Labour in India - Criticisms

Criticisms

Scholars suggest India's rigid labor laws and excessive regulations assumed to protect the labor are the cause of slow employment growth in high paying, organized sector. India's labor-related acts and regulations have led to labour market rigidity. This encourages shadow economy for entrepreneurs, an economy that prefers to employ informal labor to avoid the complicated and opaque laws. In particular, Indian labour legislation such as the Industrial Disputes Act of 1947 added rigid labour laws and one sided trade union laws. Although the Act does not prohibit layoffs and retrenchments, it does require entrepreneurs and companies to get the permission from government officials to fire an employee for absenteeism, retrench employees for economic reasons, or to close an economically nonviable company. This bureaucratic process can stretch into years, and the government officials have consistently and almost always denied such permission. As a result, the scholars argue that India's inflexible labor laws have created a strong disincentive to formally register new companies and hire additional workers in existing organized sector companies. Unlike China, Indian businesses have avoided substituting India's abundant labor for export or domestic opportunities, or use labor instead of expensive equipment for quality control or other operations. These are reasons for India's weak employment growth.

More recently, a few scholars have completed a comparative study between states of India with different labor regulations. They compared states of India who have amended labour legislations to grant more flexibility to employers, to those states in India that have made their labor laws even more rigid and complicated to comply with. These studies find that states with flexible labor laws have grown significantly faster. Flexible labor states have been able to take advantage of the export opportunities, and the per capita household income has risen much faster in states with flexible labor laws. States with rigid labor laws have led local entrepreneurs to prefer casual workers or contract workers with finite employment time period; in essence, more rigid and inflexible labor law states see increased informal employment.

A 2007 article in The Economist finds India to have the most restrictive labor laws in any major economy of the world. India's private sector, including its organized manufacturing sector, employs about 10 million Indians. Manufacturing firms need to obtain government permission to lay off workers from factories, and this permission is usually denied if they have more than 100 staff. This partly explains why most Indian firms are small: 87 percent of employment in India's organized manufacturing sector is in firms with fewer than ten employees, compared with only 5 percent in China. Small Indian firms cannot reap economies of scale or exploit the latest technology, and so suffer from lower productivity than if they scaled up, employed more people and were much bigger companies. This cripples Indian firms ability to rapidly expand or adjust with changes in global economy, both during early opportunity phase and during economic change.

Djankov and Ramalho have reviewed a number of labor studies on developing countries including India. They find, consistent with above criticisms, that countries with rigid employment laws have larger informal/unorganized sectors and higher unemployment, especially among young workers. They also report the rigid, inflexible labor laws are strongly related to low per capita income.