Transition to labor law reform: State level initiatives & informal sector labor relations

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Vol. 50 No. 1 2014JULY

Special Issue on

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Guest–Editor

Lord Meghnad Desai

Labor Law Reforms In India

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Contents

Articles

Reforming Labor Laws Meghnad Desai 1

Labor Law Reform in India: Insights fromTangled Legacy of Sidney & Beatrice Webb Bruce E. Kaufman 2

Rethinking Labor Law Reforms Arun Maira 24

Transition to Labor Law Reform: State-LevelInitiatives &Informal Sector Labor Relations Hemal Shah 33

Labor Market Flexibility & Trajectories of Anil Verma &Development: Lessons from Brazil, India & China Ana Virginia Moreira Gomes 51

Quo Vadis, Industrial RelationsDisputes Resolution…? Jerome Joseph 75

Reforming the Industrial Dispute &Trade Union Acts Tushar Poddar 89

Labour Law Reform in India J.S. Sodhi 100

Indian Industrial Relations Law: Case for Reform Debi S. Saini 118

Legal Reforms for the Self-Employed: Martha Alter Chen, Roopa MadhavThree Urban Cases & Kamala Sankaran 133

Turnover Intentions among Indian Gloryson R B Chalil &Software Professionals L Prasad 151

The Indian Journal of Industrial RelationsA Review of Economic & Social Development

VOLUME 50 NUMBER 1 JULY 2014

By Invitationsas

Transition to Labor Law Reform: State-LevelInitiatives &Informal Sector Labor Relations

Hemal Shah

The 1991 economic reforms inIndia quadrupled growth, butkept good quality jobs stagnant.About 93 percent of theworkforce is employed in the in-formal sector, holding backIndia’s growth potential. If Indiais to realize its full growth po-tential, reforming the heavilyregulated labor market is indis-pensable. However, resistancefrom vested interests in an inflex-ible market and lack of politicalcapital in New Delhi has con-tributed to more than six decadesof impasse. This paper accountsfor interests of all stakeholdersin addressing this issue. The pa-per identifies best practices thatindividual states have under-taken to simplify labor laws toease doing business and addressthe lack of skilled labor. It alsoidentifies smaller reforms to ex-tend security coverage to infor-mal workers.

Restrictive, Archaic, ConvolutedLabor Laws

For India to transition to a moderneconomy – from agriculture to industry,informal to formal sector, and shift to ur-banization – she must realize her truegrowth potential by focusing on the cre-ation of good quality jobs and infrastruc-ture. One of the key enablers is the mod-ernization of the labor market, which isregulated by extremely restrictive laws.This forces businesses to remain small,and in turn operate in the informal sec-tor. About 450 million informal employ-ees who make up 93 percent of the totalworkforce stand to benefit from reformsto labor laws and improve business pro-ductivity.

Informal or unorganized sector work-ers, by definition, are those employed inenterprises that use power and employfewer than 10 people or do not use powerand employ fewer than 20 people (Debroy& Bhandari, 2008). Common occupationsinclude small farmers, fishermen, beedipackers/bonded laborers, migrant work-ers, contract and casual laborers (Plan-ning Commission, 2001). Informal work-ers are often characterized as low-skilled,

Hemal Shah is a researcher for India and SouthAsia at the American Enterprise Institute,Washington DC. She is also a scholarwith the Takshashila Institution, Bangalore.Email: [email protected]

The Indian Journal of Industrial Relations, Vol. 50, No. 1, July 2014 33

Hemal Shah

34 The Indian Journal of Industrial Relations, Vol. 50, No. 1, July 2014

poorly paid and seldom covered by so-cial security provisions. This paper usesthe terms ‘informal’ and ‘unorganized’interchangeably.

Indian labor legislation is convo-luted, archaic and restrictive innature.

Indian labor legislation is convoluted,archaic, and restrictive in nature. About50 Central laws overlap with 150 Stateregulations. The clauses of the IndustrialDisputes Act (IDA) of 1947, one of themajor regulations, were conceived underthe British Raj. In 1976, the introductionof Chapter V-B to IDA decreed thatfirms employing 300+ people should seekgovernment permission to effect lay-offs,retrenchments and closures. This wasfurther restricted to firms with 100+workers in 1982, making hiring or firingnew workers extremely difficult even ifthey are inefficient (Sharma, 2006). TheTrade Unions Act is as old as 1926 andWorkmen’s Compensation Act from1923.

The 1970 Contract Labor Act allowsfirms to employ contract workers fortasks of permanent nature but the arbi-trariness of the law allows the govern-ment to ban contract use if similar es-tablishments use regular workers for thatsame task (Bhagwati & Panagariya,2013). The 1948 Factories Act limits themaximum hours of work per week to 48,requires paid holiday for each 20 days ofwork, bans the employment of women formore than nine hours a day, among otherthings (Bhagwati & Panagariya, 2013).

