Bridging Research With Policy in Labor Market by Tarun Das

8/6/2019 Bridging Research With Policy in Labor Market by Tarun Das

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1The research was supported by the Global Development Network, Norwegian Agency for Devel-opment Cooperation and Japan Bank for International Cooperation. All opinions expressed inthis Policy Brief are those of the authors and not those of the GDN and other donors.

GDN, 2006

The impact of research on policymaking: the case of

labor market and external sector reforms in India

The impact of research on policymaking: the case of

labor market and external sector reforms in India

TARUN DAS*TARUN DAS*

Executive summaryExecutive summary

India is a success story of economic reforms. Because of its

vast size, it also provides a good example of having a widenetwork of research institutes, and effective linkages be-tween development researchers and policy planners. Thecase study of India makes a critical appraisal of theses link-ages attempted since 1990 in external sector reforms andwith much lesser success vis--vis the labour markets.

India is a success story of economic reforms. Because of its

vast size, it also provides a good example of having a widenetwork of research institutes, and effective linkages be-tween development researchers and policy planners. Thecase study of India makes a critical appraisal of theses link-ages attempted since 1990 in external sector reforms andwith much lesser success vis--vis the labour markets.

Linkages between research-policy-implementation are verycomplex in a democratic set-up like India. The case supportsthe findings of other studies on BRP that the political institu-tional context is the most important factor determining thescope and extent of linkages among research, policy andimplementation. Reforms in the external sector were mostcomprehensive and met lesser resistance from the politicalparties as the working class was not affected adversely bythese policies. They included: liberalisation of exchange rateand exchange control regime, liberalisation of foreign in-vestment and technology transfer, removal of licenses andquantitative restrictions on imports along with rationalisationand reduction of import duties.

Linkages between research-policy-implementation are verycomplex in a democratic set-up like India. The case supportsthe findings of other studies on BRP that the political institu-tional context is the most important factor determining thescope and extent of linkages among research, policy andimplementation. Reforms in the external sector were mostcomprehensive and met lesser resistance from the politicalparties as the working class was not affected adversely bythese policies. They included: liberalisation of exchange rateand exchange control regime, liberalisation of foreign in-vestment and technology transfer, removal of licenses andquantitative restrictions on imports along with rationalisationand reduction of import duties.

On the other hand, progress of privatization and labor re-

forms was slow and the scope was very limited due to politi-

cal economy constraints. Despite various studies done in

India indicating substantial benefits from liberalization of

labor markets over a medium and long term, Indian labor

laws still remain highly restrictive. Most of these studies

were ignored by the trade unions and left parties.

On the other hand, progress of privatization and labor re-

forms was slow and the scope was very limited due to politi-

cal economy constraints. Despite various studies done in

India indicating substantial benefits from liberalization of

labor markets over a medium and long term, Indian labor

laws still remain highly restrictive. Most of these studies

were ignored by the trade unions and left parties.

Lobbying foreign direct investment in some sensitive sectors

such as real estate and retail trade wasn't easy though

many studies had indicated substantial benefits in terms ofhigher growth and employment that would follow after-

wards. For ideological reasons, the left parties and trade

unions did not allow majority equity holding by foreign in-

vestors in insurance and natural resource based sectors

such as mining and plantations.

Lobbying foreign direct investment in some sensitive sectors

such as real estate and retail trade wasn't easy though

many studies had indicated substantial benefits in terms ofhigher growth and employment that would follow after-

wards. For ideological reasons, the left parties and trade

unions did not allow majority equity holding by foreign in-

vestors in insurance and natural resource based sectors

such as mining and plantations.

Policy & politics: left parties are in the gamePolicy & politics: left parties are in the game

Although Foreign Direct Investment (FDI) regime was sig-

nificantly liberalized and foreign equity up to 100% was

allowed in many sectors in industry and infrastructure, gov-

ernments intention for increasing FDI limits in some other

sectors faced severe protests from the left parities. For ex-

ample, the then Finance Minister announced in the Union

Budget for 2004-05 that FDI limits would be raised in civil

aviation up to 49% of total equity, in telecom up to 74%, in

banking up to 74% and in insurance up to 49%. FDI limit

was raised from 40% to 49% in civil aviation, from 49% to74% in telecom and banking, but FDI limit could not be

raised from 26% to 49% in insurance due to opposition by

the left parties, which provide political support to the pre-

sent coalition government.

