" :J and !I'6 are mainly manufacturing sector

unions but there is a marked transition @ Dan increased switch to services and the rural sectorE @ in

the union category (2ebroy" #$%%&. >or instance" 1*3" a 5u,arat-based informal workers trade

union en,oys high tate-level membership.

'hree" tate-level unions form a much bigger chunk of the pie at 0 percent" the rest comprising ofnational unions (2ebroy" #$%%&. 'hus it makes sense to shift the political economy of dialogue from

formal unions at the national level to informal unions in the tate (2ebroy" #$%%&. In general" it

a rms the argument that labour and its related issues should be moved to the tate Cist to ensureffi

structural e ciency in regulation.ffi

3.3.1 alancing trade unions and flexi#ilit!+Jost studies and papers often argue mainlyabout

the detriment of restrictions @ on hiring and retrenching in firms with over a hundred workers @ to

the health of the economy. *hile this may be true" it has also been politically di cult to scrap thatffi

portion of !hapter H-: of I23 because trade unions have historically defeated such moves.

Instead" it would make sense to look at where labour market could be made fle+ible but at a lowercost to the trade unions to increase their likelihood of consent now and in the future.

One good approach to adopt was proposed by 2ebroy (#$%#&" where e orts to segregate I23sff

layo " retrenchment and closure provisions could provide some labour market fle+ibility. 'he threeff

concepts reflect increasing degrees of severity" and unbundling them could make them more

acceptable to the trade unions. Cayo s and retrenchment are more palatable to the trade unions andff

political parties than closures thereby making it easier to sell reforms. It is speculated that if

compensation for layo s and retrenchment were increased from )$ days pay per year worked to /ff

days" political resistance may diminish. In *est :engal" this compensation is higher for layo s @ff

$ percent of basic wages plus other benefits for the first $ days and 7 percent thereafter until

disposal (en" #$$&.

Joreover" it is interesting to note that from #$$7 data industrial disputes occurred more because of

violence and indiscipline as opposed to layo s and retrenchments (2ebroy" #$%%&. In the la!er caseff

workers can approach labour courts where dispute se!lements take an average of three to five

years" some even span beyond %$ years. 2ebroy (#$%%& thus argues that it is possible to sell the idea

that o ering reasonable severance packages through I23 are far superior (and palatable& thanff

haggling over layo s and retrenchments. everance pay policies in India are already DmodestE byff

international comparisons (3sher and Jukhopadhya" #$$&.

2

4


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'hat brings forth the scope to trade o higher severance pay for three important opportunities @ff

greater operational fle+ibility for businesses" greater professionalism in policy design and

implementation by Cabour Jinistries" and lower transaction costs for new companies (3sher and

Jukhopadhya" #$$&.

3.3.2 Encouraging #e%er &ualit!/ li)e0minded unionism+6nions comprising of similarindustryunits are more credible and easier to engage with. On the other hand" unions with members from

di erentiated industries and varied interests gives way to unchecked multiplicity whereby demandsff

made by members result from herd mentality" and lack credibility. !hanges to the 'rade 6nions 3ct

%#


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ome companies have undertaken community development measures by partnering with local

governing bodies" like the panchayats (en" #$$&. 3ctivities include renovating railways stations"

bathing ghats" or se!ing up social welfare activities like eye camps. ome companies also use the

benefits approach @ for instance" a multinational soft drinks and agricultural food processing

company has adopted the route of employee satisfaction. 'hey went beyond statutory requirements

by providing transport" common uniforms for managerial and support sta " common dining hall"ff and e+tra cash for buying furniture or other household items. :ut these were combined with longer

working hours (en" #$$&.

'he nature of composition of work times" breaks and benefits could also bring about positive

results. 3n interesting e+ample is that of a lubricant company that changed its working hours with

similar employee gratifications8 DInstead of a half-day on aturday" it introduced a five-day week"

with hours from 0.)$ a.m. to .)$ p.m. (apparently" nine hours&. :ut this was softened by including

a one-hour lunch break" providing breakfast" then lunch and finally tea in the evening. 'his ensures

that all employees put in a full eight-hour workday.E (en" #$$&. 6nions in large firms with

increased benefits are seeing a decline especially in the case of young and white-collar employees"who do not indicate a strong urge to unionise.