Adverse Effects

Stringent labor regulations affect in-dustrial development, thereby economicgrowth and jobs. Firms are disincen-tivized from expanding and harnessingthe economies of scale and forced to re-main informal. The World Bank’s (2013a)World Development Report focusing onlabor issues directly links larger, formalsector firms to a range of positive fac-tors. Surveying businesses in 102 coun-tries, the report found that larger firms(with more than 100 workers) are likelyto be more productive.

For instance, value added per workerin India’s informal manufacturing sectoris on average about one-tenth that in theformal manufacturing sector (Sharma,2009). The World Bank report also foundthat larger, formal sector firms innovatemore, and compete in export markets,especially in the presence of foreign com-petitors. They are also likely to pay higherwages and control for worker character-istics like age or education through a wagepremium. However, India misses out oncapitalizing on such economies of scale.For example, about 84 percent of manu-facturing firms in India are micro andsmall firms, employing less than 49people. A miniscule 6 percent of (“me-dium size”) firms employ between 50 and199 people. Only 11 percent employ over200 people (“large size”); in China largesized firms account for 52 percent(Hasan & Jandoc, 2012).

On the other hand, economic growthin India has not brought about sufficientjobs. For instance, overall employment,

Transition to Labor Law Reform


which experienced a steady annualgrowth of around 2 percent from 1961-90 (when average growth was about 3.5percent) declined sharply to 1.5 percentduring 1990-91. Employment further de-clined to around 1 percent during 1993-00, when growth rose to an average of 6percent (World Bank, 2013b). This situ-ation improved in 2000-2005 whenIndia’s GDP growth rate averaged at 7percent, and employment went up by 1.6percent (World Bank, 2013b). But as au-turn, in 2005-2010 when growth aver-aged higher at 8 percentand employmentdropped by 5.4 percent (World Bank,2013b).

Even if employment increased slowlyover the years, the rate of good jobs cre-ation was going the opposite direction.While the formal sector grew slowly at1.2 percent annually in 1983-94, this ratefell to 0.53 percent in 1994-2000 (Sharma,2006). Overall, employment in India in-creased by 92.7 million during 2000-2005but a mere 2.2 million during 2005-2010(Mahambare & Nadkarni, 2011).Eventhen, the quality of jobs added to theeconomy was dismal. The small increasein aggregate employment of 2.2 millionduring the high economic growth, but lowjob growth period of 2005-2010 was dueto a massive increase in informal or ca-sual jobs.

Fallon & Lucas (1991) argued thatemployment in formal manufacturingfirms would have been 17.5 percenthigher in the absence of job security regu-lations. But not only has the share of in-formal workers gone up to 93 percenttoday, the share of informal jobs in for-

mal sector companies is also on an up-ward trajectory (Papola & Sahu, 2012).In fact, India has been the main driver ofincrease in informal employment in all ofSouth Asia (Iyer & Vijay, 2013). Theimmediate reasons for a burgeoning in-formal economy are increased taxes andsocial security contribution burdens, in-tensity of regulations, and low quality ofpublic sector services (Schneider, 2002).

Urgent Need

India is amongst the most difficultplaces to do business.

India is amongst the most difficultplaces to do business. The World Bank’sDoing Business index shows India fall-ing down three places to 134th this year,the worst performing country in SouthAsia after Bhutan and Afghanistan.Starting a business and enforcing con-tracts are amongst the major problems(World Bank, 2014). The World Eco-nomic Forum’s 2014 Global Competitive-ness Index ranks restrictive labor regu-lations as among the top problems forbusinesses to operate in India. Address-ing this could help India make the transi-tion from a factor-driven economy to anefficiency- and innovation- driveneconomy (Schwab, 2013).

Growth of India’s manufacturing sec-tor record is also waning. In the 1970s,the share of manufacturing to GDP wasaround 12 percent. After barely risingover the years, this share fell again to14.6 percent in 2012-2013, the lowest in20 years. To meet the goals of the

Hemal Shah


National Manufacturing Policy (NMP) –boosting the share of manufacturing toGDP to 25 percent and adding 100 mil-lion jobs – strong labor law reforms areneeded now to put India on the path tocreate around 110 million jobs by 2025(Goldman Sachs, 2014). With more than10 million Indians entering the job mar-ket annually, the stakes to reform soonerrather than later will be particularly highin the coming decade to exploit the op-portunities from the demographic divi-dend.

Strong labor law reforms areneeded now to put India on thepath to create around 110 millionjobs by 2025.