Although Foreign Direct Investment (FDI) regime was sig-

nificantly liberalized and foreign equity up to 100% was

allowed in many sectors in industry and infrastructure, gov-

ernments intention for increasing FDI limits in some other

sectors faced severe protests from the left parities. For ex-

ample, the then Finance Minister announced in the Union

Budget for 2004-05 that FDI limits would be raised in civil

aviation up to 49% of total equity, in telecom up to 74%, in

banking up to 74% and in insurance up to 49%. FDI limit

was raised from 40% to 49% in civil aviation, from 49% to74% in telecom and banking, but FDI limit could not be

raised from 26% to 49% in insurance due to opposition by

the left parties, which provide political support to the pre-

sent coalition government.

The Pension Bill 2004, which proposed the entry of foreign

players in domestic pension and provident funds, could not

be passed and the ordinance on the proposed changes in

this sector was allowed to lapse simply because of the res-

ervations expressed by the left parties.

The Pension Bill 2004, which proposed the entry of foreign

players in domestic pension and provident funds, could not

be passed and the ordinance on the proposed changes in

this sector was allowed to lapse simply because of the res-

ervations expressed by the left parties.

Similarly, political economy constraints created stumbling

blocks for reforms in privatization of public enterprises and

liberalization in labour laws, despite various researches ad-

vocating for these reforms to enhance investment, produc-

tivity and employment. Left parties held the view that priva-tization may be allowed only in loss-making enterprises, and

government should not sell profit-making enterprises.

Similarly, political economy constraints created stumbling

blocks for reforms in privatization of public enterprises and

liberalization in labour laws, despite various researches ad-

vocating for these reforms to enhance investment, produc-

tivity and employment. Left parties held the view that priva-tization may be allowed only in loss-making enterprises, and

government should not sell profit-making enterprises.

Many times, government has to back track on privatization

due to pressure from political parties. The Rajiv Gandhi gov-

ernments Cabinet decision in 1985 to sell off the state-

owned Scooters India Limited to a private company Bajaj

Auto had to be canceled following protests by opposition

parties. The decision on privatizing Indian Airlines an-

nounced by the Finance Minister Yaswant Sinha in 2001 was

rolled back. The Vajpayee governments cabinet decision on

privatizing National Aluminum Company had to be put

abeyance due to pressure from the trade union leaders and

one of the coalition partners. The Man Mohan Singh gov-

ernments cabinet decision on privatizing the Bharat Heavy

Electricals in 2005 also met the same fate.

Many times, government has to back track on privatization

due to pressure from political parties. The Rajiv Gandhi gov-

ernments Cabinet decision in 1985 to sell off the state-

owned Scooters India Limited to a private company Bajaj

Auto had to be canceled following protests by opposition

parties. The decision on privatizing Indian Airlines an-

nounced by the Finance Minister Yaswant Sinha in 2001 was

rolled back. The Vajpayee governments cabinet decision on

privatizing National Aluminum Company had to be put

abeyance due to pressure from the trade union leaders and

one of the coalition partners. The Man Mohan Singh gov-

ernments cabinet decision on privatizing the Bharat Heavy

Electricals in 2005 also met the same fate.

Trade unions play an important role in labour reforms. To-day practically every political party has its trade union wing.Although trade unions represent only the organised labour,which constitutes hardly 8 per cent of total labour force,they are very vocal, and the vulnerability of Indian politics tocapture by vested interests is great. Trade unions wield areinforced political power. Besides casting their votes inelections, they influence politics and government policiesbetween elections and act as strong pressure groupsthrough strikes and demonstrations. As neither political par-ties nor union leaders are stake holders in the industry inreal sense of the term, the focus of their interventions inlabour reforms is their limited private interest which clashes

with interests of consumers and unemployed.

