Special Issue on Labor Law Reforms in India - WIEGO July... · Labor Law Reforms In India ......

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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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¨ Skilling Women in the Informal Sector 325 M.S. Ramanujam

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¨ Making Globalization Work 250 J.S. Sodhi

¨ Development and Nationhood: An India Perspective 350 J.S. Sodhi

¨ Tata Steel: Becoming World Class 310 S.N. PandeyJai B.P. SinhaJ.S. Sodhi

¨ Development as Freedom: An India Perspective 350 J.S. Sodhi

¨ Management of Contract Labour in India 350 M.S. RamanujamJ.S. Sodhi

¨ Developing a Culture of High Performance 325 Rama J. Joshi

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¨ Technology Transfer, Labour Relations & Human 300 J.S. Sodhi Resources Management in India Pravin Sinha

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Lord Meghnad Desai is an Indian-born, naturalized British economist andLabor politician. He has been awarded thePadma Bhushan, the third highest civilianaward in the Republic of India, in 2008

He secured a master’s degree fromUniversity of Mumbai, after which he wona scholarship to University of Pennsylva-nia in1960. He completed his PhD at Penn-sylvania in 1963.

He worked as Associate Specialist inthe Department of Agricultural Econom-ics, University of California, Berkeley,California. He then became a lecturer atthe London School of Economics in 1965.At LSE, he taught econometrics, macro-economics, Marxian economics and de-velopment economics over the years.

He wrote his first book Marxian Eco-nomic Theory in 1973 followed by AppliedEconometrics in 1976 and Marxian Eco-nomics in 1979. He wrote TestingMonetarism, a critique of monetarism, in1981.Desai has written extensively pub-lishing over 200 articles in academic jour-nals and had a regular column in the Brit-ish radical weekly Tribune during 1985–

1994, in the Indian business daily Busi-ness Standard (1995–2001) and in In-dian Express and Financial Express.During 1984-1991, he was co-editor ofthe Journal of Applied Econometrics. Aselection of his academic papers waspublished in two volumes as The Se-lected Essays of Meghnad Desai in1995. Lord Deasai published Rethink-ing Islamism: Ideology of the New Ter-ror (2006), The Route to All Evil: ThePolitical Economy of Ezra Pound(2007), a novel Dead on Time, (2009)and The Rediscovery of India (2009).Besides the book on Marx’s Revenge:The Resurgence of Capitalism and theDeath of Statist (2002) he also pub-lished a biography of Indian film star DilipKumar titled Nehru’s Hero: DilipKumar in the life of India (Roli, 2004).

He was Chairman British LaborParty during 1986- 1992 and was madea life peer as Baron Desai, of St Clem-ent Danes in the City of Westminster,in April 1991.

In 2003, he retired as Director of theCentre for the Study of Global Gover-nance, which he founded in 1992 at theLondon School of Economics (LSE),where he is now Professor Emeritus. Hewas Chairman of the Trustee’s Board forTraining for Life, Chairman of the Man-agement Board of City Roads and on theBoard of Tribune magazine. Lord Desaiwas also a founding member of the De-velopment Studies Institute (DESTIN) atthe LSE in 1990. Lord Desai is Chair-man of the Official Monetary and Finan-cial Institutions Forum (OMFIF) Advi-sory Board,

About the Guest - Editor

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


VOLUME 50 NUMBER 1 JULY 2014

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Important Announcement

Powerful Leadership &Excellence inPublic Enterprises V N Srivastava 165

Strategy & Structural Dimensions – A Bindu Gupta &Comparative Study of Four Industries Ajay Singh 180

VOLUME 50 NUMBER 1 JULY 2014

Guest-Editor’s Foreword

Reforming Labor Laws

Meghnad Desai

India has for several decades nowgot itself into a situation of denial anddelay in the matter of reforming the la-bor laws. The laws were passed somebefore independence and some after onthe mistaken analogy of a developed in-dustrialized country with a majority of itsworkforce in large factories. Socialistthought, reformist as well as revolution-ary, had the industrial worker at its cen-tre. The capitalist system was supposedto be sustained by exploitation of theworker-the proletariat – and hence regu-lation of the employer-worker relation-ship took prime place in reform legisla-tion.

India has a slim minority employedin the organized sector, barely 5 % of itstotal work force. Yet the rights of thistiny minority are guarded by a phalanxof laws and regulations which has hadthe effect of retarding manufacturinggrowth in India. The principal legislationsconcern the ability to hire workers onnon-permanent contracts, and, as that isdifficult, the even more difficult task ofterminating their employment on anygrounds whatsoever. Firms find it diffi-cult to liquidate themselves as that maycause unemployment of their workers.To this may be added over a hundred an-

nual inspections and enforcement ofregulations which add to the transactionscosts of doing business in the manufac-turing sector.

India’s Asian neighbors, Bangladesh,Malaysia, Indonesia, to say nothing ofChina or South Korea, have overcomethese problems and managed to developa thriving manufacturing sector. In India,the manufacturing sector remains stagnantat around 16 % and has relatively smallsize units which are engaged in mediumand high tech industries. Many Indianmanufacturers employ contract laborwhich has few rights and can be sackedon expiration of contract. This is healthyneither for the workers nor for employer-employee relationships. Our Asian neigh-bors have large factories with hundredsof employees manufacturing low techproducts which have a large export mar-ket. India lags behind in this area.

Our journal has explored the topic ofInformal Labor Markets in a special is-sue previously. This special issue tacklesthe urgent question of reform of laborlaws. I welcome this initiative and con-gratulate all the contributors and Profes-sor Sodhi and the editor for their excel-lent effort.

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

By Invitation

Labor Law Reform in India: Insights from TangledLegacy of Sidney & Beatrice Webb

Bruce E. Kaufman

Sidney and Beatrice Webb, co-founders of the industrial relationsfield and early pioneers of Fabian So-cialism significantly influencedJawaharlal Nehru and India’s post-Independence model of economic de-velopment. Part of this model was aprotectionist regime of labor law whichhas now come under increasing criti-cism as a structural impediment togrowth. This article reviews the ideasof the Webbs and uses them as a prismfor evaluating the case for labor lawreform and the direction it should take.The article advances a three-prongconclusion: the Webbs’ program forlabor market regulation remains soundin principle but the specifics in Indianeed substantial adjustment; the mostimportant way to generate higher em-ployment growth is not from labor mar-ket deregulation but continued liber-alization of product markets and en-couragement of entrepreneurship; andthe most critical pro-growth reform ismore efficient and honest institutional-regulatory governance.

Introduction

India posted an impressivegrowth record after economic lib-eralization in 1991. A slow-downduring the world financial crisis of2008-2010 was expected but so toowas a rebound once the crisispassed. The crisis is now fouryears over but the growth recov-ery for India is disappointingly ane-mic. A number of analysts insideand outside the country concludegrowth is obstructed by structuralproblems. Illustratively, IMF Re-port (2014:19) concludes, “Thereis consensus that structural re-forms are going to be the lynchpinof an eventual rebound in growth”.Five key areas of structural reformare listed: (1) power and naturalresources, (2) agriculture, (3)health and education, (4) invest-ment climate, and (5) labor regu-lation.

The IMF report is tactful andframes these structural problems,not as government failures of thepast, but as agenda items for swiftlegislative action going forward.

Bruce E. Kaufman is Professor, Department of Economics,Georgia State University, Atlanta GA USA Department ofEmployment Relations & Human Resources, GriffithUniversity, Brisbane QLD AU. E-mail:[email protected]

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

Other analysts, however, are far morecritical and say these problems have beenallowed to fester and worsen because,rather than take liberalization the nextstep forward, Indian governments of thelast decade have reverted to “the oldrecipe of social spending and industrymandates… and granting massive newentitlements” associated with “Nehru’sturn to Fabian Socialism” in India’s post-Independence era (Dalmia, 2014: 1-2).In a similar vein, the press in India isstarting to wonder if the economic miracleis returning to the more anemic ‘Hindurate of growth’ which Das (2006:2) ex-plains, “had nothing to do with Hinduismand everything to do with the Fabian so-cialist policies of Prime MinisterJawaharlal Nehru”. A well-knownAmerica labor law professor, having re-cently returned from a trip to India, alsoputs the finger of blame for India’s growthproblems on failure to jettison the “hope-less forms of Fabian Socialism thatJawaharlal Nehru, India’s first prime min-ister, brought into public life between1950 and 1990" (Epstein , 2014: 2).

The failed policies associated withNehru and Fabian Socialism provide anatural segue into the implications forlabor law reform of the seminal writingsof Sidney and Beatrice Webb, two of thefounders of not only Fabian Socialism butalso the field of industrial relations(Cole,1943; Harrison, 2000; Kaufman,2004).Many observers believe that Indianlabor law is increasingly out of date, com-plex and burdensome and poses a struc-tural impediment to sustained economicgrowth (VenkataRatnam, 2004; Hill,2009; Saini, 2009; Krueger, 2013). But,

as cited above, a number of analysts alsobelieve that the policies and practiceshistorically associated with the industrialrelations field, particularly as it camefrom Britain and Fabian Socialist writerssuch as the Webbs, are part of the sourceof the labor regulation muddle.

Trade unions have two faces — apositive voice face and a negativemonopoly face.

This article tries to sort through partsof the Webbs’ writings with enduringvalue as guides for industrial relations andlabor law reform and parts of which havebeen shown incorrect or harmful by his-torical experience. Analogous to the ideaof Freeman &Medoff (1984) that tradeunions have two faces — a positive voiceface and a negative monopoly face, it isargued that the theory of the Webbs alsohas two faces, a positive industrial rela-tions face and a negative Fabian Social-ism face. The paper briefly identifies anddelineates these two faces and then ap-plies them to working-out useful prin-ciples for Indian labor law reform. Sincemuch of the existing IR and labor lawliterature in India is descriptive and em-pirical, introducing a stronger conceptualelement may be helpful for both the en-deavors.

American & British Influences

Industrial relations started in the late19th and early 20th centuries as an Anglo-American project among reform-mindedacademics broadly linked to a social-in-stitutional approach to economics, albeit

Labor Law Reform in India


Bruce E. Kaufman


with a clear link to Germany and thatcountry’s tradition of historical econom-ics and active social policy (Kaufman,2004). Industrial relations was a responseto the growing labor problem and atten-dant class-conflict in late 19th centuryindustrializing countries and was posi-tioned as a middle-way solution betweenlaissez-faire orthodox economics andrevolutionary Marxist-radical economics.These Western ideas on a middle waysolution to the labor problem became auniquely Indian third-way approach whenintegrated with the Gandhian philosophyof industrial harmony and self-govern-ment (Bose, 1956).

The concept of industrial relationsand its formalization as a field of teach-ing and research in universities appearedfirst in the United States in the late 1910sunder the leadership of Richard Ely andJohn Commons, institutional economistsat the University of Wisconsin. The in-dustrial relations term in early Americanusage was a short-hand for ‘relationsbetween employers and employees in in-dustry and, hence, at its beginning indus-trial relations was conceived broadly asthe study of the employment relationshipand the labor problems which grow outof it. Illustrative of this broad focus, IRtextbooks often used ‘labor problems’ inthe title (e.g., Labor Problems in Ameri-can Industry, Daughtery, 1933) and fea-tured chapters on personnel manage-ment, trade unions, labor law, social in-surance, and national labor policy.

In Britain, Sidney and Beatrice Webbare widely regarded as IR founders(Hyman, 1989; Ackers & Wilkinson,

2003). They also founded the LondonSchool of Economics (LSE) in 1895.Their seminal contributions, however,were not to launch the IR field itself –labor studies was not part of the earlyLSE curriculum and IR as a constitutedfield of study did not emerge in Britainuntil the late 1940s – but to initiate thestudy of organized labor as a legitimatetopic of scholarly inquiry in England. TheWebbs’ most famous books are Historyof Trade Unionism (1894) and Indus-trial Democracy (1897). They also wroteon other labor topics, such as the poorlaws and labor conditions of women, butlabor law and personnel managementwere peripheral to their research agendaand remained so in the British IR fielduntil the 1980s.

The subject of industrial relations inBritain started out, therefore, more union-centric than in the USA and also substan-tially to the left in the political spectrum(Hyman, 1989; Ackers & Wilkinson,2003; Kaufman, 2014). The Webbs, andtheir intellectual successor G.D.H. Cole,were proponents of democratic socialismand, from experiences such as World WarI and the Great Depression, became in-creasingly outspoken critics of capitalism.The democratic socialist and leftist La-bor Party leaning of British industrial re-lations continued after World War II, al-beit moderated by the Cold War chill ofanti-communism, and found expression inthe Atlee government’s Fabian-inspiredprogram of nationalization of key indus-tries, industrial democracy through wide-spread industry-level collective bargain-ing, steeply graduated income and estatetaxes, and extensive welfare state social



programs (Hinton, 1983). This economicgrowth model, attractive in theory andappealing to anti-capitalist sentimentswidespread at the time, proved debilitat-ing in practice and by the 1970s Britaindeclined to the unenviable status of ‘poorman of Europe.’

As an organized area of teaching andresearch, the early field of industrial re-lations in India has in some visible waysmore affinity to the American model thanthe British. For example, the organizingconcept of labor problems for the studyof industrial relations was widespread inAmerica but not Britain and in India theterm found frequent use (e.g., Agarwala,1947; Mehrotra, 1965). Also, Indian writ-ers followed the American model andincluded within industrial relations the fullrange of topics related to labor problemsand the employment relationship, albeitwith more emphasis on collective thanindividual relations (Seth, 1966). Giri’stextbook is illustrative since it includesseparate chapters for personnel manage-ment, labor law, social insurance, tradeunions, and national labor policy. Also il-lustrative are early issues of IndianJournal of Industrial Relations whichcontain articles on all areas of the em-ployment relationship, including labor lawand management. By way of contrast,the range of topics in early issues of theBritish Journal of Industrial Relationsis noticeably narrower.

America has one of the least regu-lated labor markets among advanced in-dustrial countries and yet India has, bymost accounts, much the opposite with ahighly complex, bureaucratic, and protec-

tive regime of labor law (Debroy &Kaushek, 2005; Venkatta Ratnam &Verma, 2010). One has to conclude there-fore, that while the American model mayhave to some perceptible degree influ-enced the formation of industrial relationsin India as an academic field of study, itsinfluence on the regime of IR institutionsand labor laws actually put in place inIndia pales next to the influence of GreatBritain (Kennedy, 1965). Not surprisingly,therefore, one of the imports from Brit-ain – most visibly and influentially broughtback by India’s first Prime Minister —was the democratic socialist economicdevelopment model espoused by intellec-tuals and political leaders associated withthe Fabian Society, British Labor Party,and other left-leaning groups (Narayan,1964; Nanda, 1996).

Nehru spoke often and eloquently onhis desire to steer India toward a demo-cratic form of economic planning andmarket socialism which was positionedbetween American-style capitalism andSoviet style communism (Akbar, 1990).The exemplars of the period, from whichhe gained inspiration on his extensiveforeign travels throughout Europe in the1910s-1940s, were countries such asBritain, France and Sweden which movedtoward nationalization of core industries,five year economic plans with state di-rected investment, national labor move-ments, social welfare states, state

India has much the opposite witha highly complex, bureaucratic,and protective regime of labor law.

Bruce E. Kaufman


bureaucratic regulation of business, steepincome, wealth, and estate taxes, and anend-goal of ‘euthanasia of capitalism.’American ambassador to India in theearly 1960s, John Kenneth Galbraith, re-called that, “Nehru loved to reminisceabout the world of R.H. Tawney, theWebbs and of Trinity College and Cam-bridge” (Nanda, 1996: 478). Unfortu-nately, India also followed in Britain’spost-World War II footsteps and wentdown the socialist path to ‘poor man ofEast Asia’ by the late 1980s (Das, 2001;Drèze & Sen, 2013).

Two Faces of the Webbs

The Webbs are co-founders of twodifferent intellectual streams of thought.The first stream is a field of labor stud-ies known as industrial relations with rootsin historical-institutional economics andsociology and the second is a collectiv-ist-oriented doctrine of evolutionarydemocratic socialism known as FabianSocialism. Although the Webbs intendboth parts to seamlessly fit together, theynonetheless have an identifiably separatepresence in their work and the latter isconsiderably more radical and transfor-mative than the former. A brief synopsisfollows, labeled as their industrial rela-tions face and Fabian socialism face,respectively.

Industrial Relations Face: A de-tailed review and exposition of theWebbs’ theory of industrial relations isprovided in Kaufman (2004; 2013) andKaufman & Barry (2014). Provided hereis only a brief summary as it pertains toconsideration of labor law reform. A

more general exposition of the industrialrelations theory of labor law is providedin Kaufman (2012a).

The Webbs, like Commons and otherIR founders, were attracted to the studyof labor as a way to discover methods toraise the condition of the working people,reduce class conflict, and make the workworld more efficient, equitable, anddemocratic. They gained insight fromMarx but rejected his theory of classstruggle and proletarian revolution. TheWebbs saw that the labor problem writlarge, and individual labor problems writplural, come from structural features ofthe capitalist employment relationshipwhich can be contained and de-radicalized by institutional reform butnever eliminated.

Central to their diagnosis are threeinteracting factors in a private property,competitive market, laissez-faire system.The first is that human labor is treatedas a commodity to be traded on a buy-low/sell-high basis, putting workers in ade-humanized, insecure, and distrustfulposition which, in turn, undercuts produc-tive efficiency, abuses human rights, andbreeds conflict. The second is that thecapitalist employment relationship con-tains an inherent inequality of bargainingpower between employers and workersin both external and internal labor mar-kets with consequent low wages, longhours, harsh conditions, sizable incomeinequality, and arbitrary treatment, aris-ing from widespread surplus labor, invol-untary unemployment, market and orga-nizational failures, and employers’ unre-stricted private property rights. The third



is that in early capitalism the mass ofworkers are typically given little-to-novoice, representation, and due processrights inside firms, thus making the work-place an industrial autocracy — some-times benevolent but often despotic —while in the polity at large capitalists andthe rich dominate the government and setthe rules of the game to keep labor po-litically and economically subordinatedand exploited.

The Webbs point to many onerous andinequitable outcomes that arise fromthese defects in the capitalist employmentrelationship. Topping their list, however,are two. The first is persistent and wide-spread unemployment which puts theemployer in a despotic ‘take it or leaveit’ position and forces workers to acceptshameful conditions and callous exploi-tation – outcomes orthodox economictheory either denies as a matter of logicor claims flexible wages automaticallyeliminate. The second is glaring socialinjustice when rich, powerful, and sociallyprivileged elites use the government torig the game so they can siphon largesurplus income (economic rents) pro-duced by a mass of common laborersworking all year round in life-shorteningsweatshop conditions.

Having diagnosed the cause of laborproblems in capitalism, the Webbs offer avariety of solutions. They recognize theplace to start an evaluation of labor policyis specification of the social objectiveswhich policy is intended to achieve. Theyfollow orthodox economics and make ef-ficiency the first priority but argue for anenlarged conception of social efficiency.

An economic system is socially effi-cient when it best satisfies consumers’wants but subject to covering all socialcosts of production. For labor, social costincludes minimum sustainable living ex-pense for a worker and family, ability toacquire and maintain the human and so-cial capital required for production, andprovision of workplace conditions andtreatment which cover socially recog-nized human and political rights. Non-la-bor social costs include infrastructure,environmental sustainability, and qualityof life dis-amenities. These costs mustbe covered and incorporated into prod-uct prices or private cost of productionis less than social cost, leading to a nega-tive externality-type market failure.

The Webbs put-forth a two-pronglabor policy program to promote socialefficiency. The first prong is to improvewages, conditions, and treatment forworkers in the lower part of the indus-trial pyramid. Doing so also keeps wagesand labor conditions growing in line withproductivity growth, thus maintainingmacroeconomic demand/supply balanceand social justice (Hobson, 1923; Com-mons, 1934). American writers call thispart of the IR strategy ‘raising the planeof competition.’ To accomplish this goal,the Webbs propose establishment of acommon rule that extends across thenational labor market and requires allemployers to provide a minimum stan-dard of terms and conditions of work.

Since social cost rises over time,so should the level of the minimumstandard.

Bruce E. Kaufman


This minimum is called the Social Pro-tection Floor by the International LaborOrganization (ILO).Since social costrises over time, so should the level of theminimum standard.

Many employers and neoclassicaleconomists oppose protective labor laws,or resist strengthening them, becausethey increase the price of labor, movefirms up their labor demand curves, andreduce jobs (Wachter, 2012). However,what they fail to appreciate is that thisloss of jobs promotes social efficiency bybringing private cost closer to social cost,thus ending an implicit social subsidy forconsumers and firms – particularly theaffluent elite who do most of the con-sumption (Kaufman, 2009). The parallelsituation is loss of jobs when governmentdecides to curb industrial pollution, sayby putting an emissions’ tax on firms.

The social cost common rule can beestablished through one or a combinationof methods, all of which the Webbs pro-moted and were later made staple subjectsin labor problems textbooks. A commonrule, for example, can be established byindustry-wide collective bargaining, protec-tive labor laws such as minimum wagesand maximum hours, social insurance suchas unemployment compensation and oldage pensions, or public sector funded jobsprograms. Setting the common rule is chal-lenging because social cost of labor variesby family size, urban vs. rural location,stage of economic development, and othersuch factors; nonetheless, many countries,including India, specify an official povertyline based on such contingencies so the taskis not insuperable.

Also challenging is the contradictoryrole of trade unions in this process. Onone hand, without a strong labor move-ment workers suffer from an inequalityof bargaining power in labor markets andthe government is inevitably dominatedby business interests who block or greatlyweaken protection for workers throughlabor law and social insurance. On theother hand, a strong labor movement in-evitably leads to many counter-inefficien-cies which frequently grow worse overtime. In the labor market, the initial ef-fect of unions is ‘monopsony-reducing’as they level the playing field and pro-mote social justice; however, over timethey become ‘monopoly-creating’ as theircontinual push for ‘more,’ coupled withonly patchwork organization across in-dustries, gradually leads to inflatedwages, productivity-sapping work prac-tices, and a privileged labor aristocracy(Kaufman, 2012b). Likewise, in the po-litical process unions have a tendency toshift from a broad-based voice of theworking class to a narrow sectional in-terest group largely concerned with pro-tecting their institutional power andmember’s vested perquisites.

The first prong of the Webb’s laborstrategy is to push up on the lower endof the industrial pyramid by using collec-tive bargaining, legal enactment, and so-cial insurance to establish and thengradually raise the plane of competition.The second prong is to push down on thetop end of the pyramid through egalitar-ian social policies and progressive income,wealth, and inheritance taxes. The Webbsagree that people who make largecontributions to production through



successful entrepreneurship, manage-ment, and technical skills deserve higherwages and income. In this respect theWebbs accept the marginal productivitytheory doctrine. However, it is also theirview that much of the income receivedby top-end groups in society takes theform of an economic rent, called surplusvalue by Marx and unearned income byJ. S. Mill.

Much of the income received bytop-end groups in society takesthe form of an economic rent.

An economic rent is created whena resource owner receives a returnhigher than minimum supply price, suchas in the case of a monopoly rent whena firm with market power charges aprice higher than cost of production.From the Webb’s perspective, and asalso expounded by their Fabian col-league Hobson (1923), a significant por-tion of profit, interest, land rent, andhigh-end salaries – factor returns mostlyaccruing to socially privileged people inthe top end of the income and wealthdistributions – are a rent payment madepossible by various natural and contrivedscarcities and barriers to competition.Large CEO salaries, for example, arepartly a payment for valuable leadershipand business acumen but, also, a rentpayment made possible by family con-nections, political patronage, or cronyismwith the board of directors. Similarly, thehigh salaries of doctors, professors, andgovernment officials are partly a returnon human capital investment and hardwork but, for many, also a rent payment

for being born into a socially advantagefamily with the money, social connec-tion, caste, and skin color to first get intoelite private schools and universities andthen high-end professions and corpora-tions.

The nature of an economic rent is thatit can be taxed away without reducingsupply or distorting incentives. Since rentis an unearned income, and because italso provides the affluent and powerfulwith large sums of money to twist thepolitical process to preserve andstrengthen their privileged position, theWebbs were strongly in favor of enact-ing steeply progressive income, wealth,and inheritance taxes. They were alsostrongly in favor of social policies thatbreak down artificial barriers to compe-tition and social mobility, such as con-tained in preferential laws, institutionalrules, and social norms favoring men overwomen, upper class over lower class, andlight-skinned over dark-skinned. Equallyfavored were policies that opened thedoor to equal opportunity, such as qualityuniversal public education and healthcare and civil service rules for govern-ment employment.

Fabian Socialism Face

Part of theWebbs’ claim to founders’status is that they were among the firstwriters to articulate these principles insuch a thorough and penetrating way. Ifthis part of the Webbs’ thought is all thathad influenced Nehru, the post-Indepen-dence history of India would be consid-erably different. However, the influenceof the Webbs, Hobson, Tawney, Besant,

Bruce E. Kaufman


and other Fabianson Nehru and India wasnot primarily through the case they de-veloped for industrial relations but,rather, the case they built for transitionof the national economy from free mar-ket capitalism to democratic socialism andindustrial planning (Narayan, 1964;Akbar, 1990; Das, 2001).

Surveying the history of 19th centuryEngland, Sidney Webb in his chapter inthe Fabian Essays in Socialism (Shaw,1889: 46-47) tells readers of the “hope-less failure of an almost complete indus-trial individualism…[with] unrestrainedprivate property… [and] subjection to apolitical oligarchy”. Like Marx, Webbthought the transition to socialism is in-evitable and, indeed, states, “the eco-nomic history of the century is an al-most continuous record of the progressof Socialism” (ibid.). But unlike Marx,Webb sees no need for class struggleand revolution. He and Beatrice wereconvinced that the wage-earning classwas coming to realize the superiority ofplanned socialism over anarchic capital-ism. They also thought, with the gradualdemocratization of the national govern-ment driven by popular pressure andextension of suffrage, political controlof the state was shifting from the oli-garchy of capital and land owners whodominated Parliament and most ben-efited from laissez-faire capitalism to themass of wage-earners who most ben-efit from socialism. He concludes hischapter, therefore, with this forecast:“private ownership of the instruments ofproduction is irreconcilable with the com-mon weal…[It] keeps the many work-ers permanently poor… in order to make

a few idlers rich…[and] will inevitablygo the way of feudalism which it super-seded” (Shaw, 1889: 81-82). Part of thereason the Webbs founded the LSE wasto train administrators and managers tostaff the future socialist state planningapparatus.

Many socialists are frustratinglyvague about the transformation fromcapitalism to socialism and the institu-tional structure and performance of asocialist economy. The Webbs are ex-ceptions and devote an entire book, AConstitution for the Socialist Com-monwealth of Great Britain (1920), tothis purpose. With the wage-earningclass exercising democratic control ofthe government, a process of national-ization of industry is initiated, startingwith core or ‘commanding heights’ sec-tors (e.g., steel, banking, transport, com-munication) with gradual but not com-plete extension to other sectors. Plan-ning boards are created for each indus-try to make strategic investment, pro-duction, and pricing decisions and exer-cise supervisory oversight of publically-appointed management. Private propertyfor individuals is protected but privateownership of industry is gradually ex-tinguished through a mix of confiscation,fair market value compensation, andsteep profits tax. The end result is the“transformation of profit-making enter-prise into public service” (Ibid: 334) withgreater efficiency achieved by replac-ing capitalist monopoly, waste, andboom-bust cycles with public price regu-lation, scientific enterprise administra-tion, and coordinated planning of produc-tion and investment.



Implications for Labor Law Reform

Nehru and the National CongressParty gradually implemented ademocratic socialist plannedeconomy model for India which inbroad outline matched the Fabianprescription.

Nehru and the National CongressParty gradually implemented a democraticsocialist planned economy model for In-dia which in broad outline matched theFabian prescription and post-war gover-nance regimes in Britain, France, and otherEuropean countries, albeit with numerousIndian adaptations for its status as anAsian developing nation and non-alignedcountry in the Cold War. The initial growthresults were encouraging but then falteredin the 1970s and 1980s amidst rising cri-ses with inflation, balance of paymentsdeficits, and mounting labor strikes(Bhattacherjee, 2001; Nankervis, Cooke,Chatterjee & Warner, 2013: Ch.4).

Many other countries experiencedsimilar problems. In reaction, British vot-ers in 1979 and American voters in 1980decided to shift toward neo-liberalism byelecting Thatcher and Reagan. Althoughthe score card for both leaders is mixed,two trends are clear. The first is thegrowth rate of both economies staged aconsiderable rebound until punctured bythe world financial crisis of 2008-2010,fueled in part by liberalization of productand financial markets and expansion ofsmall-medium entrepreneurial-drivenfirms. The second is that both countriesalso reshaped their labor law regimes

through a two-pronged strategy whichrolled-back union power and collectivebargaining and substituted expansion ofminimum employment standards throughspecific labor law additions. The UK, forexample, adopted a national minimumwage and various European Union direc-tives on work hours and workplace in-formation-sharing while the USAadopted guaranteed family and medicalleave for women workers and discrimi-nation protection for handicapped work-ers. Although neo-liberalism is typicallyassociated with deregulation, it is particu-larly evident in the case of Britain (lessso the USA) that breadth of labor mar-ket regulation actually increased, partlyto fill the void left by receding collectivebargaining and partly to protect the vul-nerable from a market-induced race tothe bottom by setting-up a strengthenedfloor of minimum employment standardsà la the Webbs (Mitchell, Gahan, Stewart,Cooney, & Marshall, 2010).