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6


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!9 ;O7;L1-I7. R/2,R3S

Cabour market reform is an important yet politically sensitive ma!er in most countries. >le+ibility

and security for employers and employees boosts livelihoods and the rate of good quality formal

sector ,obs. Aowever" there are several stakeholders @ employees and trade unions @ who have a

vested interest in keeping the labour market infle+ible. Jany of them think that a globalising world

means a weakening of their rights @ for the last two years trade unions have been going on national

strikes to demand permanent ,obs and declare an end to contract labour.

'his paper identifies several potentially compatible reforms that could enable the political class to

make a strong case for labour market reforms to all the stakeholders. ;eforms are discussed in three

areas of the labour market that could help on this front @ social security and livelihoods" federal

freedom to amend legislation" and engaging with trade unions resistance8

One" e+tending social security coverage to the informal sector could be made possible by o eringff

the less e+pensive Fational ension ystem to employees. 'he F would serve as a competitor to

poor quality services of the 1> and 1I thereby forcing them to reform" bring prices down and

improve service delivery. 'his would also enable to bring down costs from the formality-

informality trade-o for businesses. !reating sustainable livelihoods in the informal sector is aff

stepping-stone to economic progress and future e+pansion of the formal sector" where productivity

is often higher.

'wo" there is increased evidence that competition between di erent Indian states could spurff

reforms with positive outcomes. Aowever" the presence of labour legislation in the !oncurrent Cist

serves as a bo!leneck for tates to e+ercise complete freedom in amending laws with respect to

their prevailing political economy. Joving such legislation to the tate Cist would not only add

conte+t specificity through tate control" but also make labour laws less convoluted.

'hree" engaging with trade unions is perhaps the most sensitive area of reform. It requires

understanding the latest trends in unionism" encouraging organisation for credible demands" and

designing benefits for employees that making bargaining and unionising unnecessary in the first

place.

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'his is not a laundry list of reforms but a combination of suggestions to push the dynamics in the

labour market to force regulatory practices to adapt to evolving structures @ as without adaptability

welfare cannot be advanced.

In the face of sluggish growth rates" a rising fiscal deficit" and a forthcoming demographic

dividend" Indias political elite must remember that boosting good quality ,obs is a ma!er of toppriority. On the other hand" simply discussing reform of the labour market in terms of Blabour law

reforms has not brought any results over the years @ almost


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:ha!achar,ea" 3. (#$$reedom of the tates of India" !ato Institute" #$%).

1I! (#$%#&" D>inancial estimates and performance budget for the year #$%#-#$%)"E1mployees tate Insurance !orporation" Few 2elhi #$%#.

>allon" . ;." and ;.1. Cucas (%%&" D'he impact of changes in ,ob security regulations inIndiaand Qimbabwe"E 'he *orld :ank 1conomic ;eview" ()&" )-/%)." (eptember%%&.

5oldar" :. (#$$$&" D1mployment growth in organised manufacturing in India"E 1conomic andolitical *eekly" %%%-%%.

5upta" ." ;. Aasan" and 6. ?umar (#$$&" D:ig ;eforms but mall ayo s8 1+plaining theff *eak;ecord of 5rowth and 1mployment in Indian Janufacturing"E Junich ersonal;epec 3rchive"#$$.

Aasan" ;." and ?.;. andoc (#$%$&" D'he 2istribution of >irm ie in India8 *hat !anurvey 2ata 'ell 6sME 3sian 2evelopment :ank" Fo. #%)" 3ugust #$%$.

Airway" I." and F. hah (#$%%&" DCabour and employment under globalisation8 'he case of5u,arat"E1conomic R olitical *eekly" Hol.SCHI Fo. ##" Jay #0" #$%%.29
http://www.epw.in/review-labour/labour-and-employment-under-globalisation-case-gujarat.htmlhttp://www.epw.in/review-labour/labour-and-employment-under-globalisation-case-gujarat.htmlhttp://www.epw.in/review-labour/labour-and-employment-under-globalisation-case-gujarat.htmlhttp://www.epw.in/review-labour/labour-and-employment-under-globalisation-case-gujarat.html


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Ishengoma" 1." and ;. ?appel (#$$iscal!onsolidaton"E Jinistry of >inance" 5overnment of India" eptember #$%#.

Cabour :ureau (#$%#&" D;eport on employment and unemployment #$%%-%#"EJinistry of Cabourand 1mployment" 5overnment of India" Hol.%" #$%#.