Trade unions play an important role in labour reforms. To-day practically every political party has its trade union wing.Although trade unions represent only the organised labour,which constitutes hardly 8 per cent of total labour force,they are very vocal, and the vulnerability of Indian politics tocapture by vested interests is great. Trade unions wield areinforced political power. Besides casting their votes inelections, they influence politics and government policiesbetween elections and act as strong pressure groupsthrough strikes and demonstrations. As neither political par-ties nor union leaders are stake holders in the industry inreal sense of the term, the focus of their interventions inlabour reforms is their limited private interest which clashes

with interests of consumers and unemployed.*

Ministry of Finance, India*

Ministry of Finance, India

Bridging Research and Policy P roject 2006

Bridging Brief Series

oscow, Russia Tel./Fax: +7 (095) 332 44 25, 332 44 15 Fax: +1 (202) 478 19 68 http://www.eerc.ru/47 Nakhimovsky prospekt, Suite 919, 117418, M , [email protected]

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GDN, 2006

Peculiarities of Indian labor in larger perspective

While China drastically reformed its previous employment

relations within a decade of reforms, India virtually did noth-

ing to change its labour laws even after 14 years of reforms.

The only avenue of downsizing available in India is the vol-

untary retirement scheme, pursued both by the private and

the public sector, which results in high costs and long ad-

justment period. The methods of recruitment are also pre-

dominantly contractual, and where that is not possible, firms

resort to outsourcing. This has led to dualism within firms,

slower growth of permanent employment and abnormally

high share (82 per cent) of unorganised employment in total

labour force.

While the organized sector provided too much of job-

security to a few for too long, the unorganised sector pro-

vided too little to too many. Political parties preferred retain-

ing this dualism in order to preserve their vote banks in

organised labour force. Consequently, good research works

and policy prescriptions on labour reforms remained simply

on paper leading to poor uptake of research by the policy

makers.

Therefore, proper linkages among researchers, policy mak-

ers and political parties are necessary for bridging research

and policy. Both researchers and policy makers should makeextensive efforts to inform the citizens, legislators, political

parties, workers and journalists of the high costs of inaction

or delays in privatization and labour reforms. These efforts

will mobilize popular support in favor of privatization and

labor reforms and break the opposition of vested interests.

Trade unions and left parties have aversion for privatisation

and hire and fire policy for labour as they feel that there are

not sufficient social welfare measures for those who might

be adversely affected by industrial restructuring. They also

do not like entry of foreign investors in retail trade, pension

and provident funds and do not like majority equity holding

by foreigners in insurance and natural resource based indus-

tries because of fear of loosing jobs.

They criticise Chinas experience by citing that the so-calledindustrial revolution in China has led to an increase in per-

sonal and regional inequalities. Thy feel that the different

courses of reforms taken by India and China can be ex-

plained partly by their policy history, political institutions and

industrial relations framework. Chinas long history of ex-

treme employment security might have compelled them to

reverse almost all the previous provisions. In the absence of

domestic private entrepreneurs, liberalised labour market

was perhaps necessary to attract foreign investors. Political

institutions and one trade union policy further restricted the

Chinese workers from conducting true collective bargaining.

But there is no such compulsion for India, which has a long

history of private entrepreneurship and mixed economy with

large share of private investment.

Currently the median age of the Indian working populationis, at 24.3 years, one of the lowest among the large nations.India is likely to add 83 million to its working age populationof 675 million by 2010 according to the estimates by theUnited Nations. However, existing restrictive labour lawshave been a deterrent to employers forcing them to prefercapital-intensive options for production, even if they wouldhave otherwise preferred labour-intensive options due tolow wages in India. Despite various well-researched studies,which recommended initiating a structural approach to la-bour market reforms, the government has avoided confront-ing the issue of unemployment head on. Politicians effortsto protect labour in the public sector add to inflexibility in

the labour market. Liberalisation of labour laws would cer-tainly create more investment, including foreign investment,leading to higher output and higher employment.

Similarly in the case of external sectors, further liberalisationof FDI policy is required to attract more foreign investmentin mining, insurance and retail trade as these need hugeinvestments and modern technology beyond the capacity ofthe domestic players. Liberalisations will generate higherquality of output and services and lower prices as have hap-pened in many countries.