Now, what about India? To an outsideobserver, it appears that India has only par-tially accomplished product and financialmarket liberalization and barely touchedlabor market liberalization. However, in thecase of labor law the kind of reform that isneeded is only partly liberalization — i.e.,loosening regulatory/legal constraints tospur job-creation by reducing labor cost andpromoting employment flexibility – andmore in the direction of regulatory mod-ernization and improved governance. Thisdimension of the subject is postponed, how-ever, to later in the paper. The strategicpoint of entry into the labor law reformdebate is, perhaps paradoxically, not in la-bor markets but product markets.

Bruce E. Kaufman


India needs to generate roughlytwelve million new jobs each year to keep-up with labor force growth. Further,these jobs need to offer better wages andconditions to satisfy the rising quality oflife expectations of the Indian people.One can reasonably argue about the de-gree of blame to be laid at the door ofEuropean socialist doctrines and theirimportation by Nehru and the CongressParty but, regarding the general argumentthat India still suffers from excessivegovernment intervention and costly eco-nomic regulation, the evidence seemsclear-cut. Indeed, this theme runs like agold thread through books and policy re-ports on the growth prospects for theIndian economy (e.g., Drèze & Sen,2013; Hope, Kochar, Noll & Srinivasan,2013; World Economic Forum, 2014).

Much of India remains mired inpoverty and archaic business prac-tices.

India, as oft-observed, is a land ofsharp contrasts and contradictions(Nilekani, 2009). On one hand, liberal-ization has spawned a rapidly growing ITsector and expanding number of world-competitive companies. On the otherhand, much of India remains mired inpoverty and archaic business practices.Although only an anecdotal account,mentioned earlier was law professor Ri-chard Epstein’s discussion of his first visitto India in early 2014 and in it he pro-vides in microcosm the extent to whichliberalization still remains a considerablyincomplete project (Epstein, 2014).Rather than being able to buy a mobile

phone at one store with a credit card andrelatively transparent and easy-to-com-plete contract, he had to travel aroundthe choked streets of Mumbai to sevendifferent stores to get photographs, pur-chase the phone, purchase the SIM card,on several occasions fill-out lengthy pa-perwork, and always pay with cash. Inthe short-run, this round-about processcreates jobs for the taxi driver, shop keep-ers, and government officials but in thelong-run it keeps India trapped in a lowproductivity third-world type economywith anemic job growth as other Asiancountries gain competitiveness, moveupstream into higher paying manufac-turing, and increase export share at theexpense of Indian companies (Drèze &Sen, 2013).

More comprehensive and authorita-tive evidence on sources of growth inGDP and employment is provided in sev-eral policy reports, such as the WorldEconomic Forum’s Global Competitive-ness Report 2013-2014 and WorldBank’s Doing Business 2014. Both re-ports paint a depressing picture of India’seconomy hobbled by institutional con-straints and mal-governance. In terms ofglobal competitiveness (World EconomicForum, 2014: Table 3), India ranks 60 outof 148 countries and is behind numerousother developing East Asian countries,including Singapore (2), Taiwan (12),Malaysia (24), China (29), Thailand (37),Indonesia (38), and Philippines (59). Interms of ease of doing business (WorldBank 2014, Table 1.1), India ranks 134out of 190. The anomaly of this poor per-formance on competitiveness and busi-ness creation is that when Indian people



emigrate to better governed and moremarket-friendly countries they achieveimpressive success in entrepreneurship,occupational attainment, and family in-come.

Job creation is only another name forwhat economists call labor demand andeconomic theory teaches that the strengthof labor demand is a direct function ofthe strength of product demand. Thus,adopt measures that increase Indian com-panies’ product demand and their labordemand is certain to follow, albeit mod-erated by productivity growth. The mes-sage of this insight for the labor law re-form debate in India is: put strategicemphasis where it counts the most, whichis not in labor markets per se but on im-pediments to growth in product markets.

Put strategic emphasis where itcounts the most, which is not inlabor markets per se but on im-pediments to growth in productmarkets.

Two pieces of evidence support thisproposition. First, the Global Competi-tiveness Report divides countries into fivestages of economic development, start-ing at the low end with Factor Driven, inthe middle with Efficiency Driven, andat the top with Innovation Driven. Thereport also notes that the key drivers ofgrowth differ across stages of develop-ment; for example the best way for aFactor Driven country such as Cambo-dia to improve competitiveness is notnecessarily the best way for an Innova-tion-Driven country such as Germany.

The report identifies twelve ‘pillars ofcompetitiveness’ and ranks the most im-portant for each development stage. Thereport places India in the low FactorDriven stage. At this stage, the report iden-tifies four pillars as critical: Institutions,Infrastructure, Macroeconomic Environ-ment, and Health and Education. If rankedonly on these four competitiveness pillars,India falls from an overall position of 60to 96. In other words, on the critical ‘mustdo’ ingredients for growth India is actu-ally in a considerably worse position thansuggested by its overall competitivenessranking.

Labor Market Efficiency is also oneof the twelve pillars in the competitivenessranking. However, it is rated as a criticalsuccess ingredient only when countries getto the intermediate Efficiency Driven stage– which India has not reached. Further,with respect to labor market efficiency, andfive other pillars considered critical forcountries at the intermediate stage, India’sranking actually rises from 60 to 42.Hence, the evidence is fully consistent withthe conclusion earlier reached by VenkataRatman (2011): excessive and overly rigidlabor regulation is a problem for India butnot the problem.

Additional insight on why labor mar-ket over-regulation is not the strategicfactor with respect to India’s growth andjob creation conundrum comes from read-ing the report’s discussion of the first ofthe twelve pillars, Institutions. It states(World Economic Forum, 2014: 4-5),

“The institutional environment is de-termined by the legal and administrative

Bruce E. Kaufman


framework within which individuals,firms and government interact to gener-ate wealth…[However,] the role of in-stitutions goes beyond the legal frame-work. Government attitudes toward mar-kets and freedoms and the efficiency ofits operations are also very important:excessive bureaucracy and red tape,overregulation, corruption, dishonesty indealing with public contracts, lack oftransparency and trustworthiness, inabil-ity to provide appropriate services for thebusiness sector, and political dependenceof the judicial system impose significanteconomic costs to business and slow theprocess of economic development”.

This quotation highlights fundamen-tal constraints on job creation in Indiabecause they obstruct the long-run pro-ductivity and competitiveness of thenation’s employers (more below). A de-bate on labor law reform, therefore, mustbe broadly framed to include these typesof obstacles in product markets. Short-ening the purchase process for a mobilephone from seven transactions to one isa concrete example.

The second piece of evidence comesfrom the report IFC Jobs Study by theInternational Finance Corporation (2014),a subsidiary of the World Bank. The re-port develops a conceptual framework forthinking about the factors that stimulateand impede job growth. The frameworkbegins with the labor market and theforces shaping labor demand and laborsupply. However, the report also con-cludes that a labor market focus by itselfis greatly incomplete. Illustratively, thereport analyzes responses from manag-

ers at over 45,000 enterprises in 106 de-veloping countries to the question: “Whichof the following elements [15 items in alist] of the business environment, if any,currently represents the biggest obstaclefaced by this establishment?” Respon-dents listed the following items as the topseven: Access to finance, Access to elec-tricity, Informality, Tax rate, Political in-stability, Inadequate educated workforce,and Corruption. Labor regulation was #14on the list and was cited by only 3 per-cent of respondents.

What is the connection between thisdiscussion and the Webbs? One can plau-sibly argue it reveals the fatal contradic-tion in their theory of political economy.The Webbs correctly identify in their in-dustrial relations face that surplus laborand unemployment are the most seriouscauses of poverty, substandard labor con-ditions, and unequal bargaining power.However, they also propose in theirFabian Socialism face a growth modelwhich creates these conditions by stiflingentrepreneurship and capital investment.In fairness, when the Webbs formedtheir opinions on capitalism vs. socialismthe record of capitalism had a number ofserious blotches, including periods ofdeep economic crisis and mass unemploy-ment. Their conversion to socialism wasthus partly born of skepticism that capi-talism could ever produce reasonablysustained and balanced growth. The mostrecent world financial crisis suggeststheir concerns are not to be cavalierlydismissed. Nonetheless, the record of thelast sixty years – with the considerablehelp of economist J.M. Keynes and gov-ernment demand management – suggests



the Webbs picked the wrong horse in thegrowth and prosperity race. Their policyprogram of slowly restricting and nar-rowing the economic space for marketforces and entrepreneurial action ap-pears, therefore, ill-advised and harmfulto the interests of the working classwhich, paradoxically, they sought to pro-mote. Unfortunately, on achieving inde-pendence India also bet on the socialisthorse and seven decades later the perni-cious effects in stifled product marketperformance are still reverberating intolackluster labor market performance.

Regulation & Performance of LaborMarkets.

The message of the previous sectionis that all of India’s labor laws and regu-lations can be shredded and the positiveeffect on economic growth is likely sec-ond-order. But, at least in industrial rela-tions, this scenario is not countenancedeven if it were politically feasible. Thereason is that industrial relations has fromits beginning days maintained that capi-talism functions best when labor law andsocial insurance are used to stabilize,balance, professionalize, and humanizelabor markets and workplaces (Budd,2004; Kaufman, 2004).

Diagrammatically, IR theory predictsthe relationship between labor marketregulation and economic performance isan inverted U (regulation on the horizon-tal axis from 0% to 100% and GDP/jobgrowth on the vertical axis) so that opti-mal labor law is not zero but an interiorpoint somewhere in the moderate middle(recalling IR = the ‘middle way’). One

notes that proponents of neo-liberal freemarket economics, such as ProfessorEpstein, disagree with industrial relationsproponents on this critical point. Epstein(2012:203) advances a close-to-zero po-sition, stating, “Why not try competitionacross the board – which would lead torepeal of virtually every labor law thatregulates wages and terms of employ-ment, except perhaps with respect tohealth and safety?”

The IR answer to his ‘why not?’ ques-tion comes from the Webbs, Commons,Gandhi, and other proponents of a humanconception of labor (Kaufman 2010,2012a). That is, when labor is treated asa commodity in unprotected external andinternal labor markets the results are likelyto be closer to the predictions of KarlMarx than Milton Friedman. Reasons arebecause productivity sinks (from low mo-rale, trust and cooperation), firms skimpon investments in human capital and hu-man resource management, costs esca-late from high turnover, conflict, and shirk-ing, and workers look to militant unionsand socialism for protection. Note may bemade here that in this regard the IR argu-ment for labor law is paradigmatically dif-ferent from the standard neoclassicalmodel. In the latter, a competitive labormarket is the ideal and labor law is sanc-tioned only in the case of irremediablemarket failures; in the former, a competi-tive labor market is far from ideal as abasis for a high-performance employmentrelationship and labor law is required tocreate order and stability (Kaufman, 2010;2012a). Thus, from an IR perspective,Fabian Socialism does not provide theoptimal amount of labor regulation (to the

Bruce E. Kaufman


right of the inverted U) but neither doesfree market neo-liberalism (to the left ofthe inverted U).

Little doubt exists that Indianeeds a substantial overhaul of itslabor law regime.

Little doubt exists that India needs asubstantial overhaul of its labor law re-gime. The basic framework was createdin the late 1940s-early 1950s, but withsubstantial roots in British colonial stat-utes going back to the 1920s. Maintain-ing industrial peace was then the centralgoal, partly a reflection of British impe-rial interests but also the Gandhian em-phasis on social harmony (Kennedy,1965; Sundar, 2010). Not even the mostpresciently designed labor law system,however, can remain a good fit in the2010s when designed more than a half-century earlier for a largely rural, handi-craft, and informal economy. Of course,Indian labor law has not been completelystatic over the decades and economic lib-eralization and globalization of productmarkets have increased the pressure forchange. Also, labor law reform has beenthe subject of numerous commissions,reports, political speeches, and propos-als to Parliament (Venkata Ratnam, 2004;Shah, 2013). To the frustration of actorsin all parts of the IR system, however,direct government action has been ex-ceedingly slow, particularly at the nationallevel.

Where change in labor regulation hasoccurred, the movement is sometimes inthe wrong direction. For example, the

labor law provision which critics cite asthe impediment to growth (Das, 2006;Datta & Sil, 2007; Krueger, 2013) – theban in the Industrial Disputes Act (1947)on terminating workers and closing es-tablishments – has been revised over theyears but by lowering the employmentthreshold so it covers not only large firmsbut numerous small-to-medium sizedfirms (firms with more than 100 employ-ees). Even people committed to fully pro-tecting workers’ rights can see that thisrule – coupled with equally restrictivebusiness insolvency rules — imposespotentially severe financial risks and pen-alties on firms in a market system withfluctuating sales due to product lifecycles, business cycles, and seasonalcustomer orders. Further, this rule under-mines competitiveness and economicdevelopment by incenting investors andentrepreneurs to keep firm size below the100 person floor, thus sacrificing econo-mies of scale and modern productiontechnology and exacerbating industrialdualism and a stunted manufacturing sec-tor (Debroy,2005; Kruger, 2013; Kumar,2014). Companies also evade the rule byhiring more contract workers and clos-ing down facilities through the subterfugeof a labor dispute lock-out.

Looking at the Indian labor law re-gime through the lens of the Webbs’ in-dustrial relations face, two structuralproblems look most important to reform.Recall, as context, the Webbs seek topromote social efficiency and justice byusing legal enactment and trade unionsto push-up on the lower end of the in-dustrial pyramid and push-down on thetop end. The first structural reform, there-



fore, is of the ‘push-up’ nature, achievedby extending the basic protections of la-bor law to a much larger part of theworkforce. This task is difficult because60 percent of the Indian workforce is stillin the agricultural sector and anotherlarge share are wage workers or self-employed in the informal sector (Hill,2009; Venkatta Ratnam & Verma, 2010).But, in another reflection of extreme eco-nomic dualism, the main corpus of Indianlabor law applies to only about 7 percentof the labor force, limited mostly topeople in the organized sector (Shah,2013). In the Indian context, ‘organizedsector’ includes all public sector organi-zations and private sector non-agricul-tural enterprises with 10 or more employ-ees.

The Webbs advocate that a commonrule be established across all labor mar-kets – including the market for day la-borers, contract workers, and self-em-ployed – which provides minimumwages, conditions, and treatment conso-nant with social costs and human rights.Nine out of ten people in the Indianworkforce do not have this minimumguarantee and several hundred millionlive in abject poverty (Hill, 2009). Hence,the first-prong of labor law reform is tobroaden the base of coverage. An ex-ample in this spirit, defects in implemen-tation and administration notwithstanding(Shankar & Gaiha, 2013), is the Ma-

hatma Gandhi National Rural Employ-ment Guarantee Act (MGNREGA) – alaw passed in 2005 which guarantees 100days of wage employment to rural house-holds if adult members volunteer for un-skilled manual labor on communityprojects. Also illustrative are various in-come supplement devices, such as forwidows, disabled, and retired people, un-der the National Social Assistance Pro-gram (1995), although it so far providesbenefits to only 21 million people(Subrahmanya, 2013).

The first-prong of labor law reformis to broaden the base of coverage.

The Webbs also counsel using le-gal enactment to push-down on the topof the industrial pyramid on the argu-ment that a significant part of the highearnings of the affluent elite is eco-nomic rent siphoned from societythrough monopoly market barriers, gov-ernment-created privileges, and closedfamily and social networks. Part of thesuccess of the Indian economy over thelast two decades is that it has createda new middle class, numbering approxi-mately 50 million or 5 percent of thepopula t ion . However, i t has a lsospawned a tiny elite of super-richwhose share of the country’s wealthhas skyrocketed from 1.8 percent to 26percent (Peeples, 2014). Some of thesuper-high income is a much deservedreturn to entrepreneurship and capitalinvestment; however, another portion isfrom gaming the system. As part of lib-eralization, India also substantially re-duced the progressivity of income tax

The main corpus of Indian labor lawapplies to only about 7 percent ofthe labor force, limited mostly topeople in the organized sector.

Bruce E. Kaufman


rates and eliminated an estate tax. La-bor law (broadly defined), therefore,needs to counter this trend toward rent-seeking and inequality. One avenue issocial initiatives to open-up access tohigh income parts of the job distribu-tion, such as greater educational oppor-tunities for society’s poor and disad-vantaged and greater legal enforcementof hiring, promotion and pay on the ba-sis of merit rather than connection andcaste (Bhandari, 2014). The other av-enue is to impose higher effective taxrates on family income through base-broadening and better enforcementwhile shutting-off egregious sources ofrent-skimming, such as the too-oftencorrupt process of awarding public con-tracts.

Finally, although nearly all commen-tators say touching trade union law ispolitically impossible, a Webbian perspec-tive suggests that here too significantreform is needed. Currently trade unionsrepresent perhaps as few as 3 percentof the workforce (Sundar, 2010), mostlyin the small organized sector and oftenin public sector employments, and exacta considerable efficiency cost throughrestrictive employment practices, politi-cal infighting, and adversarial relations.Labor law reform should take politics andconflict out of union recognition and col-lective bargaining by institutionalizing rec-ognition and bargaining procedures(Venkatta Ratnam, 2004); the same pro-cedures would help shift trade unionsfrom an entrenched protector of a nar-row-based labor aristocracy to a broader-based but less adversarial and politicizedworkers’ representative.

Effective Implementation & GoodGovernance

Liberalization in the early 1990sopened-up the opportunities and incentivesneeded to fuel a growth surge but, as notedin the introduction, the surge may havefaded. Observers can pick-out a varietyof structural reforms, including labor re-form, which will help put stronger windinto India’s economic sails. None of thesereforms are likely to make much differ-ence, however, if not well implemented,administered, and governed. Here seemsto emerge the critical weak spot in India’sfuture and thus the key point for strategicattack (Nilekani, 2009; Debroy, Bhandari,2013; World Economic Forum, 2014) Das(2006:1) remarks about India’s growthsurge, “what is most remarkable is thatrather than rising with the help of the state,India is in many ways rising despite thestate”. He adds, “Although Indians blameideology (and sometimes democracy) fortheir failings, the truth is that a mundaneinability to implement policy – reflecting abias for thought against action – may havebeen even more damaging” (ibid: 2). Thesame diagnosis is made by NandanNilekani (2009:457), founder of one ofIndia’s IT success stories, Infosys Tech-nologies Ltd. “Implementation, sadly, haslong been India’s weak spot”.

Indian workforce is the most highlyprotected in East Asia.

India currently has more than 45 na-tional-level labor laws and five times thatmany at the state level (Debroy &Kaushek, 2005), making the Indian



workforce the most highly protected inEast Asia (Basu, Fields & Debgupta,2000). The reality, however, is starklydifferent. Due to substantial dualism,about 10 percent of the workforce en-joys too much labor protection while theother 90 percent enjoys too little. How-ever, many Indians feel cynical and frus-trated about the government’s ability toredress this imbalance (Debroy &Bhandari, 2013; Transparency Interna-tional, 2014), albeit with a bounce in hopethat the new Modi government can dobetter.

Implementation and governance areseparate but related dimensions of insti-tutional performance. Implementation oc-curs after a labor law is passed; for ex-ample, firms need to make sure they arepaying at least a minimum wage and gov-ernment must monitor and enforce com-pliance. Governance is faithfully and effi-ciently executing the law and keeping itfree of corruption. By some accounts,India currently has the worst-performingbureaucracy in East Asia and the nationranks 94 on perceived corruption (Politi-cal & Economic Risk Consultancy Ltd,2013; Transparency International, 2014).This nation-state problem is reflected inlax labor law implementation and corruptgovernance. For example, labor inspec-tors are bribed, firms keep double sets ofaccounting and payroll records, union of-ficers take kick-backs, and governmentprogram administrators embezzle funds.It is estimated that only 15 percent of thegovernment’s anti-poverty funds reachedthe poor in the mid-2000s (“Corruption inIndia, Cause of Instability & Inequalities,”poverties.org/corruption-in-india, 2014)

and the annual funds diverted throughcorruption are one-third larger than totalgovernment expenditure on health care(“Corruption – An Epidemic of Epic Scalein India,” Huffington Post India, May 5,2014).

The point to be emphasized, therefore,is that enacting new labor laws and modi-fying existing ones is only part of the la-bor law reform battle. Attention must alsobe given to the unglamorous but criticalaspect of implementation. This insight ishardly new. American IR founder JohnCommons noted (Commons &Andrews,1936: 448), “More important than thehasty enactment of additional laws is theadoption of methods of administration thatwill enforce them. It is easy for politiciansor reformers or trade union officials toboast of new laws which they have se-cured for labor, and it is just as easy tooverlook details or appropriations or com-petent officials.” Translated into the in-verse U- shaped diagram of optimal laborregulation (earlier cited), this considerationmakes the theory more complicated be-cause it is not only an issue of too muchor too little regulation but, perhaps moreimportantly, better regulation.

The Webbs were quite mindful of theimportance of efficient and honest laborregulation and, indeed, as earlier notedthey founded the LSE in part to train high-class managers and administrators for thenew socialist planned economy. TheWebbs were optimistic for they thoughtEngland possessed one of the finest gov-ernment bureaucracies in the world (Webb&Webb, 1920: 319). As it later proved, theWebbs were too optimistic on the possi-

Bruce E. Kaufman


bilities of socialist administration and hereis another fatal flaw in their politicaleconomy. Commons (1921) judged theWebbs woefully naïve about the possibili-ties of administering a socialist state andconcluded such a system was an impossi-bility in the USA because the Americanpeople are “administratively incompetent”(Commons, 1934: 846).

When the Webbs visited India in 1911,they were impressed with the quality ofgovernance exhibited by Indians recruitedinto the Indian Civil Service, although onthe voyage home Sidney Webb wasmoved to say, “Three months’ acquain-tance has greatly increased our estimateof the Indians, and greatly lessened ouradmiration for, and our trust in, this Gov-ernment of officials” (Jayal, 1987: 209).In rendering this negative verdict, how-ever, Webb noted that “we have found theBritish officials more inaccurate and moredisingenuous than the Indians” (ibid: 119).Braibanti (1963) claims the Indian gov-ernment administration was among thedozen best performers in the 1950s; otherobservers, however, questioned at the timewhether Nehru’s idealism and faith inpeople were matched by the administra-tive capacity of the Indian state and indi-cate that corruption was growing aroundhim (the Gorwala report of 1951, cited inAkbar, 1990). These fears turned out tobe justified and India has traveled a sixdecade path toward less efficient and hon-est administration. The USA featured ram-pant corruption and mal-administration ingovernment in the 19th century and oneof the keys to its successful developmentin the 20th century was reforming a dis-eased system from within. Here, it seems,

is a similar institutional challenge for In-dia and of which labor reform is a part.

Conclusion

The Webbs’ writings present a mixedpicture with respect to Indian economicdevelopment and industrial relations poli-cies. The industrial relations part contin-ues to provide sound principles, such as anational minimum set at the social cost oflabor. The Fabian Socialism part of theirwritings, however, has proved a recipe forsclerotic growth. This paper tried to un-tangle these diverse threads and work-outthe implications for restructuring Indianlabor law. Partly this exercise is usefulbecause it stimulates thinking about theindustrial relations field and, in particular,to what extent it has general principles andconcepts useful for framing the reformdebate and guiding it to a consensus pro-gram. Also, the debate on labor reform inIndia seems to follow along a fairly well-worn groove of analysis so perhaps bring-ing a different perspective to the matter àla the Webbs is useful for stirring newthinking and dialogue.

India is long over-due for substan-tial modernization and rationaliza-tion of its labor law regime.

India is long over-due for substantialmodernization and rationalization of itslabor law regime; a large cross-sectionof Indian people recognize this impera-tive; many books, papers and reports withdetailed recommendations have beenwritten on the subject; and yet frustrat-ingly little happens. Possibly the Webbs



and the Fabian tradition make a contri-bution of a different kind for people whowant change but are discouraged. TheFabian founders chose to name the or-ganization after Roman emperor FabiusMaximus, renowned for his patience be-fore launching an attack on the enemy.Even if the socialism part of the Fabianlegacy is not helpful for the Indian IR fieldand labor law reform project, certainlyhelpful in a messy democracy is the pa-tience and perseverance part.

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By Invitationsas

Rethinking Labor Law Reforms

Arun Maira

Indian labor laws must be im-proved. The improvements re-quired must emerge from a dia-logue between representatives ofemployees and employers. Thefailure to make any significantimprovements in the laws so far,in spite of demands for overtwenty years from both employ-ers and unions, suggests that theprocesses used so far to try tochange the laws have not beenable to produce the required out-come. The paper also outlinesthe India Backbone Implementa-tion Network, a Planning Com-mission initiative, conceivedalong with the 12th Five YearPlan by the Steering Group forManufacturing.

Introduction

“If you don’t know where you aregoing, you will end up somewhere else”,warned Casey Stengel, a famous base-ball player. India needs to create morejobs. For that, it needs to build a com-petitive manufacturing sector. The drum-beat of (mostly right-wing, free market)economists and employers asserting thatIndia must change its labor laws to per-mit easier firing of workers is misdirect-ing the country from its goals.

Do we want a sustainably strongmanufacturing sector, or do we merelywant to change our labor laws? We muststay focused on our goals of a competi-tive manufacturing sector and more jobsand not get distracted by a rather shal-low presumption that easier firing ofworkers will lead to growth of competi-tive manufacturing enterprises. Let usunderstand the relationship betweenthese two objectives: one supposedly themeans to the other.

At the outset, it must be admitted thatchange in Indian labor laws is overdue.Many are very old and must be up-datedto suit present conditions. There are toomany laws and regulations, sometimescontradicting each other. And the laws

Arun Maira is Ex-Member, Planning Commission.E-Mail: [email protected]


are not implemented properly, perhapsbecause many cannot be implemented inpractice, or because the governmentmachinery to implement them is inad-equate. Not only are employers demand-ing improvements in labor laws, unionsare too. We will return to the questionsof what the thrust of changes should beand how to bring them about. First, let usexamine what is required to grow India’smanufacturing sector to create moreemployment.

Constraints on Growth

Labor laws are not the principal con-straint, or even amongst the top three orfour constraints on the growth of India’smanufacturing sector. Many surveys inthe past few years, conducted by sev-eral industry associations, consulting or-ganizations, and government commis-sions have revealed this. The principalconstraint, for both large and small en-terprises, is the quality of the businessregulatory environment. India ranks to-wards the bottom of the World Bank’srankings of countries for ease of doingbusiness and its position has been slip-ping. Implementation of business regula-tions is more corrupt, confused, and tardyin India than in other countries. This de-ters investments from abroad and fromIndian investors too. It especially saps theproductivity of small enterprises wherethe owner has to personally respond tothe regulators when he is also the man-ager of the business to which he mustgive more attention. Since small enter-prises are the largest creators of employ-ment in the manufacturing sector (andaccount for a large share of its produc-

tion and exports too), political and bu-reaucratic capacities (which are con-strained too) should be applied to addressthis number one constraint on the pro-ductivity and growth of manufacturingenterprises, and not be distracted towardslower order constraints such as the os-tensible difficulties in firing workers.

The second, almost equally large im-pediment for the productivity and com-petitiveness of manufacturing enterprisesin India is inadequate physical infrastruc-ture for transportation and power sup-ply. Indian IT enterprises are not handi-capped by these shortcomings and somany have grown to be world-class com-petitors. However, manufacturing enter-prises have to convert stuff and movestuff, and this requires energy and physi-cal transportation. They are severelyhandicapped by the poor infrastructure:it adds to costs and delays and reducestheir international competitiveness.

The third constraint is the availabil-ity of skilled manpower. Since thecountry’s objective is to employ morepeople in manufacturing, and since skilledpersons can also improve the productiv-ity and competitiveness of enterprisesthey work in, this constraint must be re-lieved very vigorously. A national skillsmission has been launched with impres-sive targets. It needs much more partici-pation of employers for development ofrequisite skills: more about this later.

Large enterprises and MSMEs havedifferent constraints. In fact, one of thegreatest constraints on the growth ofsmall enterprises in India is the availabil-



Arun Maira


ity and cost of credit, whereas large en-terprises do not have a problem obtain-ing loans from banks and at lower ratesthan MSMEs (though the cost may behigher than in other countries). The dis-tinction between the needs of large en-terprises and SMEs must be always re-membered while devising strategies togrow India’s manufacturing sector. Toomuch of attention of policy-makers isgiven to the views of large enterprises,who get the attention of policy-makersthrough powerful business associationsand directly too, rather than the perspec-tives of SMEs.

Some economists have pointed outthat India’s manufacturing sectorhas a ‘missing middle’.

MSMEs and larger enterprises havedifferent issues with labor laws. ManyMSMEs are in the informal sector. Manyof those in the formal sector fall belowthe threshold limits of industrial relations’laws. They do not need more freedom tolegally hire and fire: their contracts withemployees are informal and flexible. Itis the large enterprises who say they areimpeded by laws that make it difficult forthem, legally, to fire their employees.They have got around the restrictions byemploying large numbers of contractworkers, always at lower costs than per-manent employees. Therefore, in prac-tice, the labor laws have not come in theway of their hiring more people. So, ifthese enterprises have not grown andhave not hired even more people, theconstraint has not been the labor laws.Other constraints, mentioned before, have

restrained their competitiveness andgrowth.

Some economists have pointed outthat India’s manufacturing sector has a‘missing middle’. There are too manyMSMEs, and some large companies, andtoo few in the middle. They point to abarrier that MSMEs do not wish to crossto become bigger. According to some ofthese economists, the barrier is the oner-ous restrictions on firing people once theenterprises become larger. However, assuggested here, this may not be as muchof a restriction as it is made out to be.Other factors impede growth even more.

Such an architecture has beenmooted by the NMCC and MSMEministry. This would give incen-tives to MSMEs for a fixed num-ber of years.