Current Organization of LaborLegislation

The Centre failed to make a case forflexible labor markets due to strong tradeunion resistance (and political party affili-ations) and problems with re-draftingamendments. To curtail this, there is a ten-dency on the Centre’s part to pass the buckon to States (Debroy, 2012). India’s laborlegislation is a subject in the ConcurrentList, which means that both the Centreand the State could enact laws pertainingto the relevant category. There are:

• Labor laws enacted and enforced bythe Central government

• Labor laws enacted by Centre butenforced by both Central and Stategovernments

• Labor laws enacted by the Centre butenforced by the State government

• Labor laws enacted and enforced bythe various State governments whichapply to respective States (Ministryof Labor and Employment, 2011).

The following items related to laborappear under the Seventh Schedule (Ar-ticle 246) of the Constitution, under theConcurrent List, allowing State govern-ments to amend some Central statutes,and also add new statutes to a certainextent:

22. Trade unions; industrial and labor dis-putes

23. Social security and social insurance;employment and unemployment

24. Welfare of labor including conditionsof work, provident funds, employers’liability, workmen’s compensation,invalidity and old age pensions andmaternity benefits

This paper identifies the most idealreform scenarios in order of importancebut also rates their difficulty level.

Most Difficult Scenario

While India needs a major overhaulin labor legislation, the IDA of 1947 war-rants reform most urgently. Bhagwati &Panagariya (2013) highlight some of thepressing changes required that includetightening the definition of retrenchmentand deferring disputes to independentauthorities to deliver time-bound justiceas opposed to labor courts and tribunals.Section 9A should be amended to give



the employer more flexibility to reassignworkers to similar but alternative tasksat short notice should the need arise.The IDA also prohibits strikes only bypublic utility services without notice, butsuch restrictions should also be extendedto other industrial establishments to dis-courage “wildcat strikes.” And perhapsthe most crucial reform of all is to Chap-ter V-B that restricts laying off work-ers in a factory with 100 or more work-ers (Bhagwati & Panagariya, 2013). Be-sides India, Pakistan and Sri Lanka arethe only countries that require approvalby public administration before under-taking any dismissal (Iyer & Vijay,2013). The Contract Labour Act andFactories Act also need to relax theircaps on restrictions.

However, the Labour Ministry in NewDelhi rejects any idea of reform on thepretext it would only apply to the 7 per-cent in the formal sector anyway. On thecontrary, the discussion should be abouthow to bring the 93% under the systemand balance flexibility and security. Fur-thermore, almost all major Indian politicalparties have a trade union wing. “Thismeans political parties (more so in a coa-lition) are reluctant to legislate on laborflexibility, since this would antagonize theirown trade union wings” (Debroy, 2012).For instance, in February 2012 and 2013,millions of trade union members organizeda national strike (All India Bandh) to de-mand permanent jobs and elimination ofcontract labor preventing any change instatus quo. However, the dismal showingof the 2014 Lok Sabha elections markeda clear defeat for the left-wing politicalparties – especially the bloc of commu-

nist parties whose hold was reduced tothe lowest ever vote share of 4.4 percent– and a decisive victory for the centre-right Bharatiya Janata Party (BJP), mak-ing way for some reform discussion.

Moderately Difficult Scenario

India is becoming more federal innature. The number of states has beenon the rise in India: from 14 states in1957, India federalized to 29 in 2014. Thisis just one of the reasons to devolve morepower to India’s 29 chief ministers, ratherthan concentrating it in New Delhi. Inaddition to a majority in number, it alsomakes sense to move labor law itemscompletely from the Concurrent to theState list (by amending the SeventhSchedule, Article 246, of the Constitution)for several reasons:

First, the current arrangement ofshared responsibility encourages inaction,non-accountability, and free-riding. Onthe one hand, it keeps the Centre tight-fisted and avoid rocking the boat, and onthe other hand States remain complacent,contributing to the decades-long impasse.

Second, performance-driven statesare punished and complacent ones re-warded. For instance, states like AndhraPradesh, Gujarat, Karnataka, MadhyaPradesh, and Maharashtra, wish to makelabor laws more flexible to allow choiceand opportunities for employees. This in-cludes flexibility in work hours, night shiftsfor women, or freedom to fix minimumwages. But these initiatives would requirechanges in legislation and have thus beenshot down from the Centre (Debroy,

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2011). But moving such legislation to theState list could avoid this problem.

Third, evidence suggests that Stateswhich were able to enact seemingly more“pro-worker regulations” have lost out onindustrial production in general (Ministryof Finance, 2005). Study by Hasan andJandoc (2012) shows that in labor-inten-sive manufacturing, states with flexiblelabor regulations enjoy a higher concen-tration of large-scale firms and smallershare of employees in small-scale firms.State-level reforms also help “to mitigatethe detrimental effects that strict federallabor laws have on industrial outcomes”with regard to formal sector manufac-turing units (Dougherty et al, 2013).