Cabour :ureau (#$%)&" 5overnment of India.

Coaya" F.H. (%7&" D'he 1conomics of the Informal ector8 3 imple Jodel and ome1mpirical 1vidence from Catin 3merica"E 'he *orld :ank" *ashington 2!.

Jahambare" H. and ;. Fadkarni (#$%%&" D1mployment in India8 6neven and *eak"E !risil;esearch" 3ugust #$%%.

Jinistry of >inance (#$$&" 1conomic urvey #$$/-$" 5overnment of India" #$$.

Jinistry of >inance (#$%)&" Deiing the demographic dividend"E in 1conomic urvey #$%#-%)" 5overnment of India.

Jinistry of Cabour and 1mployment (#$$&" DFational olicy on AIH3I2 and the *orldof*ork"E 5overnment of India #$$.

Jinistry of Cabour and 1mployment (#$%%&" DCabour laws and other regulations for the'welfth>ive Lear lan (#$%#-%7&"E 5overnment of India" #$%%.

Fagara," ;. (%/&" D1mployment and wages in manufacturing industries8 'rends"hypothesisand evidence"E 1conomic and olitical *eekly" Hol - SSIS Fo. /" anuary ##"%/.

ai" J. and ;.?. Joorty (#$%)&" T'he myth of ,obless growth"T >inancial 1+press" 3pril $" #$%).

apola" '. . (%/&" Dtructural ad,ustment" labour market fle+ibility andemployment"E Indian ournal of Cabour 1conomics" )7(%&" )-%


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apola" '.. and . . ahu (#$%#&" D5rowth and structure of employment in India8 Cong-'erm andost-;eform erformance and the 1merging !hallenge"E Institute for tudies inIndustrial2evelopment" Few 2elhi.

lanning !ommission (#$$%&" D;eport of the *orking 5roup on ocial ecurity for the'enth>ive Lear lan"E 5overnment of India" October #$%%.

lanning !ommission (#$$%&" D;eport of the working group on social security"E5overnment of India" October #$$%.

;a,eev" J. (#$$&" D!ontract Cabour 3ct in India8 3 pragmatic view"E Indira 5andhiInstitute of 2evelopment ;esearch" Jumbai" #$$.

;amakrishnan" H. and J. 3sher (#$%#&" DJ5F;153 badly needs overhaul"E'he Aindu" Oct %7"#$%#.

;oy" :. (%0/&" D*est :engal8 Cabour on the 2efensive"E1conomic and olitical *eekly" Hol -SIS Fo. ##-#)" une $#" %0/.

;oy" .2. (%0&" DCags in 1mployment 3d,ustment and Inter-Industry 2i erentials8 3n 3nalysisff6sing 2ynamic Inter-related >actor 2emand >unctions"E Indira 5andhi Institute of 2evelopment;esearch" 2iscussion aper Fo %/" Jumbai.

abharwal" J. (#$%#a&" D*orlds most e+pensive fund"E >inancial 1+press" 3pril $" #$%#.

abharwal" J. (#$%#b&" D%$$ percent ,ob creation has happened in informal ,obs as labourlawsconfiscate half of gross salary"E 'he 1conomic 'imes" 2ec #0" #$%#.

chneider" >. (#$$#&" Die and measurement of the informal economy in %%$ countriesaroundthe world"E uly %7" #$$#.

en" ;. (#$$&" D'he 1volution of Industrial ;elations in *est :engal"E InternationalCabour Organiation" *ashington 2!.

hah" A. (#$%#&" D5uest post8 India needs fewer labour restrictions" not more"E >inancial 'imes"Jarch $0" #$%#.

harma" 3.F. (#$$


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'eamCease (#$$&" DIndia Cabour ;eport #$$"E 'eamlease ervices" :angalore.

6nni" . (#$$#&" Die" !ontribution and !haracteristics of Informal 1mployment in India"E 'he5u,arat Institute of 2evelopment ;esearch" 3hmedabad" India.

63I2 (#$$&" Dromoting pro-poor growth8 rivate sector development"EO1!2" #$$


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The Takshashila Scholars Programme aims to select an" /ork /ith talente" oung in"ii"uals

/ho /ish to un"ertake high ;ualit u-lic olic research o5 releance to !n"ia7 Takshashila /ill

-e a/ar"ing scholarshis 5or in"een"ent art$time research ro


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tpr labour reforms hemal shah 2013 s01

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