The MSMEs themselves point outthat the architecture of incentives toMSMEs induces them to stay small. In-centives are given to enterprises belowa threshold size. Therefore, when theycross that threshold, they lose the sup-port. So they would rather multiply num-bers of small units, each of them gettingthe incentives, than grow a large one andlose them. An alternative architecture ofschemes to assist MSMEs is required ifthe objective is to help them grow stron-ger and larger. Such an architecture hasbeen mooted by the NMCC and MSMEministry. This would give incentives toMSMEs for a fixed number of years,during which they must make all effortsto improve their productivity and grow,



because they will lose the incentivesthereafter. This will motivate small en-terprises to learn and improve faster andcross into the zone of the presently ‘miss-ing middle’.

The strategy to grow Indian manu-facturing enterprises must be to improvetheir competitiveness, rather than to pro-vide them with protection against largerand stronger competitors. To improvetheir competitiveness, enterprises mustbe faster learning than others. The onlyresource in a manufacturing enterprisethat has the ability to learn and improveits capability and productivity are its em-ployees. The capability of all other re-sources—machines, buildings, materi-als—depreciates with time, inevitably.Far-sighted employers understand thatemployees are the only ‘appreciating as-sets’ of a manufacturing enterprise. Mo-tivated and enabled employees canalso improve the capability of theenterprise’s manufacturing processesand the productivity of its machines.

People, Skills, Jobs

India has the world’s largest pool ofyoung persons seeking jobs. Human be-ings are a trainable resource. Manufac-turing enterprises in India, wanting tocompete with enterprises in other coun-tries should design their manufacturingsystems to use more human beings andless capital. A manufacturing enterprisein India that has the ability to improveemployee skills can count on a continu-ing supply of trainable people, and thushave a sustainable competitive advantageover enterprises elsewhere.

The Planning Commission asked Bainand Company to do an independent, ob-jective evaluation of the co-relation ofcompetitiveness of Indian manufacturingenterprises and their industrial relations’practices. Bain connected the economicperformance (growth, profits) amongstIndian enterprises in several manufactur-ing sectors with their orientation towardsemployees. The study confirmed thatenterprises in which employees weretreated as ‘appreciating assets’ producedbetter economic results over the long runthan their competitors who took a moreshort-term, ‘cost’ oriented view of em-ployees.

Enterprises in which employeeswere treated as ‘appreciating as-sets’ produced better economicresults over the long run thantheir competitors.

Economists who wish India wellwould want manufacturers in India toemploy more people and pay them bet-ter too. More employment and more earn-ings will give a boost to economic growth.However, this win-win solution is notbeing realized because owners of enter-prises are facing problems with employ-ees. Employees do not have the requi-site skills, they say. When employees aredissatisfied they can create industrial re-lations problems. Therefore the generalresponse of employers, with a few no-table exceptions, is either, use machinesinstead of people if they can afford them(the cost of capital is high in India, andSMEs cannot raise it easily) or, hire moretemporary/contract workers, who do not

Arun Maira


yet have the ability to organize themselves(though they are beginning to), and areeasier to fire legally.

Such tactical manoeuvres are dia-metrically opposed to the strategy tomake India a globally competitive manu-facturing hub. There is little incentive totrain temporary/contract workers, so skilldevelopment is constrained when Indiais crying for more skill development.Moreover, contract workers are paidmuch less than others, leading to indus-trial relations disputes. Thus employers’relationships with people in their enter-prises are becoming fraught. With thistrend, manufacturing may be in a down-ward spiral, at a time when, for improve-ment in competitiveness of Indian manu-facturing enterprises, people (and moreof them) must be at the heart of enter-prises’ strategies.

To build a globally competitive manu-facturing sector, India must expand thescope of its vocational skills program.More technically skilled workers are re-quired of course. Even more than thatperhaps, employers in the garments andother labor-intensive sectors say theyneed good supervisors who can managework and people well. Productivity im-provements and skill development hap-pen on the shop floor and good supervi-sors are critical for these.

Above all, the country needs verygood systems’ and people managers whowill improve competitiveness of manu-facturing enterprises by managing theinterplay of the many systems that inter-act to create faster learning enterprises.

These systems include material flows,information flows, processes for quality,productivity improvement, and very im-portantly, the human side of the enter-prise.

Manufacturing management mustbecome an attractive vocation forIndia’s best engineers.

India’s massive vocational skills pro-gram must address the need for bettermanufacturing managers too. ‘Manufac-turing management’ must become an at-tractive vocation for India’s best engi-neers, whereas they have been gravitat-ing to the IT industry, building its inter-national competiveness, at the cost ofIndia’s manufacturing sector. Churningout more skilled workers can be a socio-economic fix that will back-fire if theseskilled workers do not find jobs. To cre-ate jobs, the competitiveness of Indianmanufacturing enterprises must be rap-idly improved. To improve the enter-prises’ competitiveness, better manufac-turing managers with skills to nurturehuman assets and manage complex sys-tems will be required in much larger num-bers than what India is generating atpresent.

It is not surprising that countries suchas Germany, Japan, and Sweden, whichhave maintained (and even increased) thecompetitiveness of their manufacturingsectors, even as wages increased andtheir currencies became stronger, havea long term orientation towards humanassets. In these countries, there is muchgreater commitment to the continuity of



employees in service. To them, ‘flexibil-ity’ in employment is the ability of em-ployees, supported by employers to learnnew capabilities, rather than the flexibil-ity of employers to quickly dispense withemployees’ services.

For India to reach its goal, of creat-ing 100 million additional jobs in manu-facturing, which it must, owners andmanagers of manufacturing enterprisesin India must treat human beings as theircore asset and not a problem to beavoided.

What about Labor Laws?

We return now to the question of la-bor law reform. Labor laws must be ex-amined by keeping in mind the goal wewant to achieve. Which is to grow India’smanufacturing sector and employment init. Whatever reforms are to be made inthe labor laws must be assessed with thisgoal in mind and must support the strat-egy required to reach it.

Relations between employers andemployees must become co-opera-tive, not confrontational.

The strategy has to be to build rapidlearning enterprises with employees attheir heart. Relations between employ-ers and employees must become co-op-erative, not confrontational. Together,enlightened employers and responsibleunions must establish processes that willbuild trust within enterprises. Together,they can determine what changes in la-bor laws are required. Industrial relations

will be damaged if Government forcesany changes in labor laws that are notfounded on an understanding betweenunions and employers about whatchanges are required to ensure fairnessto employees and enable faster learningand improvement of competitiveness inenterprises. It is not politically feasiblefor Government to change the laws with-out the support of both unions and em-ployers. The lesson from France is in-structive. The productivity and growth ofFrance’s manufacturing enterprises havebeen hampered by rigid labor laws. Lastyear, the French government changed thelaws without too much contention. Theminister-in-charge explained that theGovernment was able to make thechanges because the unions and employ-ers, following the German example ofcooperation, came to an agreement aboutthe changes required which they put tothe Government to implement.

The World Bank’s annual World De-velopment Report, 2013 focused on ‘Jobs’.The need to create good quality jobs hasbecome a major challenge for policy-mak-ers in many countries, including developedones where youth unemployment is over25%. The Report points towards ap-proaches that policy-makers should adoptto create jobs. It says:”A careful reviewof labor policies in developing countriesyields a mixed picture. Most studies findthat impacts are modest—certainly moremodest than the intensity of the debatewould suggest. Across firm sizes and coun-try levels of development, labor policies andregulations are not among the top three con-straints that formal private enterprisesface.”

Arun Maira


“There is no consensus on what thecontent of labor policies should be. Viewsare polarized, reflecting differences infundamental beliefs. To some, labor mar-ket regulations and collective bargainingare sources of inefficiency that reduceoutput and employment, while protectinginsiders at the expense of everyoneelse…..To others, these policies providenecessary protection to workers againstthe power of employers and the vagar-ies of the market.”

The Report says, “The challenge isto set labor policies on a plateau—arange where regulations and institutionscan at least partially address labor mar-ket imperfections without reducing effi-ciency.”

The ‘plateau’ is a coherent combi-nation of regulations, processes, and ori-entations amongst the stakeholders—employers, workers and their represen-tatives, and regulators. The plateau (orthe edge) between too rigid regulationsand too little regulation, and between scle-rotic institutions and no legitimate insti-tutions, has to be found in each country,within each region, and even within en-terprises. Within the same country andthe same national labor laws, some re-gions and some enterprises have moreharmonious human relations and therebymore competitive enterprises.

The discovery of the plateau requiresdeliberations amongst the stakeholders atregional, state, and enterprise levels.Changes in labor laws may be necessary,and in India some changes are required.However, the discovery of what these

changes will emerge from the stake-holder engagements that will address thecomposite of processes, orientations, andregulations. The changes required in lawscannot and must not be debated in isola-tion of these grounded, multi-stakeholderengagements. Reforms in processes arecritical; not merely reforms in laws.

Improving Trust & Co-operation

Indian labor laws must be improved,as mentioned before. However, the im-provements required must emerge froma dialogue between representatives ofemployees and employers. We must findour own ‘plateau’. The failure to makeany significant improvements in the lawsso far, in spite of demands for overtwenty years, from both employers andunions, that something should be donesuggests that the processes used so farto try to change the laws have not beenable to produce the outcome required.

The tripartite Government-led pro-cess (the Indian Labor Confer-ence) has not been able to over-come the trust deficit betweenunions and employers.

The India Backbone ImplementationNetwork (a Planning Commission sup-ported initiative, about which more willbe said later) has examined several pro-cesses that have been applied so far. Theexamination revealed that the tripartiteGovernment-led process (the Indian La-bor Conference) has not been able toovercome the trust deficit between unionsand employers. Agreements supposedly



reached at its meetings are not followedthrough. On the other hand, bi-lateralprocesses, such as those facilitated bythe ILO, do enable better dialogue. Butthey are not able to convert discussionsinto enforceable decisions because Gov-ernment seems a reluctant participant inthem.

The India Backbone ImplementationNetwork was conceived along with the12th Five Year Plan by the Steering Groupfor Manufacturing. The Group hadagreed, at the outset, that a plan to cre-ate 100 million additional jobs in the manu-facturing sector, by improving the com-petitiveness of enterprises and acceler-ating the growth of the sector (which hasbeen languishing at below 16% of GDP)will not be sufficient. The root causes forthe country’s failure to implement its pre-vious plans to grow manufacturing mustbe analyzed and addressed too. The rootcauses for slow implementation, it wasfound, were (1) unresolved contentionsamongst stakeholders on a variety of is-sues (land requirements, environmentclearances, industrial relations, etc) and(2) confusion in implementation of solu-tions even when there was agreement.For these reasons, infrastructure is notbeing built fast enough, projects are stuck,skills are not being developed adequately,etc.

The Planning Commission set aboutfinding ways to convert contention intocollaboration, confusion into coordination,and thereby convert intentions into imple-mentation. Processes and techniques forthis were searched for in countries thathave good track records for building

sustainably strong manufacturing sectorsby cooperation amongst stakeholders.The India Backbone ImplementationNetwork (IbIn) was created to promotethe use of such approaches in India toaccelerate the growth of employment inIndia’s manufacturing sector.

IbIn has brought national unions andemployers’ federations together to con-sider some fundamental questions for co-operation:

• Do ‘we’ seriously want to improveindustrial relations?

• What is required to be done by us‘together’ to enable improvement ofindustrial relations?

• Are we willing to try a better methodto achieve our objective?

Several meetings have been heldamongst the stakeholders. There isagreement that both unions and employ-ers want better industrial relations, andfor this the trust deficit between themmust be reduced. This will require agreater willingness to listen to each otherand co-create solutions. Both sides haveagreed that they must follow a system-atic ‘IbIn’ process which will move alongtwo tracks:

1. Resolve issues that have not beenresolved so far, systematically, witha better process (For the record here:the principal, urgent issue in large en-terprises is contract labor, and forMSMEs it is social security. The rightof employees to form unions is theother important issue.)

Arun Maira


2. Pay explicit attention to the qualityof the process of dialogue, andstrengthen it to increase trust andcreate a stronger platform for thestakeholders’ dialogue for solutions

The second objective, the building ofa strong platform for purposeful dialogue,is essential to achieve the first objective.A strong platform will produce severalbenefits:

• The root causes of poor productivityand competitiveness of manufactur-ing enterprises will be analyzed, andcan then be addressed

• Better practices for addressing theseroot causes and improving industrialrelations will be discerned and dis-seminated

• There will be agreement on whatchanges are required in the contentand in the implementation of labor

laws to improve competitiveness ofmanufacturing enterprises, grow themanufacturing sector, and increaseemployment

An understanding of what changesshould be made in the labor laws will bean outcome of a process of cooperationbetween unions and employers’ federa-tion. Attempts to force a change in laborlaws to enable easier firing of employ-ees, which is being demanded by someemployers and some economists, willdecrease trust which is insufficientamongst employees and employers,when there is need to increase trust.

A stronger platform for dialogue isrequired. Using this platform the stake-holders in India can discover the ‘pla-teau’—the combination of practices, pro-cesses, and laws—that the World Bankreport on Jobs has analyzed as the policysolution for accelerating growth of em-ployment in manufacturing in all coun-tries.

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]


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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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By Invitationsas

Labor Market Flexibility & Trajectories ofDevelopment: Lessons from Brazil, India & China

Anil Verma & Ana Virginia Moreira Gomes

In China, labor policy first dilutedemployment security rights to facili-tate re-allocation of labor to the pri-vate sector. When new labor prob-lems emerged, policy shifted to re-regulate the labor market. Brazil’ssuccess in achieving economicgrowth and social progress simulta-neously is unparalleled: informality,income inequality and unemploymentdecreased. India needs macro-levelflexibility in re-allocating labor frominformal to formal work, from ruralto urban areas, and from the un-skilled to the skilled. Micro-levelflexibility through termination of em-ployment must be coupled with stron-ger social security programs for ad-equate severance pay and re-train-ing for other employment and alsostronger protection for workers in theinformal sector.

Introduction

The debate around labor reformsin India became prominent once againwith the election of a majority BJPgovernment in May 2014. This changein government came when despitemuch debate in the past, the previousCongress-led governments had failedto undertake any significant reform.Great expectations now await the newgovernment for reforms in laborpolicy. It is in this context that we ex-amine the labor and employment sys-tem in India with particular attentionto the issue of labor flexibility.

When one considers potentialsolutions there is an alarminglack of consensus on possibledirections for reform.

Recent research in India has richlydocumented the dysfunctions of the In-dian industrial relations system to estab-lish the case for substantive reforms ina number of areas(Shyam Sundar, 2012;2011; Sharma 2006; Sodhi, 2011). How-ever, when one considers potential so-lutions there is an alarming lack of con-

Anil Verma (E-mail:[email protected]) isProfessor & Director, Centre for Industrial Relations &Human Resources at the University of Toronto wherehe holds a joint appointment at the Rotman School ofManagement. He is also a Visiting Professor at theUniversidade Federal do Ceará, Fortaleza, Brazil.Ana Virginia Gomes ([email protected]) isProfessor of Labour Law at Universidade de Fortaleza– UNIFOR, Brazil, and Research Fellow at the Centrefor the Law in the Contemporary Workplace, Queen’sUniversity, Canada.




sensus on possible directions for reform. Itis arguably one of the reasons why previ-ous governments found themselves stymiedinto inaction. The analysis in this paper ex-plores possible avenues for reform aroundwhich parties to the employment systemcould converge. It can be useful to lookfor relevant lessons from both inside andoutside India in a search for better ideas.It is in this spirit, that we compare the la-bor and employment systems in India, Chinaand Brazil. These insights can be useful inbreaking the gridlock around labor reforms,which in turn, could contribute to sustainedeconomic development.

Why compare India with China andBrazil? Despite significant differences,these three countries face many similarchallenges. They are striving to reducepoverty, improve education and health, andto become full employment economies. Allthree are among the biggest countries inthe world in terms of population, landmassand total GNP. Together with Russia theybecame known as BRIC, a moniker forinvestors looking to profit from highgrowth emerging economies.

China and Brazil also share many ofIndia’s challenges in making their laborand employment systems more skilled,productive and flexible. For example, inmoving its 450+ million workforce fromthe public sector to the private sector,China faced a challenge unprecedentedin history in scale and scope. Labor regu-lations needed to be changed dramati-cally. This transformation of the labormarket is far from being perfect or com-plete but a substantive set of regulationswas put in place to facilitate this large-scale re-allocation of labor. Brazil, al-

ready a middle-income country, faces thechallenge of moving its labor and employ-ment system to the next higher level fromits current plateau. Most skilled labor isin short supply despite a large labor poolthat is largely unskilled or semi-skilled.Labor regulation is designed to protectworkers and jobs but its large informaleconomy leaves many workers unpro-tected. So, improving the skills of itsworkforce and reducing informality in thelabor market are significant challenges.

In the next section we provide a briefcomparative sketch of the main charac-teristics of the three countries. This isfollowed by an overview of the Indiancase for labor reforms. Lastly, we reviewthe lessons that policymakers in India candraw from the experiences of China andBrazil for developing a consensus aroundmuch needed labor reforms.

BIC: A Comparative Overview

India and China are the only countriesin the world with a population in excessof one billion each. Although Brazil ismuch smaller with a population approach-ing 200 million, it is the dominant economyin its neighborhood much in the way thatIndia dominates South Asia and, China, theglobal economy. There are other similari-ties. Although China has been able to sus-tain its high growth rate over a muchlonger period, both India and Brazil arealso considered to be emerging economiesthat boosted their historically anemicgrowth rates to new highs in the most re-cent decade. High rates of growth havegenerated more jobs, reduced poverty andraised the aspirations for a better life.Scores of enterprises from these three

Labor Market Flexibility


countries have confidently expanded athome and overseas.

In terms of per capita GDPin 2013,Brazil was at the higher end of middle-

income countries (USD 11,208), India atthe low end (USD1,499) with China nearthe middle of this range (USD6,807)(Table 1).

Table 1 A Comparative Look at Brazil, India, China

Year Brazil India China

Population (millions) 2013 200.4 1,252.0 1,357.0GDP per capita (US$) 2013 11,208 1,499 6,807Av Annual GDP Growh Rate (%) 5-yr: 2009-13 3.6 7.0 10.1

10-yr:2004-13 4.6 6.7 8.9Average Annual Inflation Rate (%) 2006-13 5.2% 9.3% 3.7%Human Dev Index (HDI) 2012 0.73 0.554 0.699HDI Rank 2012 85 136 101Adult Literacy Rate 2010 90.0% 62.8% 94.0%Male Life Expectancy (yrs) 2010 70.7 64.4 72.1Female Life Expectancy (yrs) 2010 77.4 67.6 75.6Doctors per 1000 pop. 2010 1.8 0.6 1.4Fertility Rate (Per Woman) 2010 1.8 2.5 1.6Workforce in Agriculture (%) 2011 15 47 35Labor Force Participation Rate - Total 2012 70.0 56.0 70.7Labor Force Participation Rate - female 2012 50.1 29.0 64.0Trade Union Density (%) 2010 17.8 2.4 NA# of Strikes & Lockouts 2008 411 423 NA

Sources: www.wdi.worldbank.orgTrade Union Density and Strike data from www.ilo.org

There are a number of similarities anddifferences in factors relating toworkforce development and the result-ing flexibility of labor. First, India has theyoungest workforce while Brazil has theoldest of the three countries. The popu-lation pyramid for Brazil has been shrink-ing now for many years already. InChina, the pyramid has just begun toshrink while in India it is still expandingat the base. These trends suggest that

India needs to generate new jobs at amuch faster rate over a longer time pe-riod than do Brazil and China (Goswami,2014).

India has the largest share of itspopulation still living in rural areas anddependent on agriculture. This share isthe lowest for Brazil, which has becomea largely urbanized country in recent de-cades. But despite such urbanizationBrazil’s workforce is underutilized in thenorth and the north-east while southernBrazil experiences critical labor short-ages. Brazil is also a large landmass withrelatively poor infrastructure that makesit hard to relocate the workforce and jobs.

India needs to generate new jobsat a much faster rate over a longertime period than do Brazil andChina.



India is the smallest of the three coun-tries in terms of area but poor infrastruc-ture creates problems of mobility withattendant adverse consequences for flex-ible allocation of labor. China is also alarge land mass and has experienceduneven development between the fastdeveloping north and coastal areas on theone hand and the less developed regionsof central and western China on the otherLarge investments in coastal infrastruc-ture have made China an export power-house but its challenges in managing mi-grant labor resulting from the unevendevelopment remain substantial.

In terms of inequality, Brazil has thehighest degree of income inequality of thethree countries. Its Gini coefficient, ameasure of inequality, was 54.7 in 2009compared to 33.9 in India (measured in2010) and 42.1 in China (also measuredin 2010). But, whereas inequality in-creased in both China and India since the1990s, Brazil is among the few countriesthat have managed to reduce inequalityin recent decades. Its Gini coefficientdeclined from an exceptionally high levelof 63.3 in 1989 to 54.7 in 2009. For In-dia, the Gini increased relatively moder-ately from 30.8 in 1994 to 33.9 in 2010.In China, inequality rose more signifi-cantly from 32.4 in 1990 to 42.1 in 2009.1

1To put these coefficients in perspective, it may benoted that among the developed countries, Norway(26), Sweden (25) and Germany (28) are relativelymore equal while the U.S. (41) is at the high endwith Australia (35 in 1994), Canada (33), France(33 in 1995) and the UK (36 in 1999) falling in themiddle of the range. Unless otherwise noted Ginicoefficients were measured in the year 2000. AllGini coefficients accessed from wdi.worldbank.org

Both China and India have followeda trend that Piketty (2014) contends is alaw of development itself: the rate at whichwealth becomes concentrated in a fewhands, i.e., rate of rising inequality, ex-ceeds the rate of economic growth. So,even as countries grow economically, theyinevitably contribute to rising inequality.This is a challenge for all societies but fordeveloping nations it poses a specially dif-ficult challenge: how to sustain growth thatwould raise living standards for all with-out increasing inequality or even better,while reducing inequality?

Flexibility Debate

The labor flexibility debate is oftenframed within the narrow context of theworkplace or the level of the firm. InIndia, a major demand of those advocat-ing for greater labor flexibility is to askthe government to spell out an “exit”policy that would make it easier for em-ployers to terminate employment forworkers who are no longer needed be-cause of changes in technology or in de-mand for its products or in its financialability to sustain a workforce. By itselfthis is not an unreasonable demand.Schumpeter’s concept of “creative de-struction” captures well the dynamics ofeconomic growth in our era of globaliza-tion. No job or workplace or firm canremain unaltered for forever. The needto restructure, reorganize and refocus theenterprise is forever present in the glo-bal economy and it needs to be facilitatedby domestic policy for sustained growth.

This approach to flexibility has beencriticized by a number of scholars for



various reasons that are discussed in thenext section. The purpose here is to putthis debate in the larger context of de-velopment so that we can look beyondIndia’s borders for lessons on how bestto facilitate flexibility. The narrowly-framed flexibility debate loses its moor-ings if it is not embedded in the largercontext of India’s developmental needs.When one examines the larger contextfor human resources in India, a numberof issues become apparent.

First, India has a much larger shareof its population in rural areas. In 2013,68% of India’s population lived in ruralareas while in China, this proportion was47% and shrinking rapidly. In Brazil, lessthan 15% of the population is rural. Thegenerally accepted wisdom is that it isextremely difficult to raise incomes, pro-vide a decent level of education andhealth services, and create a full employ-ment economy if a large share of thepopulation lives in rural areas. It is forthis reason that China has embarked onan ambitious program to urbanize itspopulation (Yusuf & Saich, 2008; Davis,2013; China Development ResearchFoundation, 2013). Urbanization does notnecessarily mean that there has to be ashift of rural population to existing cities,which would be a huge challenge in it-self given that Indian cities are alreadyovercrowded. Rather, it implies that moreareas need to be urbanized by develop-ing smaller towns into cities. Any newlabor policy initiatives need to carefullyweigh the implications for future urban-ization. Labor policies need to create thekind of flexibility that would smoothen thepath to urbanization. An urbanization

strategy would involve massive invest-ments in construction of urban infrastruc-tures. From this perspective, it can beargued that India needs not only laborflexibility at the micro level but also helpurbanize its population.

India’s skill development infra-structure lags behind its aspira-tions for ambitious and sustainedeconomic growth.

Second, India’s skill development in-frastructure lags behind its aspirations forambitious and sustained economicgrowth. The skill development infrastruc-ture includes the basic education system,the post-secondary and post-graduateuniversity level institutions, on-the-jobworkplace training, and research institu-tions. Drèze and Sen (2010) emphasizeseveral key ideas about basic educationin India. First, basic education has beenneglected by all elites including the gov-ernment, employers and unions. Theyspeculate that this neglect may be relatedto the potential of education to challengepower and privilege vested in the statusquo. Second, basic education has beenlimited in its reach. Literacy levels, evenaccording to government supplied andsomewhat inflated statistics, remain lowcompared to China and Brazil. The adultliteracy level in 2010 was 62.8% com-pared to 90% in Brazil and 94% in China(Table 1). Female literacy levels are re-portedly even lower although reliable es-timates are hard to find. Third, there arelarge variations in primary school atten-dance and achievement within the sys-tem across provinces, gender, family



income and the urban-rural divide.Fourth, although some gains have beenmade in literacy levels in the last twodecades, the system remains far short ofeven the modest goal of achieving uni-versal primary education up till the ageof 14. Moreover, school attendance, themost common measure of education, sayslittle about the level of learning takingplace. Numerous surveys have foundpublic schools largely understaffed andunderfunded, often lacking the most ba-sic facilities such as a separate toilet forgirls, let alone qualified and dedicatedteachers (Drèze & Sen, 2010).

India has some excellent post-second-ary and post-graduate educational institu-tions. The Indian Institutes of Technologyand the Indian Institutes of Managementhave acquired national and internationalprominence in post-secondary educationin technology and management respec-tively. A few dozen other universities andresearch institutions have similar reputa-tions for excellence. However, for manyother hundreds of thousands of qualifiedstudents, world-class higher educationremains out of reach. The RUSA2 initia-tive launched in October 2013 by the Gov-ernment of India is an ambitious effort toimprove the share of high school gradu-ates going on to post-secondary educa-tion from 19.4% in 2012-13 to 30% by2020 (Deloitte, 2013). A similar initiativefor vocational education was set up in2009. The National Skill DevelopmentMission set up a three-tier structure with

the goal of bringing industry-relevant vo-cational education to 550 million peopleby 2022 (Sodhi, 2014). These campaignsseek to improve the quality of higher edu-cation through a series of administrativereforms, coordination with states, and im-proved targeted funding to institutionsbased on meeting performance targets.Although it is too early to tell if these cam-paigns are yielding the desired results,these initiatives provide a clear signal thatpolicymakers are taking note and tacklingthe education deficits at the highest levelsof policymaking.

Labor Flexibility Argument &Evidence

The argument for labor flexibility isthat workplace level labor flexibility al-lows for efficient allocation and re-allo-cation of labor to fit the demand patternfor products or services. This flexibilityallows the enterprise to operate at opti-mal efficiency that, in turn, makes it com-petitive. The ensuing efficiency and com-petitiveness would then attract new in-vestments and lead to growth in outputand, ultimately, in jobs. Although intu-itively appealing, this argument needs tobe placed within the industrial relationscontext and validated by evidence.

Several studies have examined theempirical evidence for the hypothesizedeffects of labor flexibility on efficiency andwelfare outcomes. An ILO study is worthmentioning because of its scope and com-parative focus. Sharkh (2008) examinedevidence from a number of countries thatspan the spectrum in terms of both laborflexibility and social security programs. The

2Rashtriya Uchchatar Shiksha Abhiyan (RUSA) inHindi translates approximately to: National HigherEducation Campaign.



underlying hypothesis comes from the no-tion that system performance is enhancednot simply by making labor flexible but bycombining labor flexibility with a safety net,the so-called “flexicurity” principle (Keller& Seifert, 2002; Sarfati & Bonoli, 2002).The study concluded that the relationshipbetween labor flexibility and system out-comes is more complex than suggested byproponents of labor flexibility. Moreover, asystem could do well on some outcomemeasures such as employment but that out-come may be associated with other lessdesirable outcomes such as greater inequal-ity. In other words, there is no magic bul-let. Within those qualifiers, the study didfind that countries that were high on laborflexibility but poor on the safety net werenot the star performers. Equally, countriesthat were low on labor flexibility but highon the safety net also performed sub-opti-mally. However, an optimal middle groundon the flexibility-rigidity scale where a ba-sic form of social insurance when combinedwith moderate dismissal protection, yieldedbetter results across a range of outcomes.The message for policymakers is that sim-plistic notions of creating labor flexibilityby removing protections for labor can beself-defeating particularly for developingcountries. Rather, countries hoping to im-prove system outcomes ought to combinelabor flexibility with enhancements in thesafety net if they are to achieve goals ofeconomic growth and of increasing workerwelfare at the same time.

Flexibility Debate in India

Certain facts and trends concerninglabor flexibility in India have becomeclear in the evidence and the debate that

has occurred in recent years. First, Indiahas one of the strongest legal regimes ofemployment protection. Second, the le-gal regime suffers from a proliferationof regulations that often overlap and arenot easy to follow. Most writers on thesubject acknowledge this complex webof laws and advocate the kind of simpli-fication that would lead to better under-standing of the regulations and thereby,better compliance (Sharma, 2006).