However, moving labor laws fromConcurrent to State list will require a leg-islative amendment backed by the use ofsignificant political capital. While this isdifficult, it could be possible in the nearfuture given the new Prime MinisterNarendra Modi’s BJP being the first partywith a majority seats since 1984 and firstnon-coalition since 1989. His affinity fordecentralization (as former chief minis-ter of Gujarat) increases his potential topush for decentralizing labour laws butthe BJP does not yet have a majority inthe Rajya Sabha. While moving theseitems to the State list would be best, thereis no reason for states to try and reformlaws that are still within their power onthe Concurrent list.

Easier Scenario

Even with the reform-oriented ap-proach of the new government and their

majority in the Lok Sabha, moving la-bor from Concurrent to State list is notan easy task. One way around thiswould be to use Parliament’s power toconfer enabling power to states. Inother words, the Lok Sabha could pushfor a politically easier reform by insert-ing additional wording to subjects in theConcurrent list stating two things: Theparticular piece of Central legislationshall apply to all states that do notamend that law; whereas amended leg-islation shall apply in states that tookthe initiative to amend it (Panagariya,2014). In general, changes made bystates are void if “repugnant” to exist-ing Parliamentary legislation unless thes ta te has the Pres ident’s consent(Bakshi, 2013).

However, considering that the newgovernment does not yet enjoy a majorityin the Rajya Sabha, Parliament’s attemptto enable State power may be difficult. Inthis case, another approach could be seek-ing Presidential assent. Panagariya (2014)suggests that the “new government couldfacilitate this process by adopting a policyof time-bound decisions on proposals foramendments submitted by states.” For in-stance, he explains that government per-mission needed to lay off workers underIDA 1947 is rarely granted making the lawrestrictive. Here, a time clause could beadded wherein the government has tomake a decision on the layoff applicationwithin a stipulated period of time, failingwhich permission would be assumed asautomatically granted. This could not onlymake labor laws relatively more flexiblebut also result in efficient decision-mak-ing.



The new BJP-led government inRajasthan has recently adopted thisroute. The state’s Cabinet clearedamendments to three labor-related Actsand is seeking Presidential assent di-rectly, as it may be “repugnant” to ex-isting Parliamentary legislation. Thestate has proposed changes to IDA sothat permission for retrenchment is onlyrequired for firms employing 300+people, as opposed to 100+ people. Thestate Cabinet has also introduced athree-year time limit for raising disputes;trade unions can’t be registered with-out 30 percent worker representation,instead of the current 15 percent. Re-strictions from the Contract Labor Actwill apply only to companies with morethan 50 workers, as opposed to the cur-rent 20; Factories Act would be appli-cable only to companies with 20 work-ers with power and 40 without power,as opposed to 10 and 20 respectively(Iyer, 2014).

Easiest Scenario

While much hope is pinned on thenew government, even the easier po-tential changes outlined would still takea while. In that interim, this paper at-tempts to identify the most commonproblems for business and workers andhow State governments could under-take smaller reforms to achieve mar-ginal progress to pave the way for big-ger reforms in future. With six decadesof deadlock on labor reforms, it is timeto find a feasible approach by account-ing for perceived short-term interestsof those favoring the status quo andthose demanding immediate reform.

The hope is that marginal progress nowwill ease the transition to bigger futurereforms.

State Freedom & Flexibility forEmployers

Difficulties in complying with restric-tive labor laws and inadequate supply ofskilled labor are two of the major con-straints for business (CII-KPMG, 2014).Employers with more than 100 workersare covered by the IDA and cannot fireanyone without prior consultation, notifi-cation to the public administration andworkers’ representation, followed by ap-proval from both before collective dis-missal (Iyer & Vijay, 2013). Only India,Pakistan, and Sri Lanka have such strin-gent rules. In addition, TeamLease (2009)recognises how “educated unemploymentand shortage of competently skilled labourco-exist.” State governments can act onsome of the “controllable areas” of theseproblems in the interim of unleashing big-ger reforms (FICCI-Bain, 2012a).Bestpractices emerge in areas where stateshave a larger ability to introduce reforms.However in this case, where states havea lesser capacity to legislate, strong, piece-meal initiatives undertaken by states canalso serve as useful examples for otherstates (FICCI-Bain, 2012a).

Educated unemployment andshortage of competently skilledlabour co-exist.

There is already some evidence ofState initiatives that have brought aboutpositive results. Besley and Burgess

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(2004) show that states that “amendedthe IDA in a pro-worker direction expe-rienced lower output, employment, invest-ment and productivity in formalmanufacturing.”A more recent study byHasan and Jandoc (2012) concludes thatIndian states with more flexible laborregulations tend to have larger-sizedfirms in labor-intensive industries. Debroy(2011) also identified various States –Uttar Pradesh, Andhra Pradesh, Punjab,Gujarat, Karnataka, Orissa, andRajasthan – that took initiatives to reducethe number of inspectors for businessenterprises. Gujarat has also amendedthe IDA to allow retrenching workers butonly at a higher compensation of 45 days’pay.

