4. Labour Regulations and Informalization of Industrial Labour in India

According to Barone (2001), employment protection legislation (EPL) covers the entire set of regulations that place some limits on firms’ abilities to hire and fire workers. These regulations may emanate from legislation or court rulings, or it may be there because of collectively bargained conditions on employment or customary practices (OECD, Employment Outlook, June 1999, Chapter 2, p. 50). Industrial Disputes Act (IDA) is the most important component of EPL in India. There are, however, regulations other than IDA, which may be considered as a part of EPL. These include the Industrial Employment (Standing Orders) Act, the Factories Act and the Contract Labour Act (CLA). In the Indian context, Dougherty et al. (2011) have used a relatively more comprehensive measure of EPL, going beyond IDA.

For an extensive discussion on the limitations of the Besley-Burgess index, see Bhattacharjea (2006, 2009a, b).

Other studies expressing such a view include Ahsan and Pagés (2008), Kapoor (2014) and Das et al. (2015). It may be mentioned here that Das and associates have drawn attention to the ruling by the Supreme Court in 2001 which interpreted the CLA, 1970, in the case of Steel Authority of India v. National Union Water-Front Workers. They point out that this judicial interpretation has led to increased flexibility in the Indian labour market, enabling firms to employ ‘contract’ workers widely.

India needs to create at least eight million jobs annually as it adds 1.3 million to the working-age population every month.

The World Bank in World Development Report (2019) has emphasized that India has to create more formal jobs.

The National Sample Survey Organization (NSSO) Employment and Unemployment Survey data are available only for 2011–12. The Labour Bureau has provided estimates of employment for subsequent years till 2015–16 based on five annual Employment and Unemployment Surveys, but the published data do not contain any information on the formal-informal nature of employment.

The ‘Make in India’ policy initiative is a consequence of this realization.

The terms informal and unorganized are generally used interchangeably in the literature in India (NCEUS 2007).

The information on social security in the 55th round is available from coverage under the Employees’ Provident Fund (EPF). So, the regular employees with EPF coverage are included as formal employees. In the 68th round, the information is available about the type of job contract and social security contribution.

A majority of the 11 states which have been treated as inflexible in this study have been treated so also by Gupta et al. (2009). But Kapoor and Krishnapriya (2017) treat only 3 out of these 11 states as inflexible. Gupta et al. (2009) treat Haryana as flexible, and Kapoor and Krishnapriya (2017) treat it as neutral, whereas Ramaswamy (2015) and Sapkal (2015) treat Haryana as inflexible. Obviously, the classification of States into flexible and inflexible differs from study to study.

Kapoor and Krishnapriya have followed Gupta et al. (2009) who have presented a composite measure of labour regulations in various States, making use of information taken from Besley and Burgess (2004), Bhattacharjea (2008) and OECD (2007). Gupta et al. (2009) give their measure of labour regulations for Uttar Pradesh, but it is not separately given for Uttarakhand. Therefore, in this study, Uttar Pradesh and Uttarakhand have been treated in a similar way, as done by Kapoor and Krishnapriya. This becomes necessary because in the 1999–2000 NSS EUS data, the two states cannot be separated. In this context, it may be pointed out that Dougherty (2008) gives a score of 6 to Uttar Pradesh and 5 to Uttarakhand (out of a maximum possible score of 9) for transaction cost reducing actions taken by these two states in regard to IDA which is more than the all-state average of 4.2. Thus, there is some further justification for treating Uttar Pradesh and Uttarakhand in the same way.

Our estimates are based on NCEUS (2007) and IHD (2014) and hence differ from the estimates presented in Goldar and Aggarwal (2017) where we follow Sundaram (2008).

These estimates are by and large in line with the estimates presented in Ghose (2016). An increase in the share of informal workers in organized manufacturing between 2004–05 and 2011–12 has been reported also by Mehrotra et al. (2014).

In trying to explain the observed negative correlation, one possibility that deserves attention is that the need for (and hence employment of) contract labour tends to be more for those firms who have less opportunity of employing workers on an informal basis (because of labour laws or strong unions or large plant size). Such firms therefore tend to have more formal (permanent) jobs for the workers directly employed by them. On the other hand, those firms which can easily have informal workers do not have the pressure to go for contract workers. This is an interesting hypothesis. It has, however, not been possible to empirically verify this as the required data could not be obtained.

The dissimilarity observed across industries and across states seems to be a reflection of substitution within informality as highlighted by Prof. L.K. Deshpande and associates in their Bombay study of labour flexibility (Sudha Deshpande et al. 1998). Also see, in this context, Lalit K. Deshpande et al. (2004).

The finding of a higher incidence of contract labour use in plants located in rural areas than those in urban areas is intriguing. This could be a reflection of union avoidance strategy, involving shutting down of unionized and high real estate value plants and high wage cost plants in urban areas and relocating them to rural areas to take advantage of low costs, including low labour costs, and avail subsidies.

This finding is at variance with the model estimates for 2010–11 and 2012–13 presented in Goldar (2018), which used the same set of variable to carry out a very similar analysis. In that study, it was found that the coefficient of inflexible states is positive and statistically significant, when two-digit industry dummies are not included, but not when such dummies are included. How is the difference in results of two very similar studies are to be explained? It seems to us that because in this study only major states are considered which are divided into flexible and inflexible (whereas Goldar 2018 considered all states, including those which are neither flexible nor inflexible), the impact of labour regulations become more clearly discernible.

It seems right to claim that the path to enhancing the quality of jobs in organized manufacturing in India does not necessarily lie in reduction and elimination of contract labour. Rather, as argued by Shyam Sundar (2011), there is a need to extend the institutional regulations to the contract labour system. Accordingly, to improve the terms and conditions of employment of contract workers as well as other non-standard workers, a more effective role of the trade unions through collective organization and collective bargaining is required, and the principal employers need to be involved in this process, with multi-employer bargaining, for success of collective bargaining to yield the desired results.

The threshold level of 100 directly employed workers is adopted because several regulations become applicable as firm crosses that level. Ramaswamy (2015) notes that Chapter-V-B of the IDA requires notice, compensation and permission from government for layoff, retrenchment and closure, if a firm employs more than 100 workers who are permanent in nature and the names appearing in muster roll (pp. 243–44).

One may ask, does not this fact by itself indicate significant flexibility being enjoyed by industrial firms in adjusting their workforce.