Bhirdikar, Paul and Murthy (2011)analyzed industry data to examine the linkbetween labor market ûexibility and em-ployment over 1999-2006. They foundthat formal employment shrank even ascontract and informal employment grewsignificantly. It suggests that employershave increasingly resorted to contractlabor and to informal work to cut laborcosts. Employers have effectively by-passed the formal legal protections thatmake re-allocation of labor rather inflex-ible. Within the organized manufactur-ing sector they found a trend towardshiring contract labor and a rise inûexible work arrangements. In services,economic growth boosted employmentbut the bulk of it was in informal employ-ment. Importantly, they found that stateswith stronger worker protectionlaws, accounted for more workers hiredon contracts. Another study examiningthe effect of external shocks (in this case,average rainfall) on employment foundthat states with more pro-employer legalregimes did show relatively higher em-ployment effects compared to states withmore pro-labor regulations (Adhvaryu,Chari & Sharma, 2013). These findingssuggest that the strong worker protec-



tion laws do not necessarily correlate withmore (and secure) employment.

Strong worker protection laws donot necessarily correlate withmore (and secure) employment.

The evidence from such studies sug-gests that flexible regimes do result ingreater employment but even these jobsare often contract jobs or in the informalsector. Labor protection laws appear tohave been largely by-passed by employ-ers to create de facto labor flexibilitygiven that there have been almost nochanges in legal regulation (Sharma,2006, Shyam Sundar, 2012; Maiti, 2013).The labor market has been rendered flex-ible despite restrictive labor laws due tothe large informal sector andcasualization of employment in the for-mal sector.

Economic Growth &LaborRegulation in China

China is currently closing the gapbetween the world’s largest economy, theU.S., and itself at a fast rate. It is ex-pected to be the world’s largest economysometime in 2014 if GDP is measured inpurchasing power parity (PPP) terms andby 2025 in exchange rate terms, if cur-rent trends in GDP growth rates continuefor another decade. China’s scale and theenormous transformation of its economywithin a generation, provide a unique op-portunity to learn about the inter-relateddynamics of economic and social devel-opment. When China began to liberalizeits economy in 1977-78, it faced two huge

challenges in terms of its labor force.First, it needed to shift some 450+ mil-lion people from the state sector to theprivate sector. Second, a huge migrationwas to occur from rural areas to the ur-ban centers. Labor and employment poli-cies were continually adjusted over thelast thirty-plus years to facilitate thesetransitions. Although some of these policyinitiatives did achieve desired results,many gaps persist in both policy and out-comes that need to be addressed throughfurther reforms.To facilitate the transi-tion to the private sector, policymakersin China had to first undo the employ-ment and wage laws of the previous erawhen the “iron rice bowl” defined a sys-tem of lifelong employment security andstate-fixed wages. So, a de facto deregu-lation of employment security and wagefixing was instituted. Before 1978, allworkers in China were assigned to jobsby the state after completion of educa-tion. Wages were also fixed by the state.Employers could not fire workers, whichresulted in lifetime employment for all.This employment system reduced mobil-ity and incentives, and led to inefficien-cies due to overstaffing, low morale, andlow productivity (Meng, 2000).

A de facto deregulation of employ-ment security and wage fixing wasinstituted.

Reforms first took root in the ruralfarm sector where effective deregulationof prices led to rapid mechanization, ris-ing yields and increasing incomes. It wasnot until the mid-1990s that the govern-ment began restructuring state-run



enterprises. The largest state-owned en-terprises would remain with the statewhile smaller ones were cut loose fromstate finances to compete in the market-place on their own or go bankrupt. Toaccomplish this transition, labor policywas revised in 1986 to allow employersto hire on a contractual basis. Wageswere also deregulated in the emergentprivate sector. Lastly, workers were en-couraged and supported, financially andwith requisite training, to become self-employed in their own small business.Within a few years of such deregulation,millions of state sector workers were laidoff with some compensation, who thenbegan to swell the ranks of the privatesector (Meng, 2012; 2004; Appleton,Knight, Song & Xia, 2002; Giles, Park &Cai, 2006). Known as the xiagang, theynumbered over 40 million by 2002(Betcherman, 2005).

China’s system ofhukou,i.e., a per-mit that defines residency as rural or ur-ban, played an important role in thetransformation. It allowed the govern-ment to control allocation of labor firstwithin the urban system and later fromrural to urban areas. Brazil and Indiahave no equivalent system which effec-tively makes the allocation of labor moremarket-driven but it also fuels thegrowth of the informal labor market withall its attendant problems of worker pro-tection. Although China continues toease its restrictions on rural-urban mi-gration, a majority of the population stillholds rural hukou. Meng (2012) puts itat 72% of the population based on the1% Population Survey of 2005 and otherNBS data.

Even as state enterprises were shed-ding employment more than 100 millionrural workers moved into cities by 2002.What rural migrants could get weresometimes referred to as 3D jobs: dirty,dangerous, and demeaning. Rural work-ers were generally less educated but morelikely to be employed because of theirwillingness to accept jobs that urbanworkers would refuse. Their numbershave continued to rise with the rapidlygrowing economy. By 2012, there weremore than 260 million migrant workers,with an average monthly salary of 2,290yuan ($374.09), according to a report bythe National Bureau of Statistics of China(Song, 2013).

These two large-scale mobilizations,i.e., state sector to private sector andrural to urban, encapsulate both the tri-umphs and the trials of China’s strategyto restructure its labor market. The de-regulation of wages and employment fa-cilitated the movement but at a consid-erable human cost. Policy responses tothe problems created by these mobiliza-tions can be divided into two parts: anearlier stage of providing immediate re-lief to dislocated workers and a laterstage of re-regulation to address long-term problems of a freer labor market.Each of these is discussed in turn.

When a worker lost her (or his) jobwith a state-owned enterprise, She alsolost with it the social protection and ser-vices that came with these jobs. In 1998,the government under pressure to pro-vide some relief, introduced a new laboradjustment policy requiring state-ownedenterprises to provide a living allowance



and maintain social services for laid-offworkers for up to three years while theworker searched for reemployment. Ifafter three years, a worker was not re-employed, he would finally separate fromthe enterprise and seek unemploymentbenefits from the state. A centralizedunemployment program was establishedin the early 2000s. However, its cover-age and operation fell short of expecta-tions at least in its early years. Therewere numerous cases of labor protestserupting because workers had not re-ceived payments and/or benefits aspromised or provided for in formal regu-lations. In many cases, local or state gov-ernments have had to assume the finan-cial burden of these regulations. Wherelayoffs were particularly large and couldnot be met by the local or state govern-ments, the central government steppedin to ensure that workers were paid(Betcherman, 2004).

Even as the private sector grew itgave rise to new labor problems fromnon-payment of wages and violations ofwork hours requirements to unsafe work-ing conditions. The policy response wasto introduce new legislation to regulatein emerging areas while reinforcing al-ready regulated areas. In particular, twolaws exemplify this phase of re-regula-tion. In 2004, a special regulation on mini-mum wage was issued which was a re-vision of the “Enterprise Minimum WageRegulation” of 1993 (Cooke & Rubery,2002). It did not set a national minimumwage but rather created rules underwhich state governments could set mini-mum wages for cities or municipal-levelaggregations after consulting unions and

employers at the local level. Further, theLabor Contract Law came into forcebeginning January 1, 2008. This legisla-tion laid down the fundamental frame-work for the employment relationship. Itspells out the terms that must be includedin every employment contract from ini-tial appointment to rules for terminationof employment and severance pay. Formany workers who had enjoyed absoluteemployment security in the pre-reformera this law was a final notice that theold system was now permanently re-placed by a new regime that allows em-ployers to lay off workers and terminateemployment under certain conditions. Formany others who had experienced theturmoil of the transition era after reformswith confusion over their rights as anemployee, this was a welcome wind blow-ing in greater order and clarity over rulesof the employment game. The LaborContract Law was followed up with theLabor Disputes Mediation and Arbitra-tion Law (LDMAL) which specifies howdisputes are to be resolved including ar-bitration. It is an integral part of ensur-ing that workers’ rights under the LaborContract Law are protected when dis-putes arise.

Two challenges stand out that arenow shaping labor regulations inChina: first, a significant growth inthe informal economy, and second,the rising level of labor unrest.

By 2012, the private sector in Chinaaccounted for over 60% of the nationaloutput (Yiyuan, 2013). China now sharessome of the same problems that other



developing countries with a marketeconomy face. In particular, two chal-lenges stand out that are now shapinglabor regulations in China: first, a signifi-cant growth in the informal economy, andsecond, the rising level of labor unrest.

Informalization

Informal markets were relativelycontrolled in their size under the oldersocialist when almost everyone lived andworked within a defined work unit, theso-called danwei. But when the deregu-lation of the 1980s and the 1990s tookhold, millions of workers had to find theirown employment. Inevitably, this mobili-zation has given rise to increasing num-bers of workers being employed (or self-employed) in the informal economy(Cooke, 2011). By 2009, according tosome estimates, nearly 30% of the ur-ban labor force, and 65% of the 150 mil-lion rural migrant workers in urban ar-eas were employed informally (Cai &Chan, 2009).

From a labor and employment per-spective, the informal labor market is anunregulated zone where workers end upinvoluntarily or voluntarily. Demand forsuch labor is so great especially in theurban service sector that for many work-ers there is no choice but to become in-formal. Informality occurs due to a num-ber of factors. Some are casual or con-tract workers needed for temporary worksuch as repair and construction in for-mal establishments. Others are employedby small and medium size establishmentsthat are themselves unregistered andhence maintain no payroll nor pay any

taxes. Another category of informalworkers may be employed by informalorganizations that supply labor on a ca-sual basis to other organizations. Xu(2007) notes that in Shanghai alone morethan 400,000 workers were employed insuch arrangements including nearly halfof that number in local public servicessuch as street cleaning and garbage col-lection, etc.

As may be expected, most informalworkers take these jobs because theyhave few other options given their levelof education and, frequently, the lack ofan urban hukou. This leads to wide-spread exploitation and violation of ex-isting laws and protections. By all ac-counts, the problems of labor exploita-tion are well recognized by the govern-ment in Beijing but the Central Govern-ment needs the support of provincial andlocal governments to enforce labor lawsdesigned to protect workers.

Labor Unrest

The All China Federation of TradeUnions (ACFTU) is the only recognizedtrade union in China. Although it is notcompletely independent of the govern-ment and the Communist Party, mostwriters suggest that the ACFTU hascome under increasing pressure to speakup for workers who have become pow-erless against the tide of privatization.Much of this pressure comes from laborprotests that have been breaking out spon-taneously in recent years. In fact, em-ployers have been signing collectiveagreements that are permissible underthe Labor Contract Law. According to



ACFTU data cited in Liu (2011), therewere 1.4 million establishments that hadsigned 2.438 million collective agree-ments covering 184.6 million workers.Although reliable data on the number ofdisputes or work stoppages are not avail-able, some idea of the extent of unrestcan be gleaned from the official (andlikely understated) numbers. Accordingto the China Statistics Yearbook, therewere 589244 labor disputes “accepted”by the official labor dispute arbitrationcommittees (LDACs) in 2011 of which6592 were classified as collective dis-putes covering 174,785 employees (ascited in Liu, 2014). Though these num-bers look small compared to the size ofChina’s labor force it should be noted thatofficial reporting greatly underestimatesthe actual number because most disputeswould be either unreported or not “ac-cepted” if they did not follow certain cri-teria.

The policy response so far has in-volved the Labor Contract Law and as-sociated laws and regulations. But, policyremains unclear in many areas of collec-tive disputes, which leads to a large vari-ety of responses depending on the choicesmade by state and local authorities. Thepossibility remains that the governmentcould introduce new legislation in the fu-ture that would address collective dis-putes and their resolution more specifi-cally and directly.

Brazil’s Policy Challenges

Brazil’s economy enjoyed resurgenceunder the democratic rule after manydecades of slow growth and military rule.

After conquering hyperinflation in the1990s, economic reforms under Presi-dents Cardoso and Lula led to highergrowth in the 2000s. The economy be-gan to embrace globalization, albeitgradually and cautiously. The gradualopening up of the economy brought in-creasing pressures on the labor marketto adopt reforms. It has led to significantchanges in the Brazilian employment re-lationship justified, rightly or otherwise,by the perceived need to be competitivein a global market. One prominent chal-lenge is to invest in the education andskills of its workforce. The other chal-lenge is increasing labor flexibility evenas the size of the informal economy isreduced.

Education & Skill Development

Despite being a middle-income coun-try, Brazil’s investments in developing askilled workforce have lagged behind thepace of capital investment in the coun-try. The inadequacy of its investment inbasic education is well demonstrated bythe performance of its pupils on standard-ized international tests. In the OECD Pisa(Programme for International StudentAssessment) study, Brazilian studentsranked 52nd-54th out of 65 countries inreading and 57th-60th out of 65 in sci-ence and mathematics (OECD, 2012).While Brazilian students performed be-low the OECD average, their scores inmathematics have improved since 2003from 356 to 391 score points, makingBrazil the country with the largest per-formance gains since 2003. Significantimprovements are also found in readingand science. Between 2003 and 2012,



Brazil also expanded enrolment in pri-mary and secondary schools, with enroll-ment rates for 15 year olds rising from65% in 2003 to 78% in 2012.

An earlier study had found that Bra-zilian teachers are often poorly educatedand teach on subjects they know littleabout, while no federal program existsto better train and monitor their perfor-mance (JBIC, 2005). The government ofPresident Rousseff initiated a series ofmeasures to strengthen the skills of Bra-zilians including better funding of schoolsfor teachers, equipment and infrastruc-ture. Another ambitious initiative is theScience without Borders program, whichis sending 100,000 students on scholar-ships to study science and technology atleading foreign universities. In return,Brazil is hosting students from othercountries on an exchange basis. Brazil-ian students spend up to a year abroadstudying with well-known professorsabroad. The hope is that they will returnto Brazil with new knowledge and in-spired passion for further learning. Even-tually, they are expected to meet the con-tinuing demand for skilled labor neededfor sustained development.

Informality, Flexibility & PolicyResponses

After the crisis in the 1990s, thecountry’s economy has been on a recov-ery path: unemployment reached a lowof 7.1 % in the first trimester of 2014(IBGE, 2014:5) and in almost all the re-gions, job growth occurred through for-mal employment. Informality – workerswho lack registration or are working in

an irregular way or are self-employed,with no formal links to the social secu-rity system or the FGTS3 — has been ina continuous decline since the 2000s. Be-tween 2000 and 2012, formal work in-creased from 44.6% to 56.9% of theworkforce (IBGE, 2013:142). Informal-ity declined further from 38% in 2010 to33% in 2013 (IPEA, 2014:14). Berg(2010:12) cites the following reasons forthe decrease of informality: more inclu-sive macroeconomic policies that pro-mote the demand for formal workers;demographic shifts in the Brazilian popu-lation; educational policies; micro-levelpolicies that promote the formalization ofsmall enterprises including ones that em-ploy only one worker.

The broad concept of informaleconomy – based on the production unit– includes different forms of informality:e.g., tax evasion, small enterprises, streettrade, illegal work, temporary work, do-mestic work, precarious work, etc.(Cacciamali, 2000:153). According toCacciamali (2000:164), there are twomajor elements present in informal labormarkets: the subordinated labor and self-employed work. Their relationships sharecommon traits: high job mobility; low andhighly variable earnings; absence of so-cial protection and labor regulation;

3 Fundo de Garantia por Tempo de Serviço isSeverance Indemnity Fund, a mandatory fundcreated by the Law #5.107, in 1966. Onlyemployers contribute to it and the current rate ofcontribution is 8% of the wage, which is paid bythe employer into a state-managed fund. It can beused by the individual in case of being dismissedwithout cause, to cover expenses during illnesses,or to build or buy one’s first primary residence.



flexible and unpredictable hours and du-ties; and generally lower qualification.Pochmann (1999) argued that the legalease of hiring and firing combined withan abundant supply of low-skill workersand the lack of workers’ organizations inthe workplace gave employers excessivepower in the employment relationship.The combination of these factors placesBrazil among the countries with the high-est firing rates – 64% in 2012 (DIEESE,2014: 12). Prior to 1966, workers acquiredlifelong employment security under Bra-zilian law after ten years of continuousemployment. A new regime was intro-duced in 1966 with the creation of theFGTS, a fund that would pay compensa-tion to workers who lost their jobs. Thisregime gradually replaced the old systemof lifelong employment security. The oldsystem was fully replaced by the 1988Federal Constitution, which permits fir-ing workers but requires indemnificationfrom the FGTS. Brazil has not ratifiedILO Convention 158 on termination ofemployment and still lacks rules on theprocedure for and limits on terminationof employment.

Besides the traditional types of infor-mal work – in small production units, do-mestic work, and illegal work – there arenewer types of informal work that havebecome more prominent in recent years.These jobs result from the adoption ofmore flexible work relations. Globaliza-tion and the search for labor flexibilityconstitute the framework within whichnew types of informal work has grown.Formal employees were turned into con-sultants, cooperative members,outsourced workers or partners. These

new relations can be found not only inthe more disadvantaged segments of thelabor market, but also among the morequalified and traditional segments, e.g.,health, education, management, and law.No longer does informal work limit itselfto any specific sector, demographic groupor region.

This picture indicates that informal-ity is not a transitory problem. Eventhough informality has been decreasingin Brazil, it is unlikely to disappear anytime soon. It is important to identify anappropriate labor policy response to pro-mote formalization and thereby provideprotection to the most vulnerable work-ers. For example, laws can help increasethe cost of informality and, at the sametime, the benefits of formalization. Pre-vious research has found that the mainreason for choice of informality is toavoid taxes and the cost of social secu-rity (Neri, 2002:4).For example,healthcare access is universal in Brazil.However, access to private healthcare ismuch higher among formal workers witha labor registration card (42.9%) thanamong other groups such as the self-employed (15.3%), employees with nolabor registration card (16.3%), agricul-tural workers (18.4%), domestic work-ers (15.9%) and unpaid workers (24.3%)(Neri, 2002: 4). Informal workers do nothave any income guarantee protection incase of accident, sickness or unemploy-ment. However, they are covered by thepublic pensions system, even though theydo not make any contributions. The valueof their pension is based on the minimumwage – R$724,00, approximately US$316per month. Many informal sector employ-



ers and workers are reluctant to contrib-ute to the social security fund becausethey will receive the public pension re-gardless of whether they contribute ornot. Guaranteeing a low pension withoutthe obligation of any contribution to thesocial security system has a negative ef-fect on formalization. The problem hereis that this guarantee makes the cost offormalization higher without increasing itsgains. Thus, we disagree with Chen(2007:11) that one policy goal should beto “decrease the cost of working infor-mally”. Since formality is an importantway to guarantee social protection, thereal policy challenge is to increase thebenefits of formalization and to increasethe costs of informality (e.g., with inspec-tions, fines, etc.) “without necessarilyincreasing or reducing informality’s ben-efits” (Carmargo & Reis, 2005 :277).

Brazil: Trends in Labor Flexibility

During the economic crisis in the1990s, the Brazilian government beganto modernize by embracing some degreeof labor deregulation and flexibilization.One important argument in this discoursewas that the rigidity of the labor marketwas one of the reasons of informality.An inflexible formal labor market droveboth employers and workers to subscribeto the informal labor market. Some mi-nor alterations were made in the Brazil-ian labor code – the CLT4— had the ob-jective of creating jobs and to ease ac-cess of informal workers to formality.

The main changes in the law were theapproval of a temporary contract,5 sus-pension of the labor contract,6 and com-pensation of hours.7 These were piece-meal reforms that ended up not having asignificant impact on the labor market.No comprehensive labor reform has beenundertaken in recent years. Looking atthe Brazilian case, the most importantexamples of de facto flexibility are la-bor outsourcing and employment coop-eratives. These practices did not comefrom legal reforms, but from fraudulentpractices and by escaping trade unions.

Labor outsourcing (terceirização)8 isallowed by the Superior Labor Court -SLC, rulling #331, in the case of inter-mediary services, when there is no di-rect subordination and the work is per-formed by the individual specified in thelabor contract. The SLC requirementshave not been enough to effectively regu-late this practice, which disguises the defacto employment relationship by mak-ing a non-employment contractual ar-rangement with a third party to avoid thecosts of a bilateral employment relation-ship. According to Pochmann (2007:12-14), who examined the period between1985 and 2005 in the state of São Paulo,the number of workers in these triangu-

4 The CLT (Consolidação das Leis do Trabalho) waspromulgated by the Federal Decree-law # 5.542 on1 May 1943, joining all the legal texts coveringindividual and collective labor relations.

5 Law 9.601 of 1998.6 Consolidação das Leis do Trabalho (CLT), Decree-

law nr. 5452, art. 476 (promulgated 1 May 1943).7 Law 10.101 (enacted 19 December 2000).8 “Triangular employment relationships occur when

employees of an enterprise (the “provider”)perform work for a third party (the “userenterprise”) to whom their employer provides laboror services.” ILO, 2003 at 39.



lar relationships increased from 60,400to 423,900; indeed, 12.1% of the formaljobs created during this period consistedof these relationships. As well, the num-ber of enterprises that provide triangularservices went up from 257 in 1985 to6,308 twenty years later. In 2005, almosta third of these enterprises had no em-ployees, only “partners” in the enterprise(another term used to disguise the em-ployment relationship). There has beensome ongoing discussion in National Con-gress to regulate labor outsourcing. Themain points of this debate is whether toallow labor outsourcing both in interme-diary and final activities of the enterpriseand on who bears the liability for viola-tion of labor rights. There is still no con-sensus on these issues and laboroutsourcing remains largely unregulatedand widespread in the labor market.

The employment cooperatives alsoact as “providers” of workers (coopera-tivas de mão-de-obra). In the case ofthe disguised cooperatives (the ones thatact only to provide labor for employers),the workers are deemed to be full mem-bers of a cooperative, and not eligible forthe benefits that come with employeestatus. Employment cooperatives wereregulated by the law #12.690 from 2012,establishing new conditions for theirfunctioning and rights for their member.The law aims to decrease the incidenceof fraudulent employment cooperatives.

Both practices (labor outsourcing andemployment cooperatives) are not illegalper se. They become illegal only iffraudulent practices disguise the actualemployment relationship in the eyes of

the law by resorting to outsourcing or theuse of worker cooperatives. Therefore,there is a gray area in which even bigenterprises can comfortably hire work-ers through those relations behind a thinveil of legality. Only if the case goes to alabor court, the employment relationshipcan be identified and recognized by law,but this remedy is not so efficient. Usu-ally, workers will go to the court only af-ter dismissal, since there is no protectionagainst dismissal before deciding to suethe enterprise. Also, there are time limitson when legal questions can be taken tocourt. Complaints can not be taken tocourt after an absolute limit of 5 yearsafter the event, or during the employmentrelationship, or after 2 years of the endof the relationship.

Informality and flexibility

There has been a strong movementin recent years advocating more flexibil-ity in the labor market, arguing that laborrights make the employment relationshipexpensive and rigid, and thus not acces-sible to informal workers. The cost of anemployment relationship then has beenthe object of a sharp debate. Calculationsof “rollup” costs over and above basepay for payroll taxes, mandatory benefitsand the like vary from 19.4% to 101%(Gomes, 2001:109-10). There are differ-ent ways of making the assessment, andno clear consensus over any of them.Because many labor rights have directimplications for money paid to workers,directly or indirectly, rights are seen asan added cost factor, which seems to bea good reason to many for abolishingthem.



In this context, labor regulation hasbeen associated more with the problemsin the labor market than as a solution tothe challenges brought by globalization.For example, although there was a de-cline in the informality rate in the lastdecade, Ramos (2006:34) calls attentionto the fact that sometimes informality isseen as a solution to the lack of opportu-nities in the labor market. However, asthe author emphasizes, informality is gen-erally a survival strategy when the labormarket is not able to produce enough jobswith acceptable standards. It is in theinformal market that we find the mostexcluded segments of the Brazilian popu-lation: 51.3% of poor Brazilians are infamilies whose principal earners are in-formal workers (Neri, 2000:5).

The experience of the 1990s and2000s did not support the claimthat labour regulations causedgrowing informality”.

Recent trends in informality have beenanalyzed by a number of studies. Berg(2010) reviewed all evidence available atthe time to conclude that, “the experienceof the 1990s and 2000s did not supportthe claim that labour regulations causedgrowing informality”. Among other evi-dence, she cites the strong growth in for-mal jobs in the 2000s, a period during whichthe minimum wage nearly doubled in realterms. In a growing economy, labor regu-lation per se is not necessarily an impedi-ment. In fact, some labor policies, suchas the minimum wage, can stimulategrowth and job creation by increasing theincome of the poorest segments.

Instead of just deregulating or creat-ing more flexible labor relations, Brazilhas developed social policies that createsocial and economic opportunities to themore excluded segments of the popula-tion and, in some cases, introduced moreregulation aiming to formalize some sec-tors of the labor force characterized byhigh informality, as was the case of theemployment cooperatives law and themore recent domestic workers constitu-tional amendment (Constitutional Amend-ment 72 of 2013). Brazil’s experiencesuggests that governments, rather thanfocusing on deregulating the labor mar-ket, should tackle issues of labor flexibil-ity and informality by encouraging firms“to register their businesses and theirworkers, either through simplifying reg-istration, lowering taxes or providing in-centives to develop high-road competi-tiveness strategies” (Berg, 2010).

Policy Priorities for India

Recent policy developments in bothChina and Brazil provide useful insightsto policymakers in India in terms of craft-ing future labor policy. China has madegreat strides in recent decades. WhenChina began its economic liberalizationcirca 1980, its per capita income waslower than India’s. By 2013, China’s percapita GDP was more than four timesthat of India’s (Table 1). Brazil’s percapita GDP is more than seven times thatof India’s. Both China and Brazil alsohave higher attainments on some indicesof social and human development. The2012 Human Development Index for In-dia was 0.554, well below both Brazil’sHDI of 0.73 and China’s of 0.699 (Table



1). The challenge for India is not only toonce again kick-start economic growthbut to make significant social gains at thesame time.

When we consider India’s needs inthis light it puts the labor flexibility de-bate in a somewhat different light. As sug-gested earlier, there is no doubt that somereform of the complex web of labor lawswould bring greater clarity for both em-ployers and workers. On the other hand,simply making it easier for employers tohire and fire would be an over-simplifi-cation of a policy challenge. Moreover,there is no guarantee that any social gainswould result from a single and simplechange in the law. Even the potentialeconomic benefits could be negated by aregressive “race to the bottom” whenIndian firms would be tempted to com-pete on the basis of cost cutting ratherthan through innovation and value addi-tion.

Lessons from China have to bedrawn with the caveat that the govern-ment in Beijing can afford to be a lot moreauthoritarian than its counterpart in NewDelhi. But these differences may not beas significant for economic policymakingas it may appear at first glance. First, amajority government in New Delhi wieldsmore power in carrying its agendathrough the parliament. Second, Beijing’sauthority may be supreme in political lifebut in many aspects of workplace gov-ernance including labor flexibility, thecentral government’s role can be morelimited as it navigates policy implemen-tation by enlisting the help of state andlocal authorities.

China’s experience with the greattransition shows us that labor regulationneeds to be designed in accordance withdevelopment goals and needs of the na-tion. In the early phase of its economicliberalization, labor policy tilted in favorof employers by diluting employment se-curity rights of millions of workers. The“iron rice bowl” guarantee of lifelongemployment was removed to facilitate ashift of employment from the state sec-tor to the private sector. However, whenthe shift accelerated and other laborproblems began to crop up such as infor-mality and increasing level of labor dis-putes, both individual and collective, thepolicymakers moved gradually to re-regu-late the labor market. The re-regulationhas at its core the pluralist objectives ofprotecting the rights of both employeesand employers. One lesson to take awayfrom China’s experience is that regula-tion needs to be adjusted to developmentneeds over time. When greater labormobility is desired across sectors thenlabor policy needs to facilitate transfers.However, China’s experience has alsoshown that policies facilitating mobilitycan not address deficits in aggregate de-mand for labor. To make the economygrow other types of reforms may bewarranted and they should not be con-fused with an undue emphasis on de-regu-lating labor policy.

When greater labor mobility is de-sired across sectors then laborpolicy needs to facilitate transfers.

We also learn from the China expe-rience that both over-regulation and



under-regulation have costs associatedwith them. The same policy can appearto be a case of over-regulation in onetime period and inadequate regulation inanother time period. This notion of “ap-propriate” regulation may be criticized bysome who would argue that worker rightsshould be based on principles rather thanon the state of the economy. Certainly,raising the bar on rights is often consid-ered as righting the historical wrongs. Inthis formulation, any deregulation is re-gressive, amounting to nothing more than“turning the clock backwards”. This maybe true of certain core labor standardswhich are well-articulated by the ILO inits Decent Work agenda (ILO 2001). Butlabor regulation is much more than corelabor standards. Moreover, the early theo-rists and practitioners in the then emerg-ing field of labor market regulation andemployment relationships, such as theWebbs in the U.K., John R. Commons inthe U.S. and Mackenzie King in Canada,held that labor regulation should be closelyrelated to industry and workplace condi-tions for both efficiency and stability con-siderations (Kaufman 2004). This viewhas a parallel in monetary economics,which can be helpful as an analogy.Money supply in any economy is regulatedby the central bank to reflect growth inthe production of goods and services. Ifmoney supply keeps in step with economicgrowth, growth can be expected to besustainable and prices can be expected tobe stable. If money supply grows fasterthan the rate of economic growth it wouldlead to rising prices (i.e., inflation). On theother hand, if money supply grows moreslowly than the economy, the limited sup-ply of money would compromise economic

growth and ultimately, the surplus wouldfund more and better jobs. So, just as mon-etary supply tries to keep step with eco-nomic growth, so should regulation evolveas labor market needs and goals changeover time. It should be pointed out thatthe analogy is not perfect specially whenwe consider adjustment cycles. In caseof money supply, adjustment frequencycan be very short, sometimes as short asmonthly or even at normal times, quar-terly. Labor regulation does not need tobe adjusted so frequently. It may be sev-eral years before sufficient changes takeplace to warrant changes in regulationor on occasion it may occur over ashorter duration.