That positive state initiatives resultin labor market flexibility and productiv-ity is clear from indices produced by or-ganizations like TeamLease or the CatoInstitute, who have undertaken studies torank State initiatives to improve laborregulations for business. The TeamLease(2009) labor ecosystem index aggregateslabor demand, supply and regulation,showing Andhra Pradesh and Karnatakabeating Delhi and Gujarat for the topspots on overall labor ecosystem, but sev-eral others who are improving on othervariables. Cato’s 2013 Economic Free-dom of the States of India index alsoranks states under the category of regu-lation of labor and business (Debroy etal, 2013). While Gujarat and Tamil Naduhave maintained top spots since 2005 untilnow, states like Karnataka, HimachalPradesh, Uttarakhand have made tre-mendous progress over the years,whereas Jharkhand and Madhya Pradesh

have slipped down in the same period.While this is not a definite measure, itgives a rough blueprint to assess whatwent right and wrong in the respectivestates. But most importantly, it createscompetition to drive change.

Identifying Best Practices

The Planning Commission’s statelevel assessment for manufacturing en-vironment in March 2014 is a serious stepin institutionalizing state initiatives in thisarea. It acknowledges that the first stepshould begin with generating awarenessand motivation amongst states by com-parison with other states. The next stepis to highlight best practices, followed byhow states can “tune up” their regula-tions by getting a sense of best practicesin successful states (Planning Commis-sion, 2014).

In association with Deloitte, thePlanning Commission recently rankedstates by the time taken and the effec-tiveness of the process for registrationof manufacturing units under the Fac-tories Act and other labor laws. Themost popular practices that emergedwere in areas like simplifying informa-tion and creating awareness, online re-newals, and rationalization of inspec-tions (Planning Commission, 2014). Mr.ArunMaira, member of the PlanningCommission, argues that easing regu-lations for manufacturing enterprisesshould be in the hands of the statessince almost three quarters of the regu-lations are state regulations (Rao,2014). Outlined below are some ex-amples of such state initiatives that aim



to simplify labor regulations, both toease doing business and bolster a skilledworkforce.

Labor Management System

The “Mahashramm” initiativelaunched in 2010 by the State governmentof Maharashtra is an important electronicportal that enables efficient and timelyservices to businesses and reduces in-spections. The portal provides online reg-istration, application for licenses, exemp-tions, and renewals, in addition to payingsalaries by cheques. Businesses cantrack the status of their application put-ting an end to delays and corruption thatmay arise in such cases. Filing and rec-onciling returns are simplified: businessescan file the 14 mandated returns in onego through one comprehensive annualreport. Monthly returns are verifiedagainst bank statements and alerts aregenerated for non-compliance. In thismanner, days taken to apply for licenseswere reduced from 10 to 0.5; license re-newal from 7 to 0.5; and returns filingfrom 15 to 0.5 (DIPP, 2014). However,businesses have to ensure that their em-ployees are all registered on this systemand have individual bank accounts(FICCI-Bain, 2012b).

Compliance in Special EconomicZones

Special economic zones (SEZ) aredesignated areas to attract cutting edgeinfrastructure and foreign investmentwith the least possible regulations to boosteconomic activity. Gujarat has pioneeredlabor compliance in this area by the SEZ

Act of 2004 by making clear clauses forappointment and termination of labor forSEZ units. Flexibility in complying withIDA’s section V-A, V-B, V-C and V-Dare offered (MSME, 2014).The SEZ Acthas institutionalized the concept of ‘fixedterm’ – different from contract workers– to satisfy work needed to be done forshort periods (Debroy, 2011). This fea-ture has brought about a major reductionin manpower days lost due to laborstrikes. Gujarat, therefore, accounts foronly 0.6 percent of India’s manpowerdays lost (CII-KPMG, 2014). In fact, re-cent research by Goldman Sachs (2014)argues that 40 million manufacturing jobscould be added to the economy if statesmade their labor laws as flexible asGujarat. The state’s reform initiativebrought a growth of 60 percent in manu-facturing employment between 2000 and2012 whereas West Bengal saw only a22 percent increase (Goldman Sachs,2014).

40 million manufacturing jobscould be added to the economy ifstates made their labor laws asflexible as Gujarat.