Conclusion

Both the case studies on reforms in external sectors and

labor laws indicate that the following factors are relevant for

bridging research and policy more effectively:

a. Effective links between researchers and policy makersare essential for bridging research and policy. Involve-

ment of researchers in the policy making process from

the very beginning encourages policy-oriented research

and visa versa.

b. Continuous feedback between research and policy notonly improves quality of research and openness and

transparency of policy making, but also build ownership

of both research and policy. In the case of labour re-forms in India, research and policy have moved back

and forth many times due to socio-political constraints.

In some cases, links have not led to concrete policies,

but the linkage has been able to remove distrust

among various stakeholders such as employers, em-

ployees, trade unions, government and researchers.

c. The continuous feedback loops between research, pol-icy, implementation and monitoring has also led to set-

ting up or strengthening the existing think tanks and in-

termediaries e.g. industry, trade and workers associa-

tions.

d. Institutional credibility is important to have effectiveinfluence on policy making. The reputation of a re-

search institute or a think tank has a sustained impact

on uptake of research and policy making.

e. It appears that research institutions, that have closelinks with the policy-making institutions due to funding

arrangements, have major impact on policymaking

process and uptake of research.

f. Building networks of researchers and policy makershelps bridging research and policy. Academic associa-

tions have informal links with the government depart-

ments. It is better to formalize these networks and hold

seminars and conferences on regular basis.

g. Qualifications and experience of policy makers havemajor influence in bridging research and policy as they

are better equipped to deal with professional and tounderstand research findings.

h. The involvement of individual experts is also equallyimportant for bridging research and policy. In India, the

system of appointing experts as consultants for a speci-

fied period or as policy advisers on permanent basis has

helped in bridging research and policy and encouraging

research in new fields.

i. The setting up working groups/ expert or specialisedgroups by the government has also helped bridging re-

search and policy. However, due care should be taken

while selecting members for expert groups so that

members with diverse views and ideology are repre-


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sented in such groups in stead of picking up only pro-

government members.

j. Multilateral and bilateral donors have supported activi-ties and research to a great extent leading to the up-

take of their research input. Further, review of macro-

economic, sectoral development policies and poverty

alleviation papers have effectively helped the govern-

ment to formulate its policies. These donors must en-

hance their grants to research institutions for policy-

oriented studies.

k. Last, not the least, since political context is the mostimportant factor influencing uptake of research for pol-

icy planning, both researchers and policy makers

should conduct more studies to educate politicians and

other stakeholders about the scope, direction and fa-

vourable impact of reforms and international best prac-

tices. It will also be highly rewarding if they have con-

tinual dialogue and involve politicians, trade union lead-

ers and other stakeholders in the research and policy

making process from the very beginning. The next

phase of BRP project may try to hold seminars and

workshops with all stakeholders such as researchers,

government officials, trade unions, political leaders and

general public.

Bridging Research and Policy Project is coordinated by the Economics Education and Research Consortium (Moscow, Russia) and funded by the Global

Development Network. This project provides researchers in the transition and developing countries with expert guidance on how to advance policymakers

awareness of their research and how to increase its policy impact. The project was implemented in three phases. The first two phases strived to increase

the understanding of research-to-policy linkages in developing and transition countries. It collected and analyzed more than 50 case studies of research

utilization (Phase 1) and conducted more than 20 in-depth studies of research and policy linkages across countries and sectors. The current, third phase of

the project is concerned with a synthesis of findings to date, dissemination of lessons learned and capacity building activities.

The Economics Education and Research Consortium (EERC) is a non-governmental non-profit charity foundation. Its main purpose is to strengthen eco-

nomics education and research capabilities in the CIS. The focus of EERC is on graduate level education http://www.eerc.kiev.ua) and research networking

(http://www.eerc.ru).


GDN, 2006
http://www.eerc.kiev.ua/http://www.eerc.ru/http://www.eerc.ru/http://www.eerc.kiev.ua/

Bridging Research With Policy in Labor Market by Tarun Das

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