Brazil’s experience in reducing infor-mality and income inequalityis even morepertinent to India’s case. Although de-mocracy arrived in Brazil more recently,it is proving to be as resilient as India’s.With a Presidential system it providesmore stability and continuity inpolicymaking than does India’s parlia-mentary system of governance. Brazilhas embarked on an ambitious programof providing universal healthcare andeducation. As a middle income country,it faces greater pressures from global-ization to cut costs and improve flexibil-ity. The policy response has been to pur-sue social programs as aggressively aspro-market reforms aimed at improvingmacro-economic efficiency. Brazil isamong the very few countries whereeconomic growth has occurred at thesame time as social progress as measuredby decreasing informality, decreasing in-come inequality and decreasing unem-ployment.



Conclusions

As of mid-2014, India was facing greatopportunities as well as significant chal-lenges for reforms which if done right,could propel the country and its citizenstowards greater prosperity (Tellis, 2014).Our analysis of Brazil and China suggeststwo overarching paradigms that could in-form policy reforms in India. First, the la-bor flexibility debate needs to be recast inlight of development priorities of the na-tion. India needs re-allocation of labor fromthe informal sector to the formal sector ona large–scale. Ubiquitous informality holdsback economic growth as well as gains forlabor in terms of legal protections, income,working conditions and skill development.India needs flexibility incenting informalworkers and employers to move to formalstatus. India also needs a re-allocation oflabor from rural to urban areas. Rural resi-dence prevents people from having accessto better education, health and employmentprospects. Lack of opportunities for im-proving skills and accessing employmentperpetuates poverty. Similarly, the educatedbut unemployed youth need policies thatwould facilitate easier transition from schoolto work.

These are all examples of re-alloca-tion of labor in which India needs the kindof flexibility that would allow these tran-sitions to occur smoothly. It is labor flex-ibility at a macro-level without whichmicro-level flexibility by itself would notlead to the achievement of key goals ofdevelopment.

Second, India needs to build consen-sus around a grander vision of reducing

poverty through education and urbaniza-tion and by investing in people’s skills andin physical infrastructure. The humandevelopment and infrastructure gap be-tween India and other major emergingeconomies such as Brazil and China areconsiderable but bridgeable. India lacksnot the physical, human capital or finan-cial resources but the political will andadministrative capacity to deliver results.Only a shared grand vision can loosenthe status quo sufficiently for change toseep into the ossified layers of govern-ment and other institutions of gover-nance.

Workers should have access tocompensation based on length ofservice and the opportunity to re-train for other employment.

The above does not, in any way, ne-gate the need for reforms for greater la-bor flexibility at the workplace level. Atthe very least, some administrative sim-plification of the web of labor laws willcertainly help. But, if re-allocation of la-bor across firms and industries is to bemade easier by allowing employers toterminate employment more freely thenthis policy must be matched with simul-taneous policy responses in at least twoareas. First, workers should have accessto compensation based on length of ser-vice and the opportunity to re-train forother employment. Such worker assis-tance programs have been used in othercountries with considerable success.Second, worker protection by law andthrough enforcement must be strength-ened in the informal sector. Some aspects



of informality have to do with lack of lit-eracy and local capacity to accommodateformality. But, a large share of informal-ity lies in weak enforcement of existingregulations and fraudulent practices.These “leaks” can be plugged if govern-ment has the political will to do so.

Discussions of labor flexibility at theworkplace level should not occur with-out a consideration of adequate labor pro-tections, not only at the workplace levelbut also in the labor market at large. Ifsuch reforms are not coupled, we maysee economic growth but without any sig-nificant social progress (Sodhi, 2011). IfIndia is to join its peers on the world stageas a large but also a dynamic and strongeconomy, it can not afford to take a nar-row view of labor flexibility. The flex-ibility debate is a great opportunity toleapfrog out of the small pond to beginbuilding a world-class labor force that isas flexible as it is skilled and secure.

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By Invitationsas

Quo Vadis, Industrial Relations DisputesResolution…?

Jerome Joseph

Differences and disputes are in-trinsic to employer-employee re-lationships thus necessitating fairdisputes resolution mechanismsand processes. The increased de-mand for labor law reforms andthe general trend underlying thetarget provisions for change pointtowards an assertion of the mana-gerial prerogative of employerson grounds of competitive sur-vival and growth through labormarket flexibility. However, dis-putes resolution reforms need tobear in mind that in the pursuitof shareholder centric dividends,the democratic dividend of work-place democracy should not besacrificed. The reforms related tofair and speedy disputes resolu-tion deliverability thereforeshould be geared towardscreating workplace “ombuds-committees” and strengtheningconciliation services while leav-ing the democratic rights of la-bor untouched.

Quo Vadis, Industrial RelationsDisputes Resolution…?

The clamor for labor law reforms isback to centre stage with the change ofguard at the Centre in India and the firstmove has been initiated by a state gov-ernment run by the same party now incharge of labor policy changes at theCentre. The targets again are three la-bor legislations which have been the fo-cal points in the labor market flexibilitydebate – The Industrial Disputes Act(1947), Contract Labor (Regulation &Abolition) Act, 1970 and the Factories Act(1948)(indianexpress, rajasthan-shows-way-in-labour-reforms).Many of thesemoves are in response to demands fromindustry associations. For instance, ac-cording to FICCI, “The multiplicity of la-bor laws has created confusion and com-plexity.” (economictimes. indiatimes,2014dl-sachdev).With the clear objectiveof asserting the managerial prerogative ofemployers, according to FICCI the Indus-trial Disputes Act should be amended tofacilitate ‘hire and fire’ to meet marketdemands and to give employers the powerto change service conditions without thestatutory 21day notice that needs to begiven to employees before any such

Jerome Joseph is Professor, Personnel &Industrial Relations, Indian Institute ofManagement Ahmedabad 380015. E- Mail:[email protected]


Jerome Joseph


change is implemented. Trade unions havetheir own stand on the reforms debate asreflected in statements by their leaders.According to the General Secretary of theCentre of Indian Trade Unions, “The la-bor force is the real contributor to thevalue-added society so they should betreated as human beings and not as a com-modity. Proper enforcement and protec-tion of laws should be there for the laborforce. Labor standards are often ignoredby employers and exploitation of workerstakes place. These violations should betaken seriously by the governmentand the violators should be punished.”(economictimes.indiatimes, 2014dl-sachdev).

Labor standards are often ignoredby employers and exploitation ofworkers takes place.

The stage is thus set with the play-ers ranged on various sides of the reformsdebates and demands with the inevitabledifferences and disputes which will beplayed out in the various theatres of rep-resentative forums on offer in a demo-cratic setting made possible by the mo-saic of the Indian Constitution. Whilethere are many themes which will be thefocus of the reforms drama and the di-verse enactments of dramatis personae,this paper will focus on one area whichwill always remain significant in em-ployer-employee relations whatever thedenouement on other reform themeswhich are likely to be enacted in the nearfuture.The area in question is that of dis-putes and disputes resolution in employer-employee relations and the question to

be addressed here is related to the na-ture of reforms in this important sphereof stakeholder engagement.

Ecosystem of Industrial RelationsDisputes

A consideration of the changesneeded in disputes resolution will haveto take into account the ecosystem ofindustrial relations disputes in today’scontext. The history of industrial relationsshows that as long as there is an em-ployer and an employee, and there areterms and employment contracts, therewill be differences and disputes, conflictsover rights and conflicts over interests,standoffs between what the employee isexpected to deliver and what the em-ployee gets in return from the employer.Even if all the laws are amended in linewith organizational-managerial and inves-tor demands, the fundamental contradic-tions between employer and employeewill remain on the workplace justicefronts. Disputes in industrial relationscannot be wished away through legalreforms in the thrust towards greater “la-bor market flexibility”. The removal ofprevailing fences and boundaries whichmay result from such changes will ne-cessitate higher order disputes resolutionagencies, strategies, methods, processesand competencies in order to create a fairworkplace informed by human dignity andspeedy disposal of industrial relations dis-putes.

Table 1 gives a glimpse of the causesof disputes in industrial relations duringthe period 1961-2011. Disputes overwages and allowances, bonus, personnel,

Industrial Relations Disputes Resolution


retrenchment, leave and working hours,indiscipline and violence and a whole hostof causes under the category “others”which include layoffs, workload issues,union rivalries, have held constant overthe past fifty years. Some evidence isavailable as to what happens when or-ganized labor shrinks and the agencies

of the state withdraw in playing theirmediatory and statutory role in the datagiven in Table 1. As trade union numbersdwindle and “de facto” reforms througha tactical withdrawal of state labor de-partment services, workplace indisciplineand violence seems to have escalated asis evident from the 1961-2011 data.

Table 1 Industrial Disputes by Causes: 1961-2011

1961 1971 1981 1991 2001 2011

Wages and Allowances 30.44 34.30 28.70 28.90 24.63 24.90Bonus 06.85 14.10 07.80 04.65 06.53 03.80Personnel 29.30 23.00 21.40 17.90 10.98 09.20Retrenchment 00.00 00.00 00.00 02.59 01.34 00.50Leave and Working Hours 02.97 01.40 02.20 01.20 00.20 00.30Indiscipline and Violence 00.00 03.60 10.20 22.26 23.20 30.80Others (Lay-off, 30.44 23.60 29.70 22.50 33.20 30.50Union Rivalry, Work Load,Gherao, Not Known) Total 100.00 100.00 100.00 100.00 100.00 100.00

Source:Indian Labour Year Book: 1961-2011

Besides the 50 year decadal data onworkplace indiscipline and violence, therehave been three major incidents of seri-ous workplace violence leading to thetragic loss of life in the recent past be-tween 2008 and 2012– a Greater Noidafirm(timesofindia. indiatimes 2008 india-unit-graziano-trasmissioni-commercial-production), a Coimbatore firm (dnaindia2009 12-arrested-for-murder-of-pricol-v-p-near-coimbatore) and a Manesar firm(timesofindia.indiatimes2012manesar-plant-awanish-kumar-dzire) which werelinked to on-going disputes and thus havea bearing on the discourse on reformsrelated to disputes resolution. A carefulanalysis of anecdotal information avail-able in the public domain related to thethree tragic events referred to above sug-gests ample evidence of a serious deficit

in the area of industrial relations disputesresolution.

At the root of the three incidentsclearly is the progressive increasein “de facto labor market flexibil-ity”.

At the root of the three incidentsclearly is the progressive increase in “defacto labor market flexibility” expressedin the form of the ratio of contract work-ers to permanent workers. The insecu-rity and inequality which enters into theshop floor dynamics as a result of thecontradictions inherent in workforcestructures becomes a major factor ac-counting for the simmering discontent.The Coimbatore firm workers, for in-

Jerome Joseph


stance, were agitating for over two yearsagainst the hiring of contract workersprior to the workplace incident (reuters2009-pricol-killing-labour-at-the-receiv-ing-end). According to the top manage-ment, at the Manesar plant, the ratio ofregular to contract was 50-50 before theincident as compared to 30-35 percentcontract workers in the parent country(businesstoday.intoday 2012-violence-at-maruti-manesar-criminal-act).

Contractualization has led to wagedisparities between permanent and con-tract employees contravening the “equalpay for equal work” principle leading toserious disaffection and disputes withmanagements. The Coimbatore firmworkers were agitating for over twoyears against the non-payment of payand other benefits prior to the incident(reuters/2009/pricol-killing-labor-at-the-receiving-end).The management had alsobeen deducting up to Rs.1,000 a monthfrom each worker citing the loss incurredby the company as the reason (hindu/2009/09/26/).The Greater Noida firm dis-missed 250 contract employees in Juneafter they had staged a sit-in demandinga salary raise and the status of perma-nent employees consequent to theGreater Noida firm reneging on an agree-ment to provide a 3000 Rupees per monthpay increase, by attaching conditions tothe pay hike (timesofindia. indiatimes.2008-india-unit-graziano-trasmissioni-commercial-production). A fact-findingteam of a union that visited the spot af-ter the September 22 incident found thatout of the 1200 workers employed in thefactory, only 500 were regular workers,and the rest were on contract. The

Greater Noida firm at the time paid itsregular workers Rs.3200 a month forworking 12 hours a day; contract work-ers were paid Rs.2200 per month, anddenied various rights (sanhati/998/12)

Disaffection and discontent andworker reactions with wages and work-ing conditions have been countered withterminations and suspensions which areused freely especially at the slightest signof mobilization and collectivization forenhancing wages or for demanding regu-larization. For forming a union theCoimbatore firm terminated about 1,500workers who had not been made perma-nent for the last 20 years (cpiml/libera-tion, 2009). The company terminated 42employees for indiscipline on grounds ofpreventing capacity utilization of the fac-tory and stopping other workers fromcarrying out their duties (dnaindia 2009report12-arrested-for-murder-of-pricol-v-p-near- coimbatore).

The Greater Noida firm had beencompelled by worker protests to agreeto reinstate all but 15 of the 200 contractemployees whom it had dismissed afterthey had staged a sit-in demanding a sal-ary raise and the status of permanentemployees (timesofindia. indiatimes.2008).The Manesar plant’s reaction tothe July 18 violence was strong, “Thereis no scope to retain any of the workersinvolved in the assault and violence atManesar. We want to create a strongdeterrent with a clear message tomiscreants that the guilty have no chanceas we restart production” (economic-times.indiatimes,2012). Again as reported,the Manesar Plant, while lifting the



month-long lockout from August 21served termination notices on 500 regu-lar workers (indianexpress, 2012manesar-violence-maruti-suzuki-to-lift-lockout-sacks-500-workers)

Another tactic used is to threatenclosure although this has not beenimplemented in any of the threecases.

Another tactic used is to threaten clo-sure although this has not been imple-mented in any of the three cases. TheCoimbatore firm, for instance, said thesestrikes have hit profitability and theycould shift base (reuters/2009/pricol-kill-ing-labor-at-the-receiving-end). Whenthe Greater Noida firm top managementcame to India after the incident and alocal company director said as quoted,‘’One of the key issues they will discussis whether the Greater Noida plant shouldcontinue to function or be closed down.(timesofindia.indiatimes, 2008_greater-noida-lalit-kishore-chaudhary-marcello-lamberto)

As many as six workers who formeda union in Coimbatore were transferred toUttaranchal (cpiml/liberation/2009) and theworkers protested against it a couple ofyears before the incident (cpiml/liberation/2009). A senior official was quoted as say-ing that the HR manager was targeted be-cause he was “weaning away” employeesfrom a union that was leading the protests(hindu, 2009/09/23).Though the workerswere ready for talks, the management saidthey should not be part of a particular tradeunion (cpiml/liberation/2009).

“There is no compromise on vio-lence,” was the Manesartop manage-ment assertion when asked whether hewas ready to engage the Union, in anykind of peace talks to start operations(Ttimesofindia.indiatimes,2012-07-21,manesar-plant-maruti-suzuki-workers-union-shinzo-nakanishi). And when askedwhat would happen to the new union thathad got recognition from the HaryanaGovernment as well as the Manesarmanagement’s support after the previousone was disbanded last year, the responsewas unequivocal-“It will be derecognized,for sure” (timesofindia. indiatimes/2012-07-22, manesar-plant-awanish-kumar-dzire)

To try and offset the influence of theunion on the worker, a good conduct bondwas required to be signed by the work-ers at the Manesar plant to declare theywould “not resort to go slow, intermittentstoppage of work, stay-in-strike, work-to-rule, sabotage or otherwise indulge inany activity, which would hamper normalproduction in the manufacturing unit” andwas intended as a preventive mechanism(indianexpress,2011/11/29maruti-good-conduct-bond—unfair). In addition, as analternative to worker affinity to unions,top management said that the companyhad taken steps to improve relations withthe workers by engaging a consultant toconduct an impartial assessment and alsoconducted communication programs.“Perhaps it was not enough” (timeso-findia.indiatimes, 2012-07-21manesar-plant-maruti-suzuki-workers-union-shinzo-nakanishi) to show anypermanent result and remove anychances of a trust deficit. From what

Jerome Joseph


transpired on July 18th, such initiatives didnot appear to have weaned away work-ers from their unions or improved rela-tionships with supervisors and managers.“The management and the workers needto improve relationships,” MSI Chairmansaid (english.samaylive/maruti-violence-manesar-new-delhi-gurgaon-business-news.html)

The underlying inducers whichhave emerged are also the mainthemes of the reforms agenda re-lated to industrial relations.

The analysis and interpretation of thethree tragic workplace incidents and theemergent insight into the ecosystem ofindustrial relations disputes suggests thatthe underlying inducers which haveemerged are also the main themes of thereforms agenda related to industrial rela-tions. In a sense the analysis is also in-dicative of the kind of issues which indus-trial relations will confront if the de factoreforms of lived industrial relations expe-riences as described above become a dejure reality through changes in labor laws.

However in the backdrop of a longand well established context of a demo-cratic society and polity, industrial re-lations has evolved into a complex phe-nomenon in which employers and theirorganizations, employees and their col-lective associations as well as the stateand its agencies connect in order toevolve procedural as well as substan-tive policies and instruments to regu-late the point of contact employer-em-ployee relationship, to manage contra-

dictions which arise in their transactionsand to work towards consensus amongcontending stakeholders. Conflict andcongruence, contradictions and consen-sus, cooperation and confrontationcharacterize the interactions of variousstakeholders brought together by thecontract of employment within theframework of legality and constitution-ality. Respect for constitutionally andlegally conferred rights like the right toassociate, right to be recognized, rightto represent workers in collective bar-gaining processes, right to withdrawlabor when all else fails could be thefoundations for strengthening fair andspeedy disposal of disputes even as theIndian democracy considers reforms inthe arena of disputes resolution.

The changes in labor laws initiatedby the state of Rajasthan are but a har-binger of things to come in the thrusttowards labor market flexibility. Dis-putes are likely to increase as a conse-quence even as labor feels the heat.Disputes resolut ion needs to bestrengthened for the sake of the vul-nerable employee and for the survivalof organizations which provide liveli-hoods for the employed. What are thechanges which can create a fair indus-trial relations disputes resolution sys-tem is the question before us.

Disputes Resolution Practices:Current Scenario

The Industrial Disputes Act 1947 pre-scribes a multi stage structure for reso-lution of disputes:



Level I: Works Committees to ad-dress and deal with issues on an ongoingbasis in a proactive and participativemanner.

Level II: When a collective of work-ers feels aggrieved and negotiations withmanagement fails, can resort to a strikeby giving a strike notice as per the provi-sions of the Act or conversely manage-ment can declare a lockout when it ap-prehends threat to the firm’s assets orpersonnel. The provisions related tostrikes or lockouts as a means of disputesresolution are as follows:

• A notice of strike or lockout is to beissued and from the date of issue ofthe notice, the notice is valid for 6weeks.

• The strike can commence only after14 days of the date of issue of thestrike notice

• A strike or lockout during the pen-dency of conciliation or arbitration oradjudication proceedings would bedeclared illegal with the attendantconsequences in respect of employ-ees like the initiation of disciplinaryproceedings under the IndustrialEmployment Standing Orders Act(1946) which may lead to dismissaland the imposition of the “no work,no pay” principle for a period equiva-lent to the duration of the illegalstrike.

Level III: On receipt of the notice ofstrike or lockout, the appropriate govern-ment – state or Centre depending on ju-risdiction – initiates conciliation proceed-

ings by appointing a Conciliation Officerto negotiate with the parties and try andhelp the parties to find a solution as perthe provisions of the Act towards a settle-ment. Conciliation is mandatory in “pub-lic utilities” and recommended in non-public utilities although generally concili-ation is initiated even in such cases. Anyorganization is deemed to be a public util-ity if it is notified as a public utility byappropriate government.

Level IV: If conciliation fails, there arethree possibilities – the appropriate gov-ernment can refrain from further action,or make a reference of the dispute eitherto arbitration proceedings or to the LaborCourts for adjudication proceedings. If theappropriate government refrains from fur-ther action, the ball is back in manage-ment-employee court for either negotiat-ing an agreement amicably or engaged ina contest of wills through a prolongedstrike or lockout till either party blinks.

Level V: If reference is made forarbitration as per the provisions of theAct subject to the consent of both par-ties, the dispute goes through arbitrationproceedings towards an award.

Level VI: If reference is made to theLabor Court, the disputes go through ad-judication proceedings with provision forappeals by either of the aggrieved par-ties through a single judge and then aBench of the High Court on to the Su-preme Court for a decade or more of liti-gated resolution of the dispute with allthe attendant delays, costs and conse-quences. Labor courts have original ju-risdiction only in termination cases.

Jerome Joseph


The praxis of industrial relations dis-putes resolution system seems to be ori-ented to containment of the disputantsas well as the dispute rather thanincl ined towards a purposefuldeliverability of sustainable solutionswithin the framework of legality, con-stitutionality and mutuality within aspecified, reasonable time frame. Thereis also the tendency to use the elementsof the resolution processes to stall andto obstruct rather than to move towardsa legally, constitutionally and substan-tively sustainable conclusion. Once dis-putes get into the statutory processes,they meander around interminably withnegative work life and livelihood conse-quences for the more vulnerable amongthe employee categories with mountingfrustrat ion and anger among themarginalized leading to untoward andavoidable incidents.

If disputes are inevitable in industrialrelations irrespective of whether the cur-rent laws are amended or not, and ifdeliverability of sustainable solutions in-formed by skill and speed is the goal, thecurrent arrangements are woefully lack-ing. If disputes resolution is to be givenan identity and character, and the focusis on legally, constitutionally and substan-tively sustainable deliverability, bringingabout changes in the disputes resolutionmachinery becomes a categorical im-perative.

Fair & Speedy Disputes Resolution

The first change proposed is to re-place the Works Committee with an Or-ganizational Ombudperson or Ombuds

Committee which is representative, im-partial, independent to deal with em-ployee grievances and disputes inter-nally, amicably and honorably. Thecomposition could consist of a manage-ment representative, a trade union oran elected worker representative anda neutral third party acceptable to bothparties as Convenor. The OmbudsCommittee should be effective enoughto find solutions through an iterativeand interactive process with the mainparties to the dispute within specifiedtime frames.

The Ombuds Committee should beeffective enough to find solutionsthrough an iterative and interac-tive process.

The second change can be by mak-ing a strategic shift from government rundisputes resolution machinery to a pro-fessionally run disputes resolution ma-chinery within the framework of “mini-mum government, maximum gover-nance”. This will call for deregulation ofthe disputes resolution processes espe-cially with reference to the conciliationmachinery. This will mean conciliationservices to deal with industrial relationsdisputes will be offered both by govern-ment and professional service organiza-tions, will have the same powers as theyhave now and will be fee based. Accredi-tation and registration systems can bedeveloped to have a choice of recognizedconciliation and mediation services onoffer for disputants. Disputants can ap-proach whichever agency they see ascapable of independent, impartial solu-



tions deliverability in the shortest possibletime at reasonable cost and within aframework of purposeful mutuality. Thiswill also open up employment possibili-ties for disputes resolution professionalsskilled and experienced in this field andprofessionalize disputes resolution.

The third change relates to the powerof reference of appropriate governmentto labor courts and industrial tribunals ifconciliation or mediation fails. More of-ten than not the power of reference hasbeen used to curb strikes and lockoutsrather than to resolve disputes. It is forthe disputants to decide if they wish toseek justice from the courts or not andto weigh the costs and benefits of litiga-tion over a conciliated or mediated reso-lution of the dispute or through strikes andlockouts. Labor courts should also beprimarily oriented to get labor and man-agement to resolve disputes through con-ciliation processes. The feasibility forlabor courts to be given original jurisdic-tion (currently available only in termina-tion cases) should be explored so that anyaggrieved party – individual employee, agroup of employees, a trade union, anindividual employer, a group of employ-ers or an association of employers canapproach the labor court with provisionfor appeals to the High Court and Su-preme Court as may be necessary or per-missible as the contending disputantsmove towards a resolution of their dis-pute. This will give protection to ag-grieved individual employees to seek jus-tice in the context of non-unionized oreven unionized settings.The possibility oflitigation or direct action as a choiceavailable to individual or collective dis-

putants might act as a check and alsoserve as a leverage to seek resolutionthrough conciliation and mediation fromthe reinforced services available with bothgovernment as well as non-governmentprofessional conciliation agencies.

The current practice of using concili-ation as well as the power of referenceto curb strikes and lockouts and not somuch to find conciliated solutions throughprofessional, independent and impartialservices needs a rethink. This conclusionis based on the current provisions of lawrelated to strikes and lockouts in the In-dustrial Disputes Act 1947 wherein therestrictions on strikes and lockouts de-scribed earlier only have to do with mak-ing a determination on whether the strikeor lockout is legal or illegal with the pen-alties associated with engaging in an ille-gal strike or lockout activity. The provi-sions of law only spell out the penaltieswhich can be imposed when a strike isdeclared illegal but by themselves theydo not prevent a strike or a lockout fromtaking place. The calling of a strike inthe pursuit of dispute resolution by a unionor collective of workers is a function ofcollectively mobilized power and per-ceived ability to sustain the withdrawalof labor long enough to get managementsto the negotiating table and to negotiatea resolution. The current practice of us-ing conciliation and the power of refer-ence as restrictions on strikes is onlyadding to the low credibility of concilia-

By themselves they do not preventa strike or a lockout from takingplace.

Jerome Joseph


tion as a disputes resolution mechanism,which in industrial relations circles is con-sidered just a “waiting room” before thedispute is referred to adjudication. Whilethe provisions related to giving a strikenotice before going on a strike and thespecification of a strike date may be re-tained, the provisions prohibiting strikesduring the pendency of conciliationshould be repealed in order to give con-ciliation a fighting chance as a disputesresolution mechanism. The prospect ofprolonged litigation or direct action shouldimpel management and labor towardsreinforced and professional conciliationand mediation services.The reforms re-lated to disputes resolution thereforeshould be geared towards strengtheningthe ombuds committee and the concilia-tion alternative as the key instruments offair and speedy solutions deliverabilitythrough relevant amendments to the In-dustrial Disputes Act 1947.

Conciliation Services &ConciliatorCompetencies

The challenge of recasting the disputesresolution identity with Ombuds commit-tees and Conciliation can be met onlythrough the enhancement of capabilitiesand competencies rather than by succumb-ing to the clamor for the expansion of thestatutory powers and authority of theconciliator.Based on our interactions withCentral Conciliators, our informed andconsidered view is that the following com-petencies are necessary to fulfill their roleswith credibility and professionalism:

1. Interpretative Understanding ofLabor Laws Towards Disputes

Resolution: This skill calls for notonly understanding labor laws whichfall within their jurisdiction but alsoto be able to interpret the laws inspecific disputes contexts while try-ing to get the disputing parties tomove towards sustainable agree-ments and settlements. The higherorder competency is the ability to in-terpret law in the context of disputeswhich may arise in the industrial re-lations context to ensure legality andconstitutionality while seeking reso-lution of the substantive issues.

2. Multiple Stakeholder Orientation:Invariably, the practice of industrialrelations is characterized by multiplestakeholders engaging each other ona roller coaster cooperation-conflictcontinuum. Different stakeholdersdealing with the issues on the tablebring different perceptions and inter-pretations which may often make thesituation appear intractable to theuninitiated. For the seasoned concili-ator, the challenge is to see the is-sues on the table through the eyes ofthe interacting stakeholders and to tryand steer their expectations into azone of workable agreements byhelping them to recognize areas ofcongruence and divergence througha process of iterative engagement.

3. Solutions Generation Capability:Disputes in the industrial relationsarena are often characterized byrigid bargaining positions and parti-san posturing. Ruthless power playfeaturing a fruitless exercise ofblaming and point scoring vitiatesrelationships and stakeholder com-



munications. In this context the abil-ity to help disputants to see beyondthe game playing and getting themto move towards a reasonably sus-tainable agreement is best served bythe ability to generate creative so-lution propositions. The more thesolution propositions generated thegreater the possibility of getting thedisputants to the dotted line. This ispossible only if the conciliator cansee beyond the partisan perceptionsand conflicting expectations and vi-sualize solution propositions whichcan lead to sustainable outcomesinformed by legality and constitution-ality.

4. Self-Confident Serenity: Disputes inthe industrial relations space are in-formed by atmospherics and theat-rics. The conciliator needs to guardagainst misinformation and misrepre-sentation by one or more of the dis-puting parties. Verbal abuse andphysical threats, allegations and ac-cusations are all inextricable compo-nents of industrial relations disputes.The ability to be able to maintainone’s composure whatever theprovocation and the capacity for ver-bal dexterity in the midst of verbalviolence can go a long way in gain-ing respect and staying in control ofthe situation whatever the ultimateoutcome.

5. Professional Relationship BuildingSkills: Conciliators in today’s envi-ronments face greater danger of col-lusive or opportunistic relationship ori-entations in their engagements withdisputing parties. A collusive ap-

proach to relationships involvesswinging towards one or other of thedisputing parties for personal gain orto avoid personal loss with little sen-sitivity to conflict of interest consid-erations. An opportunistic relation-ship orientation operates on the ba-sis of expediency and instant gratifi-cation. A professional relationshiporientation is always conscious ofone’s role as a conciliator whereinone is part of the disputes resolutionprocess and yet not part of the dis-pute. The challenge is to maintainthat equilibrium day in and day out inthe midst of playing out one’s role –a state of mind which can best bedescribed as one of detached en-gagement.

6. Integrity based Credibility: Thegreatest danger in today’s opportu-nistic environment is to surrender in-tegrity based credibility to the lure ofillicit gain and instant gratification. Ina context of corruption and bribery,abuse of power and misuse of statu-tory authority, adopting a policy ofunflinching and unyielding integrity isa rare standard of professional be-havior. Conciliation without credibil-ity is like a body without a soul and isessential for long term effectivenessas conciliators

7. Resilience: Given the nature of theconciliation process and consideringthat the process is based on dispu-tant voluntarism and the disputantcommitment to speedy resolution,setbacks and failures are intrinsic tothe process. To be a great concilia-tor calls for great resilience in the

Jerome Joseph


wake of hostile posturing, rigid posi-tional bargaining and raw power playespecially by the more powerful dis-putants. The ability to stay the coursewith persistence and patience arevital qualities for the conciliator.