Self-certification & InspectorRationalization

The introduction of Single Window Actin 2002 made Andhra Pradesh the firststate to introduce the concept of self-cer-tification. This enabled firms to avoid ar-bitrary inspectors by submitting their mus-ter rolls and registers along with a self-certification form showing compliancewith various labor laws. However, it is the

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state’s thriving IT industry that goaded thispractice. This is yet to be scaled up to themanufacturing sector, whereby labor lawsare more in number as it falls under thejurisdiction of the Centre’s Factories Act.While this initiative is laudable, improve-ments can be made by making inspectionscomplaint-based or random as opposed tomandatory inspection currently. Thirdparty agencies could also be recognizedto issue compliance certificates (FICCI-Bain, 2012c).

Third party agencies could also berecognized to issue compliancecertificates.

Industry -University MoUs

Gujarat, like a few other states, hasbeen steering the setup of industrial train-ing institutes (ITIs) to implement voca-tional training courses. But the state’sgovernment differentiates itself from ITIinitiatives by other states with its cam-paigns to increase the participation ofindustry to strike a match between skillstraining and academia. As noted byFICCI, industrial organizations like Tata,LG, Eicher have signed MoUs with thestate government’s employment andtraining department specifying skills theyrequire and in exchange offering place-ments to successful students. This hasled to university-business integration. Forexample, Saurashtra University and EssarGroup work together in designing coursecurriculum relevant to industry; ITIKubernagar works with Toyota andEicher to make skills relevant to theirbusiness (FICCI-Bain, 2012d).

State Freedom to RedesignNREGA

Though well-intentioned, the formergovernment’s National Rural Employ-ment Guarantee Act (NREGA) that guar-antees 100 days of work to the rural poor,has unintended consequences. For Indiato boost growth, jobs, and productivity, ithas to make a rapid transition from agri-culture to manufacturing coupled withskilling programs, and thereby urbaniza-tion. Labor is four times more produc-tive in industry and six times more in ser-vices compared to agriculture (GoldmanSachs, 2014). Government policies shouldincentivise this transition, but NREGAdoes the opposite. While rural wages aregoing up, slowing urbanization and pro-ductivity are together stoking inflation inIndia (Goldman Sachs, 2014).

NREGA could be reformed to limitthe number of rural jobs to thosewho strongly prefer to remainclose to their households (for ex-ample, women).

NREGA could be reformed to limitthe number of rural jobs to those whostrongly prefer to remain close to theirhouseholds (for example, women). Thegovernment could instead channel theremaining funds to sponsor or subsidizethese workers for 100 days in privatesector labour-intensive industries. Thiswould also incentivize employers to in-vest in their skills in that subsidized timeand hire them full-time by paying wagesfor the rest of the 265 days or more(Kumar & Busvine, 2014). However,



NREGA is a one-size-fits-all CentrallySponsored Scheme (CSS), where stategovernments contribute a share of thefinances and responsible for implemen-tation but have no say in design(Raghunandan & Aiyar, 2013). With thecurrent government poised in favor ofdecentralized decision-making over CSS,the Planning Commission, with PrimeMinister Modi at the helm, could extendmore freedom to state governments toredesign their NREGA schemes to alignmore with productive jobs and urbaniza-tion.

Social Security Reform

In the first quarter of 2014, 3,057,472man-days were lost due to strikes andlockouts (Labor Bureau, 2014). While theformal sector is characterized by a rigidlabor market, the 93% of the Indianworkforce in the informal sector workunder extremely flexible conditions.However, social security coverage isminiscule or non-existent. Evidence fromthe most unionized state of India, WestBengal, suggests that three of their larg-est trade unions (CITU, INTUC, AITUC)focus their work around security forworkers in the informal economy (Sen,2009).Scaling up security for informalsector workers could therefore be oneof the most crucial factors in reducingthe fierce resistance from trade unions.Trade unions worry about any discourseof reform equating it with dilution of theirrights. This section argues for a two-pronged approach: identify and addresstrade union problems to the extent that itmakes bargaining unnecessary and un-attractive.

Social Security Cost-ValueMismatch

The cost and administrative burdensof India’s social security schemesdisincentivize employers from administer-ing them. At the same time, employeesfind it unattractive to contribute to them.Benefits and contributions leave low-wage employees with only 50% of theirmonthly salary (Sabharwal, 2012). TheEPFO is 10-20 times more expensivethan any other public or private govern-ment securities mutual fund in the world(Sabharwal, 2012). In addition, its pen-sion scheme has an unfunded hole of ru-pees 50,000 crore (Sabharwal, 2014).Moreover, the perceived value for moneyis fairly less for low-wage workers —the EPF has often been criticized forpoor customer service. The ESI, on theother hand, is also blighted with poor hos-pital facilit ies and lack of staff(Sabharwal, 2012).It is also the world’sonly health insurance plan with a claimratio of less than 50 percent (Sabharwal,2014). Thus, businesses are increasinglymoving to the cost-to-company approachof monetizing all benefits to include insalaries, as opposed to providing benefitsover and above the gross salary.