8. Transactional Impartiality: Very of-ten, stakeholders engaged in indus-trial relations disputes perceive con-ciliators to be biased in their deal-ings– epithets like pro labor or proemployer are often heard in indus-trial relations circles. Few concilia-tors earn the respect of stakeholderson both sides of the fence on groundsof transactional and relational impar-tiality, independence, fair play andpurposefulness. The ability to be re-spectful to all and partial to nonewhile being intensely engaged withthe stakeholders in order to try andmove them towards a sustainablesettlement is a daunting task but criti-cal to the long term effectiveness andefficiency of conciliators

Besides these competencies, concili-ators also need to expend efforts in “per-spective building” in order to understandbetter the changing context of concilia-tion processes and the attendant need forconciliation professionals to becomemore aware of the dynamics underlyingindustrial relations today. Some of theelements in the perspective buildingframework are as follows:

• Developing a critical understandingof the contemporary economic andbusiness environments in order tobetter appreciate the challenges andopportunities confronting conciliation

professionals. A deeper understand-ing of the thinking behind moderncommercial businesses with theirunwavering focus on profit maximi-zation and the impact such a focushas on workers, consumers and theecological environment can help insituating the conciliator role dynam-ics, pressures and challenges.

• Gaining a better understanding of theimpact of the neo liberal ideologiesand free market orientations on theindustrial relations institutions like leg-islative bodies, labor ministries andfunctionaries, workers and tradeunions, legal provisions and compli-ance pressures, collective bargainingand settlement processes, disputesresolution and adjudication pro-cesses.

• Within the above context, while ac-knowledging the legal acumen of theconciliators born of long years of ex-perience in their multifaceted rolesas regulators and enforcers, there isalso need to look at the conciliatorrole and to recognize that there is aneed to focus on one single skillwhich could make or mar the com-pliance and conciliatory role of thecommissioners – the skill of negoti-ating - to move the interacting em-ployers, employees and unions indi-vidually and collectively towards bet-ter processes, better relationships andbetter outcomes.

• Need to realize that business “utili-tarianism” driven by shareholder cen-tric profit maximization has to becountered with the normative infusion



of legal and constitutional standardswithin the conciliator jurisdictionconsidering that even compliancewith law is seen purely in cost ben-efit terms by business in a marketdriven economy

• Need to uphold legal and constitu-tional rights of individual and orga-nized labor even as the conciliatorsteers the disputants towards a sus-tainable outcome.

The perspective building approachshould move away from an overly legal-istic approach towards a skill based ap-proach. Legal acumen is necessary inunderstanding and applying law in a cre-ative manner to industrial relations situa-tions, but what is needed in today’s dy-namic and volatile environment in whichmarket dynamics dominates discourse, isthe ability to influence interacting indus-trial relations solutions through astute andenhanced conciliator capability. Speedydisposal will only come through skilledhandling of multiple stakeholders and theirconflicting and congruent interests. So-lutions generation creativity comesthrough human and social sensitivity.

As long as there are employers andemployees and a contract of employment,there will be disputes and the directionof reforms as well as the industrial rela-tions experiences of the recent past sug-gest higher workplace volatility andhence the need for systems for speedyand skillful resolution of disputes in a fairand just manner. Utilitarian Reforms ori-ented to unitarist restoration of manage-rial prerogative are contra indicated withthe democratic ethos of the constitution-

ally constructed industrial relations dis-putes resolution system in India. Mana-gerial prerogative can manage resourcesbut the democratic dividend unleashesresourcefulness through connectednessand relatedness. It is the clash of the anti-thesis with the thesis which produces ahigher order synthesis – this is the lawof higher order change.

Strikes and lockouts, conciliation, ar-bitration and adjudication are optionsavailable to resolve disputes. CredibleOmbuds Committees and competent con-ciliation can still hold its own providedOmbuds Committee professionals andconciliation services have the right com-petencies and the right perspectives todeploy the competencies for facilitateddisputes resolution processes, while it isincumbent on disputants to work towardsstrengthening the ecosystem for concili-ated settlements as opposed to resolvingdisputes through other available methods.

References

http://indianexpress.com/article/india/india-oth-ers/rajasthan-shows-way-in-lobour-re-forms/2/

http://articles.economictimes.indiatimes.com/2014-06-07/news/50404696_1_labor-lawr-industrial-disputes-act-dl-sachdev

http://www.dnaindia.com/india/report_12-ar-rested-for-murder-of-pricol-v-p-near-coimbatore_12925772

http://articles.timesofindia.indiatimes.com/2008-09-23/delhi /27930491_1_india-uni t-graziano-tramissioni-commercial-produc-tion

http://articles.timesofindia.indiatimes.com/2012-0 7 - 2 2 / i n d i a - b u s i n e s s /

Jerome Joseph


32787683_1_manesar-plant-awanish-kumar-dzire

http://www.cpiml.org/liberation/year_2009/nov_09/spec ia l_fea ture .h tml(h t tp : / /blogs.reuters.com/india/2009/09/23/pricol-killing-labour-at-the-receiving-end/)

(http://businesstoday.intoday.in/story/osamu-suzuki-says-violence-at-maruti-manesar-criminal-act/1/187672.html)

http://blogs.reuters.com/india/2009/09/23/pricol-killing-labour-at-the-receiving-end/

(http://www.hindu.com/2009/09/26/stories/2009092655370500.htm)

http://articles.timesofindia.indiatimes.com/2008-09-23/delhi /27930491_1_india-uni t-graziano-trasmissioni-commercial-produc-tion

(http://sanhati.com/news/998/)

http://www.dnaindia.com/india/report_12-ar-rested-for-murder-of-pricol-v-p-near-coimbatore_1292572

http://articles.economictimes.indiatimes.com/2012-07-31/news/32961874_1_manesar-plant-awanish-kumar-general-secretary-sarabjeet-singh

http://www.indianexpress.com/news/manesar-violence-maruti-suzuki-to-lift-lockout-sacks-500-workers/989067/0

(http://blogs.reuters.com/india/2009/09/23/pricol-killing-labour-at-the-receiving-end/)

(http://articles.timesofindia.indiatimes.com/2008-09-24/delhi/27900908_1_greater-noida-lalit-kishore-chaudhary-marcello-lamberto)

http:/ /www.hindu.com/2009/09/23/stories/2009092354830400.html

http://www.cpiml.org/liberation/year_2009/nov_09/special_feature_1.html

http://articles.timesofindia.indiatimes.com/2012-0 7 - 2 1 / i n d i a - b u s i n e s s /32775809_1_manesar -p lan t -marut i -suzuki-workers-union-shinzo-nakanishi

http://articles.timesofindia.indiatimes.com/2012-0 7 - 2 2 / i n d i a - b u s i n e s s /32787683_1_manesar-plant-awanish-kumar-dzire

(http://www.indianexpress.com/news/maruti-good-conduct-bond—unfair—govt/881712/0)

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By Invitation

Reforming the Industrial Dispute & Trade UnionActs

Tushar Poddar

This paper looks at how laborlaws in India may have sloweddown employment growth. It es-timates how much growth is be-ing foregone due to the lack oflabor mobility from agriculture toindustry. It then focuses on In-dustrial Disputes Act and TradeUnions Act. The paper discussesspecific provisions which mayhave negatively impacted em-ployment growth, including theprovisions for employment termi-nation in India, requiring thepermission of the governmentand consultations with tradeunions. It examines how theyneed to be reformed, by lookingat lessons from within India andother countries. Finally, it exam-ines the case of Korea as a suc-cess story in generating labor-intensive manufacturing growth.

Introduction

India’s employment growth in recentyears has been anemic. The economyadded only about 2 million jobs each yearin FY05-FY12, compared to 12 million ayear in the five years before that. More-over, increasing numbers of workers areleaving the workforce – the labor forceparticipation rate fell by 3 percentage pointsover the same period. As a labor-abun-dant country, India should be generatingjobs in labor-intensive manufacturing.However, the manufacturing sector sawa net decline of 5 million jobs in FY05-FY10 at a time when industrial growthwas very strong at over 9% during thisperiod. The industries that are losing jobsare in the most labor-intensive sectors –textiles, electronics, and apparel. Firms aresubstituting capital for labor.

This paper begins by looking at struc-tural problems in India’s labor market, andhow they have hindered employment. Weestimate how much growth is being fore-gone due to the lack of movement of sur-plus labor from agriculture to industry. Wethen focus on labor laws – two in par-ticular that we believe could reap largedividends if they are reformed. We lookat labor laws in other countries in order

Tushar Poddar is Chief IndiaEconomist at Goldman Sachs, Mumbai.E-mail:[email protected]


Tushar Poddar


to distill lessons from how those laborlaws have been revised. We conclude bylooking at employment growth examplesfrom some of the more successful manu-facturing countries in Asia, Korea in par-ticular.

The Labor Problem

In theory, India can realize significantlabor market gains from its favorable de-mographics due to: 1) increases in laborinput from the young; 2) economies ofscale in operation – as a firm grows, itcan initially have increasing returns toscale – whereby adding more labor andother inputs leads to a more than propor-tional increase in output; and 3) urban-ization – moving labor from low-produc-tivity agriculture to high-productivity in-dustry and services.

Employment growth has been ane-mic, and this is reducing the gainsfrom labor input from the young.

In practice, the gains have beenmuch smaller than they could have been.Employment growth has been anemic, asdiscussed above, and this is reducing thegains from labor input from the young.India’s employment profile is remarkablefor its small scale and informality. Toescape stringent laws, entrepreneurskeep the scale of their operations small.Most workers are in small enterprises,with their share in enterprises employingless than six people at 65.6%. Self-em-ployed workers constitute half theworkforce.

Source: Planning Commission (2013): Twelfth Five Year Plan (2012-2017),Volume III,22. Employ-ment and Skill Development

Exhibit 1 Informal employment is highest in India

Reforming the Industrial Dispute & Trade Union Acts


Source: Fourth All India Census of Micro, Small and Medium Enterprises, 2006-07: Registered Sec-tor; Planning Commission, 12th Five Year Plan Draft

Exhibit 2 Scale of employment is very small

94.9

69.2

4.9

26.0

0.24.8

0

20

40

60

80

100

0

20

40

60

80

100

Number of enterprises Employment

PercentPercent

Micro, small and medium enterprises:

Micro

Small

Medium

According to research by the WorldBank, the value added per worker in theinformal sector is less than half of thevalue added per worker in the formalsector. Further, employers have no incen-tive to invest in skills of contractualworkers or in providing insurance.

Complex labor laws incentivizefirms to remain small and stay inthe informal sector.

Complex labor laws incentivize firmsto remain small and stay in the informalsector. This allows them to remain underthe radar of labor officials and escapestringent provisions. The large number oflaws leads to inspection visits by differ-ent officials under different laws, whichincreases transaction costs and opens up

opportunities for rent-seeking. There isalso no standardization of documentationrequired or time periods for which recordshave to be kept. The inflexibility of laborlaws has prevented large-scale employ-ment growth in manufacturing. Movingworkers from the informal to the formalsector can unleash productivity growth.In addition, formal workers in the formalsector pay taxes, so revenue collectionscan rise.

Labor mobility has also been ham-pered, as labor laws have reduced thedemand for manufacturing labor. We usea simple framework to estimate the im-pact of labor mobility on growth rates.We broke down GDP growth into threecomponents: 1) the contribution fromsectoral increases in labor productivity,suitably weighted by the sector’s share

Tushar Poddar


of GDP; 2) the contribution from growthin the labor force in the sector, in the ab-sence of labor mobility, again weightedby the sector’s share of GDP; and 3) theimpact on GDP growth from inter-sectoral labor mobility, in the presenceof differences in sectoral labor produc-tivity levels.

These are summarized in the equa-tion (1) below:

)()()(

)1()1(

ISIS

IASAS

AAIAI

A

SIAIIAA

SIAIIAA

mlmlml

nSSnsnSSSsSg

×∏∏−∏

×+×∏∏−∏

×+×∏∏−∏

×+

−−+++

−−++= πππ

where:

superscript A stands for agriculture,I stands for industry, S stands for ser-vices.

g: GDP growth

s: share of a sector in GDP

n: natural rate of growth of laborforce in the sector

l: share of a sector in totalemployment

Π: level of labor productivity

π: growth rate of labor productivity

m: the net movement of laborbetween sectors (e.g., mAS standsfor labor movement fromagricultural to industry).

The contribution of inter-sectoral la-bor mobility on overall GDP growth isrepresented by:

)()()( IS

ISIAS

ASAAI

AIA mlmlml ×

∏∏−∏

×+×∏∏−∏

×+×∏∏−∏

×

(2)

We find that labor is four times moreproductive in industry and six times moreproductive in services compared to agri-culture (Exhibit 3). We measured theimpact on GDP of urbanization by look-ing at productivity differences betweenagriculture and the manufacturing andservices sector. We find that in recentyears the increase in GDP due to the shiftfrom rural to urban areas has not in-creased significantly. The increase inGDP from the migration of workers fromagriculture to other sectors was 0.87 per-centage points of GDP, according to ourestimates, in FY05-FY12. This was notsignificantly higher than the contributionof migration in FY00-FY05 of 0.73 per-cent points of GDP. Moreover, the con-tribution of moving from agriculture toindustry has actually fallen over this pe-riod. Compare this with China, where weestimate urbanization is contributing 2-3percentage points to GDP growth.

The Straitjacket of Labor Laws

India has some 44 labor laws, whichare enacted by the Central Governmentand enforced by both the Central as wellas state governments. In addition, thereare also labor laws enacted and enforcedby the various state governments. Somelaws date from the colonial era. TheTrade Unions Act is from 1926, theWorkmen’s Compensation Act is from1923, and the Factories Act is from 1948.We focus on two acts in particular, that



Exhibit 3 Labor is much more productive in industry & services compared to agriculture

Source: “India: Adding 110 million jobs”, Goldman Sachs Asia Economics Analyst (2014), IssueNo: 14/13

have some of the most restrictive provi-sions and where we believe labor reformscan have the largest impact on manufac-turing employment and growth.

The Industrial Disputes Act (1947)

The law deals with the firing of work-ers, strikes, and the closure of firms. Webelieve this law has done more to holdback the growth of India’s manufactur-ing sector than any other policy. It keepsmost of the labor force in the informalsector, primarily in temporary jobs, pre-venting employers from investing in theirtraining.

We believe the most consequentialpart of the Industrial Disputes Act isChapter Vb, which deals with special pro-visions relating to lay-off, retrenchmentand closure in certain establishments.This chapter is applicable to all firms that

have more than 100 workers. “Lay-offs”denote being out of work temporarily,though still remaining on the employer’spayroll, while “retrenchment” implies per-manent loss of job.

Sections 25M and 25N deal with pro-cedures to be followed for lay-offs andretrenchment, respectively. Under bothsections, the prior permission of the gov-ernment is required on an applicationmade in this regard. For retrenchment,the workman has to be given threemonths’ notice in writing indicating thereasons for the retrenchment. Impor-tantly, the government consults with theworkman before giving permission: “Theappropriate government, after makingsuch enquiry as it thinks fit and after giv-ing a reasonable opportunity of beingheard to the employer, the workmen con-cerned and the person interested in suchretrenchment, may, having regard to the

Tushar Poddar


genuineness and adequacy of the reasonsstated by the employer, the interests ofthe workmen and all other relevant fac-tors, …grant or refuse to grant such per-mission…”

Section 25O deals with the proce-dure for closing down an undertaking.Theemployer has to apply for permission atleast 90 days before the date ofclosure.Workmen are entitled to receivecompensation equivalent to 15 days’ av-erage pay for every year of service.

Section 25Q of the Industrial Dis-putes Act lays out the penalty for lay-offand retrenchment without previous per-mission: “Any employer, who contravenesthe provisions of section 25M section25N shall be punishable with imprison-ment for a term which may extend to onemonth, or with fine which may extend toone thousand rupees, or with both.”

Section 25R, which deals with pen-alty for closure, argues that any employerthat closes down an undertaking withoutcomplying with the procedure of gettingpermission from the government shall bepunishable with imprisonment for a termthat may extend to six months or with afine that may extend to five thousandrupees, or with both.

In addition, there is Section 25G onprocedure for retrenchment: “the em-ployer shall ordinarily retrench the work-man who was the last person to be em-ployed in this category.” The principle fol-lowed is last come, first go. There is noconsideration of merit.

A factory job is not a voluntary con-tract between an individual and anemployer, but a tri-partite arrange-ment with the government.

A factory job is not a voluntary con-tract between an individual and an em-ployer, but a tri-partite arrangement withthe government.

These provisions, which have seensome more pro-worker amendments bythe states, essentially mean that the gov-ernment is involved with every lay-offand retrenchment of workers. A factoryjob is not a voluntary contract betweenan individual and an employer, but a tri-partite arrangement with the government.Moreover, whenever a worker needs tobe fired, the government would consultwith the workers and their representa-tives, thereby bringing in the approval ofthe trade unions in the case. As a result,Indian employers looking to lay-off orretrench workers are presumed to beacting improperly until they can prove oth-erwise. India stands virtually aloneamong countries in having such stringentnorms for employment termination. Thissort of government permission is not re-quired in any developed country and al-most none of the emerging markets re-quires the permission of the governmentand consultations with trade unions. Evencountries with restrictive labor regula-tions (for example, Bangladesh, Philip-pines, and Malaysia), do not require con-sultation and approval from trade unions.

There are few, if any, countries thatrequire government permission to fire



workers. In China, to dismiss a workerdoes not require prior authorization fromthe government though the labor admin-istration must be informed. In Malaysia,the courts do not interfere with the em-ployers’ decision to retrench workers pro-vided the decision is bona fide and nottaken to victimize the employee.

Comparing Gujarat & West Bengal

An interesting case study is a com-parison between Gujarat and West Ben-gal on state amendments to the Indus-trial Disputes Act. The Gujarat govern-ment amended the Industrial DisputesAct in 2004 to allow for greater flexibil-ity in the labor market for Special Eco-nomic Zones (SEZ). It allowed firmswithin the SEZ to lay off workers, with-out seeking the permission of the gov-ernment, by simply giving one month’snotice to the worker. To allow for firmexit, the law was amended such that theemployer can close an undertaking bygiving two months’ notice to the govern-ment. Contrast this with the normal legalrequirement of getting permission fromthe government, with the latter giving anopportunity for the employees to be heardon the issue. The Gujarat Act 12 changedthe definition of “industrial dispute” toexclude the termination of service of anemployee in an SEZ, thereby significantlyreducing the scope for litigation.

The West Bengal Government, incontrast, made several pro-workerchanges. The IDA was amended to beapplicable to more firms – those employ-ing above 50 workers. It changed thelaws to make it virtually impossible to

shut down a loss-making factory. Theemployer with the application for closuremust contain the particulars of the quan-tum, mode, manner and time of paymentof compensation to the workmen. Theowner is also required to furnish a guar-antee to discharge liability for paymentof compensation to the workmen. Mostfactory owners thus prefer to keep theirloss-making units barely viable, but striptheir assets. Not only this, the West Ben-gal amendment says that where an ap-plication for closing down an undertak-ing is made, the appropriate governmentmay issue such directions as may be nec-essary for maintaining normalcy and con-tinuity of work during the notice period.This allows the government to keep aloss-making enterprise afloat even afterthe employers are unable to do so. Thisprevents the churn of capital and labor,which is at the heart of modern enter-prise.

The results are quite clear-cut. WhileGujarat saw a 60% growth in manufac-turing employment in 2000-2012, WestBengal saw only a 22% increase.

There is a strong case for adopt-ing an entirely new law to governindustrial relations.

Given the issues detailed above, andconsidering that the Industrial DisputesAct dates back to 1947, we believe thereis a strong case for adopting an entirelynew law to govern industrial relations.Due to several state amendments overthe decades, the law has become un-wieldy, apart from the strict measures

Tushar Poddar


mentioned above, which we believe areclearly in need of revision. However, anew law may take several years in orderto get a consensus among the states. Inthe meantime, the Gujarat amendmentshows one way forward. The moststringent conditions, especially regardingretrenchment, may be excluded for theSEZs. This would allow these zones tobe havens of employment and allow mar-ket forces to work in the labor market.With the government no longer involvedin every employment decision, employ-ers would be encouraged to increaseformal employment and expand manufac-turing, thereby taking advantage ofeconomies of scale and investing morein the training of their workers.

The Trade Unions Act (1926)

We believe there are at least threekey aspects of this act that merit retool-ing. First, the act allows for a multiplicityof trade unions. The Trade Unions Actstipulates that any seven or more work-ers can form a trade union and apply forregistration. Further amendments allowthe formation of at least ten unions in anestablishment with a size of 70 workers.This means multiple trade unions in anestablishment, which can reduce har-mony, increase conflict, and promotecompetition between them.

Second, members enjoy immunityfrom criminal and civil liability when fur-thering the interests of the trade union.This immunity allows them to call strikes,which can hinder the smooth functioningof industrial units. This includes breach-ing terms of the employment contract.

Third, the law provides the scope foroutsiders to the tune of 50% of the of-fice bearers. This is undesirable as itopens the door to outsiders who can cap-ture the unions and may not have the in-terest of firm employees as their prior-ity.

It is instructive to see how othercountries have reduced the role of tradeunions. Bangladesh reformed its laborlaws in 2006 and now requires a mini-mum membership of 30% of workers toform a trade union. In Sri Lanka, at least40% of workers on whose behalf thetrade union seeks to bargain with theemployer should be members of such atrade union. In Pakistan, 20% of work-men should be members of a union to beentitled for registration. However, for col-lective bargaining, the union with at leastone-third of workers employed in an es-tablishment will be eligible for collectivebargaining.

The union with at least one-thirdof workers employed in an estab-lishment will be eligible for collec-tive bargaining.

In the US, to curtail the power ofunions, the Taft-Hartley Act was passedin 1947. It declared closed shops as ille-gal. A closed shop is where the employeragrees to hire only union members andan employee who resigns from the unionmust be dismissed. The act forbadestrikes in order to assign particular workto the employees. For a strike or lay-off,an 80-day notice had to be given by ei-ther side. Further, the president could



obtain an 80-day injunction to stop thecontinuation of a strike. This has beenused often by US presidents to forestallindustrial strikes. The act strengthenedthe employees’ rights relative to the es-tablished union in several ways, includ-ing that an employee’s membership of anestablished union is not required for himto work. The landmark act helped cor-rect the balance in industrial relations andled to reduced industrial action and strikesas the US economy entered its historicpost-war economic expansion.

In the UK, Margaret Thatcher’sGovernment passed six pieces of leg-islation in 1980-1993 to reduce unionbargaining power. Initially, the permis-sible grounds to refuse to join a unionwere extended. The definition of atrade dispute was narrowed to coveronly disputes between workers andtheir employer, and the applicability ofunions’ immunity for civil and criminalliability was reduced. Inter-union dis-putes and all others lost immunity.Unions became financially liable toemployers by unlawful industrial ac-tion. Industrial action outside the au-thorized terms could lead to the unionbeing sued for damages and result ininjunctions being granted against theunion. Contracts specifying that onlyunion labor was to be employed wereoutlawed. All unions were required toballot members before engaging in in-dustrial action. Absent such a ballot, theunion automatically lost immunity andcould be sued for breach of contract.Individual union members had the rightto take their union to court when in-dustrial action had not been the sub-

ject of a lawful ballot. Further, unionmembers could not be disciplined forfailing to participate in a strike. Thesepieces of legislation changed the natureof industrial relations in the UK, andthey were followed by a period of strongeconomic growth and job creation.

These pieces of legislationchanged the nature of industrialrelations in the UK, and they werefollowed by a period of strong eco-nomic growth and job creation.

Given how outdated the TradeUnions Act has become, there is a clearneed to overhaul to act to make it moreapplicable to the modern era. Legisla-tion in the US and particularly the UKprovide examples of how this can bedone with sufficient political will. Amodern act could promote better rela-tions between employers and unions,encourage greater formal sector em-ployment and economies of scale, andlead to less conflict.

Lessons from Korea

India has one of the lowest shares ofmanufacturing in GDP in Asia, at about15%. An interesting comparison is withKorea, which has one of the highestshares of manufacturing in output at over30%. India and Korea’s share of manu-facturing in output was similar until theearly 1970s at about 14% of GDP. How-ever, the trajectory since then has di-verged dramatically. While Korea’s shareof manufacturing in GDP has acceler-

Tushar Poddar


0

5

10

15

20

25

30

35

0

5

10

15

20

25

30

35

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

PercentPercent

Manufacturing output as a share of GDP:

India

Korea

Source: “How India can become the next Korea”, Goldman Sachs Asia Economics Analyst (2014),Issue No: 14/15

Exhibit 4 India and Korea manufacturing as a share of GDP has diverged since the 1970s

Korea’s labor laws during 1970s-1990s were liberal, allowing consider-able flexibility in employment deci-sions. Until the mid-1970s, Korea’slabor markets were in a state of per-manent excess labor supply on rapidurbanizat ion and demographictailwinds. About 3% of the populationwas aged over 65 years in 1970 com-pared to 11% in 2010, with the work-ing age population growing at around3% per annum in the 1970s. Againstthis backdrop, labor regulations fo-cused on job creation and training, andthe formation and activities of laborunions were restricted until the late1980s, especially for foreign-investedcompanies. The minimum wage wasintroduced only in 1988, and Korea didnot join the ILO until 1991.

Korea’s manufacturing growth beganwith labor-intensive industries. In 1970,the main export items were textiles, ply-wood and wigs, representing 40%, 11%and 11% respectively. Given that theseare labor-intensive sectors, exports drovejob creation. The main items changed togarments, steel plate, and footwear in1980. Garments remained the top exportitem in 1990, with a 12% share but fol-lowed by semiconductors, footwear andTVs. By 2000, however, the top exportitems were transformed to capital-inten-sive items; the top five items were semi-conductors, computers, automobiles, pe-troleum products, and ships. Industrialsectors, of which most are manufactur-ing, have stopped adding to their share oftotal employment since the peak of 28.5%in 1988.

ated, India’s share has stagnated at about15%. Korea’s per-capita income was 2.5

times that of India’s in the early 1950s.Today it stands at eight times.



The experience of other successstories in manufacturing in the regionis similar. In China, in its high-growthphase starting from 1998, computers,electronics, electrical machinery, andtextiles added the most jobs in manu-facturing. Similarly, Taiwan saw simi-lar increases in computers, electronics,electric parts, and leather productsfrom the 1970s. Thus, in the initialgrowth phase, the labor-intensive sec-tors see the most rapid growth. Asgrowth gets more broad-based, moretechnology-based sectors become thekey drivers of job creation. This pro-vides valuable lessons for the sectoralcomposition of growth in India.

There is little doubt from the Asianexamples that the initial phase of growthhas to come from intensively using thefactor that is the most abundant: labor.India’s growth strategy has to rely onlabor-intensive manufacturing, and to dothat requires urgent attention on lawsgoverning labor. India’s labor laws arecurrently not geared to encourage large-scale labor-intensive manufacturing, andwe believe the Industrial Disputes Actand the Trade Unions Act should bechanged to make them more supportiveof job creation. Such a retooling ofIndia’s labor laws would also be in linewith the new government’s stated pri-ority of ensuring sufficient jobs forIndia’s youth.

References

Addison, JohnT.& Siebert, W. Stanley (2000),“Labor Market Reform in the United King-dom: From Thatcher to Blair”, Journal ofPrivate Enterprise, 15(2)

Baird, Charles W. (2011), “Freeing Labor Mar-kets by Reforming Union Laws”, CATOInstitute, Washington D.C.

Comparison of Labor Laws: Select Countries(2013), Exim Bank’s Occasional Paper No.160.

Planning Commission (2013), Twelfth Five YearPlan (2012-2017), Vol. III, 22.Employmentand Skill Development

Ministry of Finance of India, Economic Survey(2012-13), “Seizing the Demographic Divi-dend”, Chapter 2.

Poddar, Tushar & Vaibhaw, Vishal (2014), “In-dia: Adding 110 million jobs”, GoldmanSachs AsiaEconomics Analyst, Issue No:14/13.

Poddar, Tushar, Kwon, Goohoon & Vaibhaw,Vishal (2014), “How India can become thenext Korea”, Goldman SachsAsia Econom-ics Analyst, Issue No: 14/15.

The Industrial Disputes Act, (1947), UniversalLaw Publishing, New Delhi (2012).

US: 1947 Taft-Hartley Substantive Provisions,National Labor Relations Board, http://www.nlrb.gov/who-we-are/our-history/1 9 4 7 - t a f t - h a r t l e y - s u b s t a n t i v e -provisions,retrieved June 2014.

By Invitationsas

Labour Law Reform in India

J.S. Sodhi

There has been an all pervasiverecognition that the countyneeds to reform its labor law re-gime. It has become counterpro-ductive to the twin objectives ofjob creation and industrialpeace and hurts the very peopleit meant to benefit. Successivegovernments failed to matchtheir rhetoric with concrete ac-tion. The present government’sintent of reform followed by se-lective swift action is a welcomedeparture from the past. Malaiseof the labor laws is deep rootedand covers the broad spectrumof 44 Central and a large num-ber of State laws. The paper,however, takes up the criticalchanges needed to make theselaws less cumbersome and lessrigid while keeping intact the le-gitimate rights of the workers.

Introduction

Universally the power structure in thesociety has been and is weighed towardsthe haves and therefore, the weaker sec-tions of the society need protection. In-dia has been no exception. That was theprimary motivation for organization ofworkers and formulation of labor laws bythe governments across the world. InIndia, except for four decades 1950-90,the balance of power has remained withthe employers. Since the 1990s, however,the state has been soft in implementinglabor laws in its letter and spirit. It real-izes that the labor law regime is out ofsync with the realities of the economicenvironment and it has not been able torestore cordial industrial relations andpeace.

Industrial relations had worsened dur-ing the last decade which witnessed man-agements’ aggressiveness towards theworkers and trade unions. They havebeen resisting formation of unions at theenterprise level and coercing the unions,wherever they exist, to terminate theirpolitical affiliations and insist on not tohave outside leadership. Employment ofcontract labor has increased manifoldmuch of which is in violation of the Con-tract Labor (Regulation & Abolition) Act,

J.S. Sodhi is Director, Shri Ram Centre forIndustrial Relations, Human Resources, Economic& Social Development, New Delhi.E-mail:[email protected]


1970. Such workers are paid much lesswages compared to a permanent workerdoing the same job and have no securityof job (Sodhi-ILO, 2010).

Government of India has also beenan active player in the employmentof contract labor in contraventionof the Contract Labor Act.

Strangely enough, Government ofIndia has also been an active player inthe employment of contract labor in con-travention of the Contract Labor Act. Infact it is the largest employer of con-tract labor. The violation of other laborlaws is happening under its very nose.Labor law enforcement in Export Pro-motion Zones is negligible. The positionis similar in the IT sector. State govern-ments like Kerala have passed orders re-stricting the functioning of trade unions.Haryana State Government had passeda similar order preventing its employeesfrom going on strike.

The Legal Framework

There are 44 Central and a largenumber of State laws in the coun-try.

The country has plethora of laborlaws. Since labor in India is on the con-current list, the Central and the state gov-ernments are competent to enact legis-lation. There are 44 Central and a Largenumber of State laws in the country. TheCentral laws are categorized in to threeviz: those enacted and enforced by the

Central Government (12 in number);those enacted by the Central and en-forced both by the Central as well as theState governments (16 in number); and,those enacted and enforced by the vari-ous State governments which apply torespective states (16 in number). Themost critical laws were enacted beforeor just after Independence (the TradeUnion Act, 1926, Industrial Disputes Act,1947, Workmen Compensation Act 1923,Payment of Wages Act 1936 and the In-dustrial Employment-Standing Orders-Act, 1948). Amongst others, majoritywere enacted 30 years back. Chronologi-cally, sixteen of the forty four Centrallaws were enacted before or immediatelyafter Independence, nine in the late 1950sand the 1960s, ten in the 1970s, six in1980s, two each in the nineties and onein the last decade. (Annex 1)

Changing Labor Laws

Obviously, the laws are too old. Whilethe age of the law per se may not be anindicator of its relevance or otherwise, itis important to mention that liberalizationand globalization, which began in the1990s, had totally changed the the eco-nomic paradigm in the country. The con-text in which these laws were enactedhas, therefore, undergone a metamorpho-sis.

With these laws in the background,doing business in India is a cumbersomevocation particularly for an upright en-trepreneur. The multifarious labor laws,with varying connotations and definitions,force the employer into submission to thelabor inspectorate, multiple trade unions



J.S. Sodhi


and rigidities in which it cannot retrenchany employee once employed (subject tothe completion of 240 days of continu-ous work). The laws bind him to not evenclose the enterprise. Government permis-sion is required to effect these changes.

The object of formulating laborlaws was laudable but the chang-ing economic environment hasmade them outdated.

The object of formulating labor lawswas laudable but the changing economicenvironment has made them outdated.The malady is well recognized at the high-est levels. The former Prime Minister DrManmohan Singh had repeatedly statedthat labor laws needed to be changed.He had said (ILC 40th Session) “the pro-cess of doing business with India has tobecome less intimidating, less cumber-some and less bureaucratic to attractmore investment. Many of the legaciesof the past have not much relevance to-day. Indeed, some of them have becomecounterproductive today and may well behurting the very people they are meantto benefit”. He further stated that thecountry needed new laws which providedsafety standards catered to the basicneeds of workers, took care of their wel-fare and were flexible enough to createrather than destroy jobs.

The plea for changes in the labor lawshad gathered momentum with the presentgovernment’s commitment to create aconducive environment for investors andliberate the entrepreneurs from the tyr-anny of myriad labor laws. Equally im-

portant is the fact that India needs to cre-ate 80 million jobs during the next 10 yearswhile at present it has created only twomillion jobs every year during 2005-12.Almost five million persons lost jobs inthe labor intensive manufacturing like thetextiles and apparels and electronics dur-ing 2005-10. According to GoldmanSachs, it is because firms are substitut-ing capital for labor largely because offear of coming into the ambit of a largenumber of labor laws.

Despite the felt need, the noise andcommitment have almost never been fol-lowed through with any concrete action.The logic given for no major changes inthe laws is that any change in Centrallegislation has to be approved by bothhouses of the Parliament and the States(labor is on the concurrent list) can bringin appropriate regulations given in thebroad structure of labor laws(Panagariaya, 2014). The President ofIndia has the constitutional authority toamend the laws as sent by the State gov-ernments under section 254 (2) of theConstitution. However, despite this, onlystates like Gujrat, Maharashtra, AndhraPradesh and Rajasthan (proposedamendments), amongst others have ad-dressed the issue to some extent.

Amendments have also been madeduring the last four years to the Centrallaws. The Employees Compensation Act(earlier known as Workmen’s Compensa-tion Act) had been changed with respectto the wage ceiling limit, which was in-creased from Rs. 4000 to Rs 8000 permonth for purpose of calculating compen-sation along with other minor changes;



Employee State Insurance Act, 1948 wasamended to improve the quality of serviceunder the scheme; the Plantation LaborAct, 1951 was amended to provide safetyand occupational health care to plantationworkers and the Industrial Disputes Act,1947 was amended in 2010 to: amplify theterm ‘appropriate government’ definedunder section 2(a) of the Act; enhance thewage ceiling from Rs. 1600/- to Rs. 10000/- per month to cover workmen working insupervising capacity; provide direct accessto workman to the labor court or tribunal incase of disputes arising out of Section 2(a) of the Act; establish grievance redressalmachinery; and, empower labor courts orTribunals to execute Awards. Some of theproposed amendments are with variouscommittees of the Parliament and at vari-ous stages of discussions.

Amendments by State Govenments

Some of the state government’s havebeen active in making amendments. Forexample, the Gujarat government hadmade changes allowing the SEZ’s to layoff redundant workers without seekingthe permission of the government. Itmandaded the SEZ’s to give a formalnotice, severance pay and a compensa-tion of 45 days for a year of work ratherthan the 15 days given to other work-ers. It also allowed “Fixed Term Em-ployment” under the Industrial StandingOrder Act 1946 and Gujarat Rules 1955which defines conditions of employment,Self consolidation–cum-consolidatedAnnual Return scheme; keeping a maxi-mum of two inspection registers and, fol-lowing the Supreme Court verdict, no payfor no work was also introduced.

The State of Rajasthan has recentlyproposed changes in the Industrial Dis-putes Act, 1947 to the effect that gov-ernment permission will now not be re-quired for retrenchment in companiesemploying up to 300 (up from 100 underthe Central Act) workers. Other amend-ments relate to the change in the Facto-ries Act regarding the applicability of theContract Labor Act, 1970 to establish-ments by raising the limit of number ofworkers to 20 and 40 with or withoutpower up from the present 10 and 20workers. These amendments thoughhave to be ratified by the President ofIndia.

Andhra Pradesh government hadmade amendments in the Contract La-bor Act, 1970 which were hailed as amodel for other states to follow. It hadintroduced a clause restraining the em-ployment of contract labor in core ac-tivities of any establishment if the samewas prohibited by notification. However,wide ranging exemptions were madesuch as the normal functioning of theestablishments such that the activity isordinarily done through contractors; orthe activities are such that they do notrequire full time workers for the majorportion of the working hours in a day orfor longer periods as the case may be;and any sudden increase of volume ofwork in the core activity which needsto be accomplished in a specified time.The amendments amply clarified thecore activity meaning as any activity forwhich establishment is set up which in-cludes any activity essential or neces-sary to the core activity with certainexceptions.

J.S. Sodhi


West Bengal government has turnedthe clock back in 2014 by making it vir-tually impossible to shut down a lossmaking factory. The law in the state ap-plies to all establishments employing upto 60 workers.

It is argued that the States of Gujarat,Andhra Pradesh, Maharashtra and nowRajasthan have made meaningful amend-ments to labor laws of the country. Gujarathas been able to create more manufac-turing jobs than other states, such as WestBengal & Kerala with restrictive laborlaws. However, these forward lookingchanges have been done by a handful ofstates and are partial in nature. Moreover,the amendments relating to the Centrallaws have not addressed most of the coreissues plaguing the labor laws.

Let us, for example, take up somecore issues being discussed and debatedin the context of labor law reform. Theseare: too many laws and their consolida-tion; anomalies and divergent definitionsof the worker, establishment, wages etc.;employment of contract labor in activitieslonger than presently allowed; applicabil-ity of labor laws to companies with vary-ing size & employment; labor administra-tion and enforcement of labor laws or theinspector raj, dispute settlement; and ri-gidities of labor laws. The demand to re-move rigidities has drawn the maximumattention and debate. Let us take it up firstalong with other issues related Acts.

ID Act 1947

Flexibility vs. Rigidity: Flexibilitydebate in India has been mired in the

controversy of too much protection tothe workers: lay off and retrenchmentof the workers; and, the closure of theenterprise. The clauses state that anemployer cannot layoff or retrench anyworker or close down operations of theestablishment without prior permissionfrom the appropriate government.There is though a caveat that permis-sion is deemed to have been grantedby the appropriate government after 60days if no communication is receivedby then.

This clause, according to employ-ers and economists, has been a majorbottleneck of employment generation inthe organized sector. While total em-ployment has increased during the lastten years, formal sector employmenthas been decreasing i.e., employmentgeneration in smaller establishments(where no permission is required for layoff, retrenchment and closure) hasbeen increasing faster than in other(those with 100 workers and above) es-tablishments.

While total employment has in-creased during the last ten years,formal sector employment hasbeen decreasing.

In view of these rigidities, the em-ployers have been resorting to technol-ogy up gradation with the intention ofkeeping their workforce below 100.UNIDO’s (2012) report in this contextstates that the clause relating to applica-bility of the ID Act has kept the Indianenterprises small. According to them, the



average number of workers in Indianfirms in the organized sector is 75(UNIDO, 2012), compared to 178 in In-donesia and 191 in China. The Govern-ment of India’s Economic Survey (2012-13) stated that it could be due to the out-dated labor laws.

It is also argued that India is amongthe very few countries where prior per-mission is required for lay off, retrench-ment and closure. A comparison withother countries (Table 1) shows thatsuch permission is required in India,Pakistan and Sri Lanka only. Such per-mission is not required in Bangladesh,China, Indonesia, Philippines, Malaysia,Thailand and Vietnam. In all countriesof Europe, North America, and those inAfrica, such a permission is not re-quired. In China, Indonesia and Vietnamand most of the countries in Europe andAfrica, only prior consultations are re-quired with the trade unions. In UK,every employer must give a reasonablenotice after one month of work for sev-erance of employment and after twoyears of service, employers must pro-vide a sufficiently fair reason of dis-missal and redundancy payments.

The Government of India had set upmany committees, including the SecondNational Commission on Labor (NCL,2002) to look into the broad frameworkof labor laws including the ID Act andsuggest changes. The NCL which hadbroad based consultations had suggesteda fine balance between organizations’need and workers interest. It had sug-gested that prior permission may not benecessary in respect of layoff and re-

trenchment in an establishment of anysize. It, however, suggested an enhance-ment of the notice period from one totwo months and enhancement of re-trenchment compensation from thepresent 30 to 45 days. For closure ofthe enterprise too the compensation(which is 30 to 60 day’s salary depend-ing upon whether it is a sick and ongo-ing industry with a view to become vi-able, nonprofit organization etc.) may beenhanced.

Prior permission may not be nec-essary in respect of layoff and re-trenchment in an establishment ofany size.

The issue and the prognosis appearsimple and should be implemented. How-ever, there is a huge question mark on therole and intentions of the employers whiledealing with the issue. Many argue thatthe employer’s attitude is just to get rid ofthe workers because of multifarious rea-sons not necessarily connected with thevagaries of business. Some of these are:permanent workers are drawing muchhigher salaries by virtue of the number ofyears of service and replacing them wouldreduce their wage costs substantially.Most of them are unionized and they donot submit to the whims of the employer;the process of legal suspension is verycumbersome even for the genuine delin-quents. Senior age worker’s skills and pro-ductivity are always a matter of concern.In any case the employer is happy to havea workforce whom they can hire and fire.Large scale employment of contract la-bor, much in contravention of the law, is a

J.S. Sodhi


Table 1 Labor Laws Provisions Related to Consultations and Notifications Prior to CollectiveDismissal: Comparison in Select Countries

Prior Consul Notification Notification Approval Consent EmployersCountry tations to the to the by public of workers’ obligations to

with trade public admin- workers’ admini- represent consider alt unions req- is tration represen stration -atives ernatives

uired required -tative or judicial required to dismissalrequired bodies required

required

ASIABangladesh No Yes Yes No No NoChina Yes Yes Yes No No YesIndia Yes Yes Yes Yes Yes* YesIndonesia Yes No Yes No No YesPakistan - - Yes Yes - -Philippines No Yes No No No NoMalaysia No Yes No No No NoSri Lanka No Yes No Yes No NoThailand No Yes No No No NoVietnam Yes Yes Yes No Yes YesEUROPEFrance Yes Yes Yes No No YesGermany Yes Yes Yes No No YesRussia Yes Yes Yes No No YesUK Yes Yes Yes No No YesNORTH AMERICAUSA No Yes Yes No No NoFRICASouth Africa Yes No Yes No No YesTanzania Yes No Yes No No YesUganda No Yes Yes No No No

Source: International Labour Organisation (1947) cited in Exim Bank (2013)* Section 25N of ID Act states that the appropriate government or the specified authority may grantor refuse permission after giving a reasonable opportunity of being heard to the employer, the work-men, and the persons interested in such retrenchment, which implies that without the consent of theworkers’ union it would be difficult to get the permission granted.

point in this direction. It is, therefore,rightly feared that giving them the rightto hire and fire would result in large scaleunemployment in the organized sectorwith an adverse effect on working con-ditions of those (contract or casual work-ers) who will be hired.

Despite this, there is acceptance thatno government permission may be re-

quired for lay-off, retrenchment and clo-sure of the enterprise and requiredchanges may be made in Chapter VA andVB of the ID Act. But given the attitudeof a large section of the employers, it maybe appropriate to make it justifiable(based on economic/business ups anddowns which they should give in writingto the unions and have discussions withthem). The retrenchment compensation



though must be high (at least 60 days ofeach year of completed service or num-ber of years of service left whichever isless) including a notice period of twomonths may be statutorily fixed. This isto enable employers to achieve flexibil-ity but in case of absolute necessity only.The issue of closure may also be dealt ina similar manner. It is well known thatthere are sick companies in India but notsick employers. In fact, many of themremain very rich and enjoy a lavish lifestyle.

Notice of Change: Section 9A (item11 of fourth schedule of ID Act) requiresemployer to give 21 days notice of changein workers conditions (with respect tochange in technology, workload, manning,shift work etc). It has been forcefullyargued that in today’s context, it is a se-rious drawback on the functioning of dayto day activities of the factory as manychanges are to be implemented at a shortnotice. The employers have been de-manding that this section should be com-pletely deleted from the ID Act.

It is fair that no notice may be re-quired and the amendment may be madeafter discussions with the unions on thelegitimacy of the change.

Dispute Settlement: The ID Act setsa procedure for settling labor disputesthrough collective bargaining-- Section 18(1), negotiation, conciliation-Section 18(3) and mediation, voluntary arbitration(Section 10A), compulsory adjudicationin labor court (Section 7) and industrialTribunal (section 7A) and National Tri-bunals (Section 7B). Labor courts are

constituted by the appropriate govern-ment for the adjudication of industrial dis-putes relating to any other matter speci-fied in the Second Schedule. Industrialtribunals likewise are constituted for thesame purpose under the Second or theThird Schedule.

The ID Act’s main objective was tocontain dispute, promote cordial industrialrelations and keep litigation to the mini-mum. However, experience has provedto the contrary. The major reasons havebeen: lack of trust between the employ-ers and the unions/workers; lack of suc-cess of conciliation; legal provisions (sec-tion 2a and section 36 of the ID Act)permitting a worker or a union to raise adispute any time after its occurrence;lack of faith in the arbitration process;the dilatory legal process which is fa-vored by the employers; absence of aproper and statutory bi-partite forum(Works Committees have been defunctfor a long time) to settle differences with-out the third party intervention; and aboveall employers’ disinclination to settle thedispute as a majority of them are regard-ing the dismissal of the employees.

The solution lies in introducing mul-tiple amendments of having competentconciliation officers (Sodhi & Guha,2006), fixing a limit of one year for rais-ing a dispute (Section 2A and Section 36),barring the unions below 15% of the rep-resentation and most importantly, bring-ing in amendment to statutorily promotebi-partite forums to settle disputes ratherthan depending upon a third party for thesame. The country can take cue from theGerman Co-determination Model which

J.S. Sodhi


has statutory bi-partite forums wheremost of the issues have to be resolved(Sodhi et.al, 1995).

Most of the disputes in the labor tri-bunals and courts relate to suspensionand dismissal of the worker. There is afair and a comprehensive mechanism ofsuspension and dismissal given in the IDAct. It is suggested that if the worker isdismissed after proper and fair enquiryon charges of violence, sabotage, assault,as well as insubordination of any kind,the matter may be deemed to have beensorted out at this stage itself and it shouldnot be allowed to be escalated upwardsas allowing the worker to raise this dis-pute at higher levels is tantamount toquestioning of the process of suspensionof the employee.

An amendment may be made here tobroad base the representation of suspen-sion and dismissal process by including oneperson of eminence in the existing pro-cess-an ombudsman type to allay the ap-prehensions of the unions and workersabout the fairness of the process. Therecommendation of the committee shouldbe binding on both the parties on a broadbased list of acts of misconduct which maybe developed by the government. Similarprocess may be followed in other casesof differences including the grievanceredressal machinery between the man-agement and the workers/unions. No dis-pute under this list may be allowed to go

to the labor tribunals or court. In a fewothers (10-20% of the cases), if the dis-pute remains unresolved at the bi-partitelevel, it may be referred to conciliation andupon its failure to arbitration or adjudica-tion with a directive that the legal processwould be completed on a maximum ofthree hearings. This change may bebrought about statutorily. This will, on theone hand, reduce the role of third partyintervention and on the other, de-burdenthe courts leading to a speedy completionof the pending cases.

Applicability of the Act: The ID Actis applicable to every enterprise irrespec-tive of the number of workers. However,Chapter VB of the Act is applicable toenterprises which are not seasonal orwork is not performed intermittently em-ploying more than 100 workers on anaverage per working day in the preced-ing 12 months. The applicability was re-duced from 300 to 100 workers duringthe Emergency (1976). There has beenintense debate on the restoration of themanpower threshold limit as according tosome studies (Fallon & Lucas, 1993) the1976 amendment of the ID Act 1947 re-duced the demand for labor by 17.5%.The employers have also been arguingthat this threshold limit should be re-stored. This change may be favorablyconsidered.

Contract Labor (Regulation &Abolition) Act, 1970

The Act allows employment of con-tract labor in a large number of activitieswhich are considered peripheral in na-ture. It stipulates that such employment

The solution lies in introducingmultiple amendments of havingcompetent conciliation officers.



should be provided through contractorswho are expected to adhere to the legalobligations of employment of contractlabor. The Act applies to every estab-lishment in which 20 or more workmenare employed or were employed on anyday of the preceding 12 months. It doesnot apply to establishments where thework is of intermittent nature. The Actapplies to establishments of the govern-ment and local authorities as well.

The ‘appropriate government’ undersection 10 (1) of the Act is authorizedafter consultation with the Central orState Boards to prohibit employment ofcontract labor in any establishment in anyprocess operation or other work. Suchrestrictions are often decided on the ba-sis of: whether the work is of perennialnature; whether the work is incidental ornecessary for the work of an establish-ment; whether the work is sufficient toemploy a considerable number of wholetime workmen; and, whether the work isbeing done ordinarily through regularworkmen in that establishment or a simi-lar establishment.

The main purpose of the Act was tofacilitate the employment of workmen inactivities which are not perennial and donot form the core activity of the organi-zation. However, the practice has beenotherwise both by the government andother organizations. The reason given isthe inflexibility of the existing labor laws.Also, employers’ claim that in today’schanging economic-environment, the dis-tinction between the core and non-coredoes not exist. This belief by the employ-ers has led to large scale employment of

contract labor, mostly in contravention ofprovisions of the Contract Labor Act.

Admittedly, the rigidities of labor lawsand employers inability to regulate theirworkforce in high and lows of the de-mand is an important issue and organiza-tions must have the flexibility to adjustwork force to remain competitive. Thereare two sets of the policy changes whichmay be considered here. One, the rec-ommendation that flexibility can be intro-duced by deleting Ch. VB and Section9A of the ID Act as highlighted in theearlier part of the paper. If this amend-ment is made, contract labor should onlybe permitted as per the law in non-coreactivities and the appropriate governmentshould strictly enforce their right to abol-ish them in activities which are core tothe organization. Aberrations may inviteserious penalties which need to be en-hanced sufficiently.

Contract labor should only be per-mitted as per the law in non-coreactivities.

Two, in the absence of the suggestedchanges in the ID Act, the law should berenamed as Contract Labor Regulation Actand the word ‘prohibition’ may be removed.However, contract labor employment maybe allowed in specified activities, the list ofwhich may be decided through consulta-tions. This should be done if the industrywould employ them responsibly by payingwages suitably calibrated with the skill lev-els of the employees rather the minimumwages. Wages should be fixed in relationto the equivalence of the job in which per-

J.S. Sodhi


manent workers of a particular organiza-tion are engaged, the level of skills requiredfor the job and years of experience of thosebeing employed as a contract labor (Sodhi,2013). Tripartite consensus on engagementof contract labor and payments as well asthe working conditions must be createdbefore Section 10 of the Act is deleted. Anintegral part of the amendment is the re-sponsibility of the contractor and the aber-rations inviting severe penalty on them.

Another possible approach in en-gagement of contract labor is the con-cept of ‘Fixed Term Employment’ underwhich employment is for a predeterminedperiod and wages and allowances as wellas statutory benefits would be similar toregular workers with such workers nothaving any right to regularization aftercompletion of the term.

The Trade Union Act, 1926

The Act and its many clauses haveled to more confusion and problems thansorting them out. It gives the right to anyseven persons to register a union but issilent on its recognition in the enterprise.The Act allows one-third of its leaders asoutsiders. All this has led to multiplicity ofunions, problems in recognition of unionsand outside leadership (Section 16) whichled to politically motivated leaders’ inter-ference in the affairs of the establishment.

The multiplicity of trade unions isabhorred by the employers and createsproblems with respect to their recogni-tion as a bargaining agent. Even coun-tries like Bangladesh and Srilanka haveenacted far reaching amendments to suit

the present competitive environment. Forexample, Bangladesh reformed its laborlaw and minimum membership of work-ers required for forming a trade union is30, in Pakistan 20 % for its registrationand union with one third of the workersfor collective bargaining (2012 amend-ment). In Sri Lanka, only the union with40% of the membership in the companycan engage in collective bargaining(EXIM Bank, 2013).

It is suggested that only one outsidermay be allowed as an outside leader andthat there should be a limit of companies inwhich an outsider can become a leader ofinternal unions. Second National Commis-sion on Labor (NCL) had made a numberof meaningful suggestions to bring amend-ments in the Trade Union Act. These were:union must have the representation of 20%of the workers for its recognition as a bar-gaining unit; and that section 16 of theTrade Union Act may be deleted. Theseare important suggestions and the Act mayaccordingly be amended.

Labor Administration

Labor administration comprises La-bor Commissioners, Labor Officers andLabor Inspectors. Section 4(1) (9b) (v)of Chapter 6 defines their roles and du-ties. The most difficult and annoying partof labor administration for the employ-ers is the inspection notoriously given thelabel of Inspector Raj. The labor offic-ers and inspectors are expected to verifymultifarious sets of regulations under thelabor and industrial relations legal frame-work. The officials have the power toseek information/records as well as en-



ter any establishment, factory or officeand make copies of any documents main-tained by the management. They canimpose fine for any labor law violations.

Since the employers find it ex-tremely cumbersome to maintainsuch registers, the violations arehigh.

The system has been unable to meetthe laudable objective of monitoring theimplementation of labor laws largely be-cause of the multifarious registers andregulations. The scope extends to regu-lating the height of urinals to workerswash rooms to how often the workplacemust be lime washed. The employer isexpected to maintain 6 different regis-ters of attendance logs, 10 different ac-counts of overtime wages, five types ofannual returns besides adhering to a hostof other stipulations and maintenance ofregisters. Since the employers find it ex-tremely cumbersome to maintain suchregisters, the violations are high. Theemployer prefers to give bribes ratherthan maintain all the registers and theyfind a willing partner amongst majorityof labor inspectors. This system has re-mained ineffective because quite oftenlabor officers do not have reliable infor-mation about the location and dispersalof establishments within their jurisdiction.The ratio of labor inspectors to the num-ber of enterprises is also adverse. It isphysically impossible to cover the areaand the number of companies under thejurisdiction of one inspector. Even facili-ties like transport and other logistics tocarry out inspections are insufficient.

For a policy recommendation, the twoissues which need to be looked at are:the number of laws and their procedureshave to be simplified along with a drasticreduction in the items under inspection;and total freedom from inspection whichthe employers want would be total disre-gard of the primary obligation of the stateto formulate and regulate the implemen-tation of the laws. There is, therefore,the need to maintain a balance first bystatutorily reducing the provisions and listof inspections while keeping intact theobjective as administering the complianceor otherwise of the legal obligations. Thematter has been under consideration anda number of suggestions which have al-ready come up as follows.

The Prime Minister’s Council onTrade & Industry on 4th December 2004was set up under the Chairmanship ofAnwarul Hoda, Member (Industry), Plan-ning Commission and it recommended inDecember 2005, the following steps:

“A system of third party inspectionshould be established to give to enterprisesan option to get their regulatory compliancecertified by reliable agencies like the ISO14001 certification by the Quality Councilof India, Occupational Health and SafetyStandard (OHSAS 18001) by the BritishStandard Institute UK, Social Accountabil-ity Standard (SA 8000) by Social Account-ability International, USA and correspond-ing standard developed by Bureau of In-dian Standards (BIS). Once such certifi-cation has been obtained, the unit shouldbe exempted from routine inspection. Spe-cial inspection would be authorized only onreceipt of credible complaints”.

J.S. Sodhi


The employers demand is for selfcertification and some of the state gov-ernments have already introduced thissystem. However, given the rent seek-ing behavior of the labor inspectorate,the employers will get away with what-ever they do. The Government of India’sprogram of filling e-returns is welcome.But this not being implemented swiftlyand may take a long time. Therefore,till the time this process is completed, amechanism of joint inspections with jointannual calendar of inspections should bedeveloped. However, it is imperativethat the list of inspection is significantlypruned.

It is imperative that the list of in-spection is significantly pruned.

Other Issues

Too many laws: There are too manylaws and there is an urgent need to con-solidate them. As Second NationalCommission on Labor (NCL) suggested,these must be grouped together underfive categories: labor relations; wages& working conditions; social security,and a separate bill for agricultural work-ers and others in the unorganized sec-tor. Also, there are different laws appli-cable to establishments according tomicro, small and medium, size ofworkforce and across sectors. Thisshould be done away with.

Different definition of the workerin laws: There is also the problem ofno uniform definition of a worker in the

Acts. Some like the Minimum WagesAct, Payment of Gratuity Act, EmployeeProvident Fund Act and others do notdefine a ‘worker’ and instead define an‘employee’ with different definitions.The ID Act Section 2(g) defines work-man “as any person (including an ap-prentice) employed in any industry to doany manual, unskilled, skilled, technical,operational, clerical or supervisory workfor hire or reward………..”. This in it-self has given rise to ambiguity as courtshave upheld that even a Pilot is a work-man since their work is of technical na-ture. Even supervisors are a part of thedefinition of a worker according to theID Act.

One definition of a workmen irre-spective of the act and the size of estab-lishment is the immediate need. The su-pervisors should be out of the ambit ofthe definition of the worker except in thesmaller establishments (10 and 20 work-ers), in which the salary is of below Rs.10000/-.

A summary at all the suggestedamendments in labour laws is given inTable 2.

Concluding Remarks

Business must not be tied up to toomany rules and regulations and then ex-pected to deliver. Labor law reformthough not the only contributor, will pavethe way for robust growth and invest-ment. It has been an important agendaof a number of governments, nationalcommittees and the Second National



Tabl

e 2

Sugg

este

d L

abor

Law

Cha

nges

at a

Gla

nce

Labo

r Law

Cur

rent

Leg

isla

tion

Prop

osed

Am

endm

ent/C

hang

e

1.ID

Act

, 194

7•

Gov

ernm

ent p

erm

issi

on re

quir

eda.