Cost-cutting also leads to collusionbetween businesses and labor inspectors;unregistered firms often don’t return theirex-employees contributions (Rajeev,

The EPFO is 10-20 times more ex-pensive than any other public orprivate government securitiesmutual fund in the world.

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2009). Maharashtra’s “Mahashramm”initiative mandates all businesses – informal and informal sectors – to pay allsalaries/wages by cheque. Businesses,banks, labor and network correspondentshave to be all linked and financial institu-tions are expected to provide the linkageby extending the option of “no frills” bankaccounts. This also ensures the paymentof EPF to workers (FICCI-Bain, 2012b).

Competition to Reform

Competition is yet another way toreform social security and improve valuefor money. With the extension of theNational Pension System (NPS) to allIndian citizens, including from the infor-mal sector – and the Pension Fund Regu-latory and Development Authority(PFRDA) as regulator of the pensionsector – employers should allow and en-courage employees to opt into thescheme of their choice. The NPS, unlikethe EPF, runs on a defined contributionmechanism whereby a pensioner getsback the amount proportional to his con-tribution, rather than a fixed return. TheNPS also enjoys a higher rate of returnthan the 8.25% under EPF. The NPSscheme is web-enabled and removes thehuman interface that could invite rent-seeking, thereby inviting choice andcontestability, and incentivizing EPFO toreform alongside (Asher, 2011).

Setting up Organizations

State governments should look intoinvesting and encouraging formal sectororganizations modeled after private com-panies, like TeamLease Services, Ma

Foi, Randstad, and Manpower, in the in-formal sector. Besides offering humanresource services, such organizationsdedicate their operations towards improv-ing their people supply chain by identify-ing and matching contract laborers, ortemporary staff, a sensitive subjectamongst the trade unions. Contract la-bor is often exploited in India’s formalsector as short-term “informal” laborersabsent social security provisions. Thepresence of such organizations wouldensure that contract laborers get a fairwage for their services in addition to so-cial security, on the assumption that tem-porary jobs are still better than no jobs.

Developing the Informal Sector

Though ideal, formalization is imprac-tical until informal workers are equippedwith required skills and training to enableemployers to invest in them and adminis-ter expensive social security options.Needless to mention, compliance withrestrictive labor laws and poor infrastruc-ture add to the problem. Policymakersneed to think of ways to reduce the for-mality-informality trade off.

Costs of formalization include entrycosts and operating costs (Loayza, 1997).Entry costs of doing business in India in-volve 12 procedures that take 27 days,costing 47 percent of income per capitawith paid-in minimum capital of 125 per-cent - as opposed to 5 procedures in 11days, costing 3.6 percent of income percapita, with just 10% paid-in minimumcapital in the OECD (World Bank, 2014).Operating costs – complex taxes, laborregulations, property rights, contract en-



forcement, access to infrastructure – arealready high. Ranking 134th out of 189countries on the World Bank’s DoingBusiness index, India falls behind evenher BRICS counterparts.

Ranking 134th out of 189 countrieson the World Bank’s Doing Busi-ness index, India falls behind evenher BRICS counterparts.

Costs of remaining informal includepenalties and corruption, limited accessto public services, missed opportunitieson expansion, limited access to financeand cooperation with formal enterprises(Ishengoma & Kappel, 2006). How-ever, the situation in India can besummed up as follows: “the opportu-nity costs of informality seem to bemuch lower than the cost of operatingformally…total formality may meanclosing up the business unless the busi-ness environment within which firmsoperate is improved” (Ishengoma &Kappel, 2006).

Instead, until costs decline, attemptsshould be directed at creating an assur-ance of sustainable livelihoods in the in-formal sector. For instance, states likeGujarat have been proactive in creatingmore choice and opportunities for farm-ers by amending restrictions on the Ag-ricultural Produce Marketing CommitteeAct to allow them to sell their produce towholesalers, exporters, industries andlarge trading companies (Shah, 2013).This would ensure a smooth transition forinformal sector workers when the timeis right to formalize.

Flexibility & Security – “Flexi-curity”

Any use of the term flexibility orreform agitates trade unions.

Any use of the term flexibility or re-form agitates trade unions. India’s for-mal sector offers no flexibility to firms,but as a contrast, workers enjoy goodsecurity coverage. So currently India hasan absolute welfarist model – somethingthat a low middle income country cannotafford. Instead, a good formula to emu-late is Denmark’s flexi-curity model: atripartite model that combines flexibilityfor employers, security for workers, andan active labor market policy to encour-age skilling programs and matching theunemployed.

In addition to the reforms highlightedabove, flexi-curity could be kickstartedby segregating IDA’s meanings of lay-off, retrenchment and closure provisions.The three concepts reflect increasingdegrees of severity, and unbundling themcould make them more palatable to tradeunions, making it easier to sell reforms(Debroy, 2012). It is speculated that ifcompensation for layoffs and retrench-ment were increased from 30 days’ payper year worked to 45 days, political re-sistance may diminish. In West Bengal,this compensation is higher for layoffs –50% of basic wages plus other benefitsfor the first 90 days and 75% thereafteruntil disposal (Sen, 2009).

Severance pay policies in India arealready “modest” by international com-

Hemal Shah


parisons (Asher & Mukhopadhya, 2005).That brings forth the scope to trade offhigher severance pay for three importantopportunities – greater operational flex-ibility for businesses, greater profession-alism in policy design and implementa-tion by labor ministries, and lower trans-action costs for new companies (Asher& Mukhopadhya, 2005).

Like-minded Unionism

Trade unions comprising similar indus-try units are more credible and easier toengage with. On the other hand, unions withmembers from mutually exclusive indus-tries and varied interests lead to uncheckedmultiplicity whereby member demandsarise out of herd mentality, and lack cred-ibility. The Amendment Act 2001 to TradeUnions Act 1926 was channeled towardsaddressing superfluous multiplicity. As aresult, 10,274 registrations were cancelledin 2001in West Bengal, they probably didnot meet the criteria of the Amendment interms of industrial homogeneity (Sen,2009). While there has not been much re-search on the direct implications of suchoutcomes, the main aim of such reforms isto ensure “orderly growth, reduce multi-plicity and promote internal democracy inthe industrial organization and theeconomy” (Business Portal of India, 2013).With state unions comprising 89 percent ofthe total pie and informal unions on the rise,there is more reason to make this item partof the State list.

Improving Work Conditions

In addition to scaling up security inthe informal sector, creating better work

conditions could also make bargainingthrough unions unnecessary making la-bor relations more efficient. Examplesfrom successful approaches used bycompanies show minimized backlashfrom unions. This includes communitydevelopment, work benefits, and timelybreaks.

Community development measuresinclude renovating railway stations, bath-ing ghats, or social welfare activities likeeye test camps – sometimes in partner-ship with local bodies like the panchayats(Sen, 2009). Benefits that go over andabove the pay package, like free trans-port, dining halls, or extra cash for buy-ing household items have also worked inthe past. The kind of composition of worktimes, breaks, and benefits could alsoincentivize amicability.

In this manner, unions in large firmswith increased benefits are seeing a de-cline especially in the case of young andwhite-collar employees, who do not indi-cate a strong urge to unionize. Moreover,state unions comprise nearly 90 percentof the total pie and informal unions aregrowing. Such patterns summon the in-creasing need to shift reform narrativeto the states and the informal sector (Sen,2009).

Concluding Remarks

Labor market reform is one of themost politically difficult tasks in a largedemocracy like India. India’s labor leg-islation is archaic, restrictive, and con-voluted, thereby discouraging businessesto expand and create more jobs. If India



is to realize its full growth potential, it willneed to reform its heavily regulated la-bor market by ushering in more flexibil-ity and scaling up security for workers.Currently, 93 percent of workforce thatis employed in the informal sector whereproductivity is low and wages are small,stands to benefit from such reforms.However, resistance from vested inter-ests and lack of political capital in NewDelhi has contributed to six decades ofimpasse on this issue.

This paper identifies the most idealreform scenarios in order of political sen-sitivity. This ranges from re-writing theIDA and other restrictive laws; to mov-ing labour legislation from the Concur-rent to the State list; to seeking Presi-dential assent for State-initiated changes.However, the paper lays out detailed andeasier policy reform options to pave theway for bigger reforms in future.

The best way forward is to engageall major stakeholders – businesses, em-ployees, and bureaucrats – to bring aboutsmaller reforms by plucking the low-hanging fruits. The paper identifies pro-cedural reforms undertaken by differentstates that spur flexibility and clarity inlabor laws to facilitate the ease of doingbusiness. Examples from states likeGujarat and Andhra Pradesh show ini-tiatives to simplify compliance processesand also connect skilling programs to theneeds of industry. Similarly, the last sec-tion argues for ways to scale up socialsecurity coverage in the informal sectorand making bargaining unnecessary. In-citing competition between social secu-rity schemes, organizations to match

workers, and improving work conditionscan bring more security to workers andencourage good quality unionism.

Interim reforms outlined in this pa-per from successful practices are in-tended to help push labor market dynam-ics. Regulatory practices need to adaptto evolving structures – as otherwisewelfare cannot be advanced. In the faceof a slowing growth rate, attempts totame the deficit and inflation, and a forth-coming demographic dividend, India’spolitical elite must remember that boost-ing good quality jobs is a matter of toppriority.

Acknowledgments

The author would like to thank Dr.Mukul Asher (Takshashila Institution) forhis comments.

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Transition to labor law reform: State level initiatives & informal sector labor relations

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