No

gove

rnm

ent p

erm

issi

on m

ay b

e re

quir

ed fo

r•

Lay

off,

Ret

renc

hmen

t &•

Ret

renc

hmen

t com

pens

atio

n of

15

lay

off,

retr

ench

men

t and

clo

sure

Clo

sure

days

for e

ach

year

com

plet

ed.

b.R

etre

nchm

ent c

ompe

nsat

ion

to b

e in

crea

sed

to (C

hapt

er V

B, V

A)

•O

ne m

onth

’s p

rior

not

ice

indi

catin

g45

day

s pe

r yea

r of c

ompl

eted

or n

umbe

r of

reas

on fo

r ret

renc

hmen

tye

ars

of s

ervi

ce le

ft w

hich

ever

is le

ss•

Com

pens

atio

n fo

r cl

osur

e de

pend

s up

onc.

Not

ice

peri

od o

f 2 m

onth

s fo

r ret

renc

hmen

tw

heth

er th

e in

dust

ry is

sic

k, n

on-p

rofi

t etc

.d.

Clo

sure

requ

irem

ents

may

be

mad

e st

ring

ent

with

hig

her c

ompe

nsat

ion

com

pare

d to

the

pres

ent

one.

•Not

ice

of C

hang

e (S

ectio

n 9A

)•

21 d

ays

notic

e to

be

give

n to

the

gove

rnm

ent.

a.N

o go

vern

men

t not

ice

may

be

requ

ired

b.C

arry

out

the

chan

ges

afte

r dis

cuss

ion

of th

e le

-gi

timac

y of

cha

nge

with

the

unio

ns/w

orke

rs.

Subm

it th

e le

gitim

acy

repo

rt to

the

gove

rnm

ent.

2.D

ispu

te S

ettl

emen

t•

Prov

isio

n fo

r rai

sing

a d

ispu

te•

Perm

its a

wor

ker/

unio

n to

res

ort t

o a

dis

pute

a.Pu

t a

six

mon

th li

mit

for r

aisi

ng a

dis

pute

(Sec

tion

2 A

& S

ectio

n 26

)an

y tim

ea.

Bar

uni

ons

with

less

than

15%

from

rais

ing

the

•Col

lect

ive

barg

aini

ng S

ectio

n•

Bi-

part

ite fo

rum

s, e

xcep

t Wor

ks C

omm

ittee

s,di

sput

e18

(1),

(3),

and

Labo

ur C

ourt

sar

e no

t sta

tuto

ry in

Nat

ure

b.Pr

ovid

e le

gal s

anct

ity to

the

bi-p

artit

e fo

rum

s(S

ectio

n 7A

& B

), Vo

lunt

ary

like

the

co-d

eter

min

atio

n m

odel

of G

erm

any.

arbi

trat

ion

(Sec

tion

10A

) and

c.In

volv

e a

thir

d pa

rty

like

the

ombu

dsm

an in

the

Com

puls

ory

adju

dica

tion

enqu

iry

proc

ess

of s

uspe

nsio

n an

d di

smis

sal.

(Sec

tion

7)d.

The

reco

mm

enda

tion

shou

ld b

e bi

ndin

g (o

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J.S. Sodhi


3.C

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Commission on Labor. All of themhave categorically stated the need tochange labor laws. What has stalledthese reforms is the lack of consen-sus among the three actors i.e., thegovernment, employers and theunions. The unions and the employersjust would not give up an inch of theirrespective turfs. Yet a consensus atthe tripartite forums is the essence ofthe labor law framework of India. TheCentral Government had also not beensteadfast despite understanding thefelt need and public postures. Thestalemate has, therefore, continued.The governments have also been anx-ious of the so called ‘political back-lash’. It is difficult to comprehend thatsuccessive governments have notbeen so much concerned about givinglegal protection at par with the orga-nized sector workers to 94% of theunorganized sector workers but isworried about the political backlash ofmaking amendments for six percent ofthem. It will be pertinent to highlighthere that the coverage of ID Act, 1947,the rigidity clauses of which have beenthe bone of contention, has a cover-age of about 1.4% of the workforceor 3% of the hired workforce. Theother apprehension is of large scaleretrenchments and closure which isnot without valid reason. This thoughcan be addressed by substantially in-creasing the compensation to be paidin such cases so that the employerresorts to them only in case of abso-lute necessity. The experience of someof the state governments like AndhraPradesh for the contract labor, Gujaratfor making a number of desired

J.S. Sodhi


changes in the labor laws and now theproposed ones in Rajasthan should helpthe authorities in allaying some of theseapprehensions to create an investor andbusiness friendly, environment. As longas the amendments in labor laws do nottrample the rights of workers, theseshould be carried forward. Fimally, theCentral Government must take the leadin bringing the desired amendmentsrather than passing the buck on to theState governments. Leaving it to the lat-ter will only escalate disparities within thecountry with its economic and social con-sequences.

References

Exim Bank (2013), “Comparison of Labor Laws:Select Countries”, Research Brief No. 75,August 2013, Mumbai.

Fallon, Peter R. & Lucas, E. B. R. (1993), “JobSecurity Regulations and the Dynamic De-mand for Industrial Labor in India and Zim-babwe”, Journal of Economic Development,40 (2)

Government of India (2012-13), India: EconomicSurvey, Ministry of Finance, New Delhi

Government of India (2002), Second NationalCommission on Labour, Ministry of Labourand Employment, New Delhi.

International Labor Organization (1947), Indus-trial Disputes Act for India, Exim BankResearch Brief No. 75, August 2013

Panagariya, A. (2014), “Masters of Their Des-tiny”, The Times of India, May 31, NewDelhi.

Sodhi, J .S, Joshi Rama, Chellapa, H.V.V,Masilamani, S, Kalia, S. & Sandhu, H.(1995), In Search of Participation, Shri RamCentre for IR,HR Economic & Social De-velopment, New Delhi.

Sodhi, J.S.(2013), Employers Perspectives onContract Labor, Mimeograph, Shri RamCentre for IR,HR Economic & Social De-velopment, New Delhi

Sodhi, J.S. & Guha B.P. (2006), Effectiveness ofConcil iat ion Machinery in India,Mimegragh, Shri Ram Centre for IR, HREconomic & Social Development,, NewDelhi.

UNIDO (2012), International Year Book on In-dustrial Statistics, Geneva.

Annex I Labor Laws Enacted by the Central Government

Sl No. Name of the Act

a. Labor laws enacted & enforced by Central Government

1. The Employees’ State Insurance Act, 19482. The Employees’ Provident Fund and Miscellaneous Provisions Act, 19523. The Dock Workers (Safety, Health and Welfare) Act, 19864. The Mines Act, 19525. The Iron Ore Mines, Manganese Ore Mines and Chrome Ore Mines Labor

Welfare(Cess) Act, 19766. The Iron Ore Mines, Manganese Ore Mines and Chrome Ore Mines Labor Welfare Fund

Act, 19767. The Mica Mines Labor Welfare Fund Act, 19468. The Beedi Workers Welfare Cess Act, 19769. The Limestone and Dolomite Mines Labor Welfare Fund Act, 197210. The Cine Wokers Welfare (Cess) act, 1981



11 The Beedi Workers Welfare Fund Act, 197612 The Cine Workers Welfare Fund Act, 1981

b. Labour Laws enacted by Central and enforced by both the Central as well as theState Governments

13 The Child Laobr (Prohibition and Regulation) Act, 198614. The Building and Other Constructions Workers’ (Regulation of Employment and Condi-

tions of Service) act, 199615. The Contract Labor (Regulation and Abolition) Act, 197016. The Equal Remuneration Act, 197617. The Industrial Disputes Act, 194718. The Industrial Employment (Standing Orders)Act, 194619. The Inter-State Migrant Workmen (Regulation of Employment and Conditions of Ser-

vice) Act, 197920. The Labor Laws (Exemption from Furnishing Returns and Maintaining Registers by

Certain Establishments) Act, 198821. The Maternity Benefit Act, 196122. The Minimum Wages Act, 194823. The Payment of Bonus Act, 196524. The Payment of Gratuity Act, 197225. The Payment of Wages Act, 193626. The Cine Workers and Cinema Theatre Workers (Regulation of Employment) Act, 198127. The building and Other Construction Workers Cess Act, 199628. The Apprentices Act, 1961

c. Labour Laws enacted by Central Government and Enforced by the State Governments

29. The Employers’ Liability Act, 193830. The factories Act, 194831. The Motor Transport Workers Act, 196132. The Personal Injuries (Compensation Insurance) Act, 196333. The Personal Injuries (Emergency Provisions) Act, 196234. The Plantation Labor Act, 195135. The Sales Promotion Employees (Conditions of Service) Act, 197636. The Trade unions Act, 192637. The Weekly Holidays Act, 194238. The Working Journalists and Other Newspapers Employees (Conditions of Service) and

Miscellaneous Provisions Act, 195539. The Workmen’s Compensation Act, 192340. The Employment Exchange (Compulsory Notification of Vacancies) Act, 195941. The Children (Pledging of Laobur ) Act 193842. The Bonded Laobur System (Abolition) Act, 197643. The Beedi and Cigar Workers (Conditions of Employment) Act, 196644. The Unorganized Workers’ Social Security Act, 2008

By Invitationssas

Indian Industrial Relations Law: Case for Reform

Debi S. Saini

Indian labor laws were con-ceived in the pre-independenceperiod or shortly afterwardsbased on an import-substitutionand statist model of economicdevelopment. They were pre-mised on adversarial IR assump-tions, social justice and indus-trial peace. The paradigm isshifting towards global compe-tition, productivity, efficiencyand mutual cooperation.IR is giv-ing way to employee relations.This paper examines the way theIndustrial Disputes Act 1947, theTrade Unions Act 1926, and theIndustrial Employment (StandingOrders) Act 1946 have beenworking and to what effect. Itdiscusses a broad framework ofchanges that need to be effectedin them so as to be aligned withthe contemporary global and In-dian economic realities.

Introduction

Aneconomic growth model that acountry adopts has to have a clear no-tion of the basic postulates of industrialrelations (IR) as a facilitator. After at-taining Independence, India adopted thestatist,import-substitution model of eco-nomic development. Economic planning,licensing, foreign exchange rationing andregulation, and capital market regulationpolicies were followed strictly so as tobe aligned with the national priorities.Economic growth was juxtaposed with“social justice” as an essential societalvalue. Trade unions were allowed toflourish and expand as instruments ofpromoting countervailing power of theworking class subject to the above val-ues. Simultaneously was preached theconcept of responsible unionism; asadversarial collective bargaining wasseen as the “law of the jungle.” Espe-cially during the 1960s and 1970s tradeunions grew in strength. But this modelceased to be effective and resulted inwhat came to be labeled as “the Hindurate of growth.” Eventually, the modelled into a deep crisis during the late eight-ies. Critics reminded the planners the vir-tues of Thatcherism and Reagonomics,and suggested the adoption of the glo-balization model as a savior. The new

Debi S. Saini is Professor & Chairperson—HRM Area, Management DevelopmentInstitute, Mehrauli Road, Gurgaon 122007.E-Mail:[email protected]


economic policy (NEP) adopted in July1991 was symptomatic of a shift fromthe pursuit of values like socialjustice,status, and welfare state to efficiency,productivity, freedom of contract, mar-ket focus, competition and flexibility ofwork. The then finance minister, Dr.Manmohan Singh who later becamePrime Minister during 2004-2014, prom-ised labor law reform to facilitate thenew paradigm. For addressing the sys-temic malaise of the earlier model, mar-ket was viewed as an instrument of de-livering justice through the ‘trickledown’.

Employers saw trade unions to behindering operational flexibilitywithout which they found it verydifficult to compete in the chaoticeconomic environment.

The above policies of globalizationeventually got reflected in a new kindof workplace order. Employers sawtrade unions to be hindering operationalflexibility without which (flexibility)they found it very difficult to competein the chaotic economic environment.State became far less sympathetic tothe cause of social justice and the re-sultant union crisis; this was still moreso in the developing countries. The in-stitution of trade unionism and collec-tive bargaining came under heavy pres-sure so as to take a comprehensive careof all employees at work (Kochan etal., 1986). Cost became a concern dueto the rising intensity of competition.Collective bargaining zones were get-ting squeezed; and employers found it

difficult to be liberal in granting wageincreases.

India has about 47 major pieces ofcentral labor legislation and more than100 pieces of state labor legislation thatwere intended to carry out the Constitu-tional vision of building a welfare stateas envisaged in the Directive Principlesof the State Policy. These directiveshave been described as the “soul” of In-dian Constitution (Dhavan, 1989). Indianlabor laws can be grouped into five ma-jor categories i.e. laws relating to: work-ing conditions, wages and monetary ben-efits, industrial relations, social securityand miscellaneous labor laws (Saini, 2011for a detailed discussion). Some of theselaws were already in existence at thetime of Independence; more were addedlater.

The supporters of globalization haveargued that many pieces of Indian laborlegislation have lost their relevance dueto changes in the global and Indian eco-nomic environment and the onset of theintense competition. Research exists totestify that perceived rigidities in Indianlaborlaw have been negatively impactingthe development of the Indian economy(Mitchell, Mahy&Gahan, 2012: 41). In-ternational institutions like the WorldBank, IMF, and foreign investors havebeen waiting since long about fulfillmentof the government’s promise to makechanges in labor law, and still more so inthe IR law. The top most concern of in-dustry is the belief that too much of jobsecurity promotes inefficiency and lowproductivity. It also reduces labor mobil-ity that is a necessary condition for effi-

Indian Industrial Relations Law


Debi S. Saini


cient working of firms in a competitiveenvironment. The example of China isbeing cited to support this; as it has un-dertaken industrial re-structuring as perthe needs of the investors and globaliza-tion. At the same time, there is plenty ofliterature to testify that the system isimplemented such that there are severeproblems in justice reaching the work-ers (Saini, 1997; Mitchell, Mahy&Gahan,2012: 22).

In the above context, this paper ex-amines the structure and working of In-dian IR law and suggests areas of stateaction through reform. Towards this end,it discusses the framework of changesthat need to be effected in them so as tobe in sync with the contemporary globaland Indian economic realities. It alsoanalyses the new employee relationsstrategies that employers are followingto stay ahead in the era of intense com-petition. On the basis of the analysis ofthe structure and working of the threemain pieces of IR legislation in India, ithas argued for a case of reform in manyaspects of these three Acts. The paperalso identifies areas of action for thetrade unions, employers and the state.

The Indian IR Law: Structure &Working

Many alternative models of social andeconomic justice have been adopted indifferent parts of the world in the fieldof industrial relations (IR). These mod-els range from powerful corporatismofContinental Europe to completevoluntarism of the type where labor lawhas been seen as only a footnote to col-

lective bargaining (also named as theClassical Oxford School of IR in pre-Thatcher UK) to substantial legalism andstate involvement in USA to almost nolabor law in some parts of the develop-ing world (Saini, 2003).Indian model issomewhere in between,upholding thefreedom to unionize and promoting indus-trial peace through negotiation as well asstate control of the industrial action. Glo-balization has, however, made its indel-ible impact on these models. And, thereis a trend towards a greater degree ofcooperation in IR.

The Industrial Disputes Act 1947(IDA) is the most important pieceof IR legislation in the country.

India’s IR law is enshrined in threepieces of legislation: the Industrial Dis-putes Act 1947 (IDA), the Trade UnionsAct 1926 (TUA), and the Industrial Em-ployment (Standing Orders) Act 1946(IESOA). The Industrial Disputes Act1947 (IDA) is the most important pieceof IR legislation in the country. It has itsroots in the Rule 81-A of Defence of In-dia Rules that was promulgated by theBritish Indian Government in 1942 tocontrol industrial unrest in the country,as the British were focusing themselveson fighting the Second World War andcould not afford to have a rising curve ofindustrial disputes. This rule envisaged asystem of compulsory adjudication of in-dustrial disputes by government-ap-pointed tribunals in case the disputantparties failed to resolve it bilaterally.Even after the War was over, it wasfound that Rule 81-A was successful in



controlling the industrial unrest. Shortlybefore Independence in April, 1947, thisrule was converted into a full-fledged Actin the form of IDA. The Act envisages aconciliation-adjudication-arbitrationmodel of industrial disputes resolution. Itempowers the “appropriate government”,in its discretion, to refer an industrial dis-pute for adjudication either on failure ofconciliation or even without any resortto conciliation. Among others, the Actprovides for a dispute prevention mecha-nism in the form of works committee,conciliation officers, board of conciliation,and court of inquiry. After the failure ofthe dispute to get resolved through thepreventive mechanism, it can be referredby the appropriate government, in its dis-cretion, for adjudication to a labor courtor industrial tribunal, depending upon thenature and type of the dispute.

Initially, only disputes espoused by atrade union or substantial number of per-sons were treated as industrial disputes,but later on, a provision for processingindividual termination (including dismissal,discharge or retrenchment) disputes wasinducted in the IDA, thus treating someindividual disputes as industrial disputes.The 2010 amendment to the IDA is thelatest. Among others, it has provided thatfor individual termination disputes theparties can directly approach the laborcourt, and no reference is required forthe same.1 There is a provision for en-tering into conciliated settlement undersection 12 (3), which has wider applica-

tion on all present and future workers ofthe organization till the settlement is inoperation. In addition, under section 18(1), parties can enter into a voluntarysettlement (without the intervention of theCO); but this settlement is enforceableonly against the signatories. In 1971, sec-tion 11-A was inducted in the IDA at thebehest of trade union leadership, whichclaimed rampant victimization of theworkmen by the employers. This had theeffect of making labor court virtually acourt of appeal in termination cases. Inthese cases, the labor court could alterthe punishment even if the workman isfound guilty of misconduct. This provi-sion is seen by the industry as contribut-ing to inflexibility, and as an obstructionin maintaining discipline. It is argued thatunder this section courts have many timesexonerated delinquent workers or givenmuch less punishment to them even whenthey were found guilty of having com-mitted a misconduct.

Courts have many times exoner-ated delinquent workers or givenmuch less punishment to them evenwhen they were found guilty of hav-ing committed a misconduct.

The strike provisions of the IDA areprovided in sections 22 to 25. Workersemployed in a public utility service can-not go on strike without giving a noticeof at least 14 days, and before the dayspecified in the notice. But there is nosuch provision that obliges workers togive strike notice in non-public utilities.They may even go on a lightning strikeinstantaneously, and yet the strike would

1 Discretionary reference by the appropriategovernment is still a necessity for adjudication ofcollective interest disputes.

Debi S. Saini


not be considered as illegal for not serv-ing any notice. Also, there is no provi-sion in the Indian law for conducting astrike ballot amongst workers. Thus, evena minority of workers can give a call forstrike. Section 36 of the Act bans thepresence of lawyers in conciliation pro-ceedings. It also restricts lawyers’ ap-pearance before the adjudicatory bodies.But a lawyer can be allowed to appearbefore these bodies if the other partygives his consent to this effect. Section9-A provides for a notice of 21 days tobe given by the employer before makingany change in service conditions of theworkmen.2 This provision is also beingcontested by the industry as it restrictsits flexibility, and finds it difficult to ad-just to the needs of the changing busi-ness environment. For, workers raise anindustrial dispute once such notice isgiven, which further restricts theemployer’s flexibility.

The TUA confers on workers thefreedom to register a trade union subjectto the requirements of the Act. There isa provision for creation of a political fundfor being used for different political pur-poses. This is another provision whichhas attracted bitter criticism. The Act alsoprovides to unions and workers immunityagainst civil and criminal liability for par-ticipating in certain types of industrialaction. Maximum problems faced byworkers under the TUA relate to regis-tration of a trade union. There are wide-spread malpractices indulged in at the

office of the registrar of trade unions, andoften workers are denied trade union reg-istration on frivolous grounds. Many atime, political pressures or court interven-tion is sought for compelling the regis-trar to register the trade union.

The standing orders when certifiedare deemed to have become a partof the contract of employment.

The main objective of the IESOA isto ensure standardization of the terms ofemployment and their certification by agovernment officer, who is known as thecertifying officer. He is charged with theduty of certifying that the contents of thestanding orders are just and fair. Thereis also provision for payment of subsis-tence allowance during the suspensionperiod while the domestic inquiry is be-ing conducted against the worker. Thestanding orders also contain among oth-ers, the procedure for taking disciplinaryaction against the workers. The standingorders when certified by the certifyingofficer are deemed to have become a partof the contract of employment.

Looking at the way the IR law isworking, it can be said that the industrialdisputes resolution systems and pro-cesses suffer from the problems of de-lay, formalism and inaccessibility (Baxi,1993; Saini, 1997). The system has notbeen able to check the commission ofunfair labor practices (ULPs)3 both bythe employers and the employees (Saini,

2 The matters in respect of which change in serviceconditions cannot be done have been provided inSchedule IV of the IDA.

3 See the Fifth Schedule of the Industrial DisputesAct 1947.



1995). The law has also not been able toprotect the interest of the trade unionleaders who come in the forefront to fightfor their associates. A study of the ac-tual working of the adjudication systemfound that especially in the context ofmedium and small organizations, labortribunals, in effect, do the work of pro-viding “legitimacy to the union-smashingexercises of the employers” (Saini,1997).

There is a serious problem of the non-enforcement of labor laws from theworkers’ point of view. This is largely aresult of the acts of collusion betweenemployers, bureaucracy, labor law con-sultants, and even union leaders, espe-cially in the private sector (Saini, 1995a).At the same time, comparatively pro-gressive employers are supporters ofmost of these provisions, but are askingfor changes in some of these provisionsso as to adapt to the needs of thechanged times. Especially the MNCs andconscientious employers want an IRframework with simpler laws. They wantto keep themselves away frommaneuverings that are known to be tak-ing place at the behest of the labor de-partment or ‘brief-case union leaders’.

There are some good indicators forthe employers. More dismissal decisionsrendered by the higher judiciary are goingin favor of the employer in the name ofefficiency and productivity. Also, over theyears, the number of strikes is declining,and so is the number of mandays lost.

A new IR strategy is discerniblefrom the IR policies of more progres-

sive organizations and many MNCs.They are pursuing union-substitutionstrategies through provision of betteremployee welfare, care, empowerment,employee involvement, and communica-tion. This is called neo-unitarism—alsocalled the IBM model of employee re-lations. Companies like the Tata Steelare very successfully practicing a pa-ternalistic IR model (Saini &Budhwar,2013). Even some manufacturing com-panies like Jindal Aluminium Ltd. in Ban-galore are practicing IBM type of non-union policies (Patil, 1998). At the sametime there are many stories of successin resisting these HR strategies whichare perceived by the union to be dilutingthe eff icacy of union strength.(Ramaswamy, 2000; 219).There arealso revelations that unions are becom-ing more cooperative with the employ-ers than before in the private as well aspublic sectors (Ramaswamy, 1994;VenkataRatnam, 2003).

Unions are becoming more coop-erative with the employers thanbefore in the private as well aspublic sectors.

Overall, we are witnessing an era ofa greater degree of cooperation even asit might be partly due to the covert pres-sure on the trade union leaders. But ithas also to do with the workers realizingthat employers can no more shell outmoney to meet all types of demands.Cooperation seems to be becoming theneed of the employers as well as theemployees.

Debi S. Saini


Policy Suggestions andRecommendations

On the basis of the structure andworking of these industrial relations andother laws, the following amendments tothe Indian IR legislation are suggested:

1. Renaming the IDA as the EmployeeRelations Act:The term industrialrelations came into vogue in the late-nineteenth century, more and gainedpopulanity during and after the Sec-ond World War. After the War wasover more and more employers en-tered into collective agreements withtheir employees. Trade unions alsoshowed rise in their membership.The focus of IR was on the relation-ships between an employer and theemployees and resolving industrialdisputes collectively through the in-volvement of union.But since the1980s and beyond, a sea change isdiscernible in the IR field. Large sec-tions of the workforce are temporary,part-time, ad hoc, agency and con-tract workers, who may not be mem-bers of any union. They expect to betalked to individually for their moti-vation and commitment. There ismore emphasis on forging coopera-tion through employee engagementinterventions almost all over. Bothresearchers and employers are nowusing the term employee relations(ER) which emphasizes more on theindividual than the unionized workerforce. Though many use the twoterms IR and ER inter-changeably,the focus in the former is more onthe unionized and in the latter more

on the individual employee. ER in-volves building relationship and orga-nizational culture through human re-source interventions for employeecommitment (Saini &Budhwar,2013). Hence a case for re-namingthe IDA as the Employees RelationsAct.

2. Integration &Simplification:Indiahas 47 central labor statutes, andsome 150 pieces of state labor legis-lation. There is a demand for inte-gration and simplification of theselaws so that at least trade union lead-ers and common managers can un-derstand their spirit and contents.Ironically, no attempt has been madein this regard. Sometime back theNational Labor Law Association pre-pared, what they referred to as thedraft Indian Labor Code, 1994(NLLA, 1994). This was an attemptto imbibe fundamental principles ofIndian labor jurisprudence in an inte-grated manner. This code was alsoan attempt to integrate and simplifydefinitions of certain terms as definedin different pieces of labor legisla-tion. Presently, we have some 13 dif-ferent definitions of wages, and asmany definitions of worker and otherterms. This causes tremendous con-fusion in the mind of the worker andall others dealing with these piecesof legislation.

3. Industrial Relations Commissions(IRCs):As is clear from the earliersections, IDA has its roots in a tem-porary war-time ordinance. In mostdeveloped countries, labor disputesare resolved through collective bar-



gaining, and not through adjudica-tion. India had intense debate dur-ing 1970s and 1980s about constitu-tion of autonomous multi-memberindustrial relations commissions(IRCs) at the central and state lev-els in place of the present industrialtribunals that are presided over byone person only. This debate startedafter the recommendations of thefirst National Commission on Labor(Government of India, 1969). Lateron, the NLLA’s Draft Labor Codeof 1994 also made similar recom-mendations of setting up autonomouscommissions.4 Even the second Na-tional Commission on Labor 2002(Government of India, 2002) en-dorsed the recommendation to pro-vide for IRCs at the central and statelevels. They were to deal with in-terests as well as rights in labormatters. The functions expected tobe performed by these IRCs in-cluded: certification of bargainingagents and bargaining councils; de-ciding the level at which collectivebargaining shall be held; mediationof disputes if desired by disputantparties; and adjudication of disputes

not settled by any of the abovemethods.Despite nearly three de-cades of debate, recommendationsto constitute the IRCs were neverput into operation. Presently, it seemsto have gone into oblivion; the con-cerned parties have even forgottenabout them. It is suggested that witha view to arrive at more acceptablesolutions to IR problems there is anurgent need to put the recommen-dation for constituting these IRCsinto operation. These IRCs wouldhave one judicial and two non-judi-cial members who should be expertsin matters related to labor issues andsocial sciences. The labor courtscould continue to decide individualtermination matters, as activated di-rectly by the workman concerneddirectly.

4. Re-orienting the Conciliators &Adjudicators: IR adjudication is aunique branch of law. Many distin-guished jurists and sociologists of lawhave opined that every person han-dling labor matters should have theknowledge of law and social sciences.Otto Kahn-Freund, a celebrated laborexpert insisted that a lawyer could notunderstand law, let alone be an edu-cated lawyer unless/he learnt the lawin conjunction with other social sci-ence disciplines. Another jurist, Jus-tice Brandeis, has gone to the extentof commenting that “a lawyer who hasnot studied economics and sociologyis very apt to become a public enemy”(Wedderburn, 1983:30). This is trueof labor law where scholars andjudges often need to cross disciplin-

4 On the basis of the recommendations of theNational Commission on Labor (Government ofIndia, 1969) and some other committees, NLLAalso recommended constitution of such multi-member mediation-cum-adjudicatory bodies at thestate and the central levels. The NLLA NationalLabor Code draft used the term NationalLaborRelations Commission (NLRCs) in place of IRCs.It also provided that NLRCs shall have powersexercisable by the Supreme Court of India underclause 2 of Article 32 of the Constitution. It alsoenvisages the taking away of the jurisdiction of thehigh courts over the labor relations commissions.

Debi S. Saini


ary boundaries to articulate labor jus-tice issues. Report of the First Laborlaw Review Committee of the Gov-ernment of Gujarat had envisaged acontinuous training for a period of sixmonths for the new recruits to laborjudiciary and also a refresher coursefor labor court judges and labor offic-ers at the end of every three years(Desai, 1994; Government of Gujarat,1974). It is suggested that the CentralGovernment establishes a special na-tional institute exclusively to train la-bor judges, labor administrators andmembers of the proposed IRCs. It willhelp developing in them the acumenfor the inquisitorial method of disputeprocessing.

5. Sending the Conciliation File toAdjudicator: It is a fact that theconciliation file of the industrial dis-pute contains some useful data thatcan be helpful in understanding thenuances of the case by the presidingofficer of tribunal/labor court con-cerned. But it is never sent to them.It may be recalled that the wholepurpose of the IDA was promotinginquisitorial and not adversarial inves-tigation of the industrial dispute. Thefile can help understand better theissues on hand, the attitude and be-havior of the parties concerned on theissues, the nature of the demands in-cluding their genuineness, the pres-sures on them, and the contents ofthe failure report by the conciliationofficer including the confidential part.This will also make the COs moreresponsible in writing the failure re-port. It is therefore suggested that

the entire conciliation file includingthe failure report of the CO shouldbe forwarded to the labor court/in-dustrial tribunal along with the refer-ence order. Further, this will help di-lute legalism in processing the indus-trial disputes.

6. Lawyers in Conciliation &Adjudi-cation Processes: Section 36 of theIDA prohibits the presence of law-yers in the conciliation process, andrestricts their presence in adjudica-tion proceedings. Lawyers have beendescribed as “traditional elites”(Abel, 1973) and “repeat players”(Munger, 1991: 604), and having end-less ingenuity. Often, they tire out theother side as also the judges by in-dulging in endless arguments. Theidea underlying section 36 of the IDAwas to ensure that an industrial dis-pute does not become a completelawyers’ domain and subjected to le-gal wrangling; but must be discussedbetween the parties as one involvingeconomic relations through politicalsolutions. But the situation today issuch that in labor courts and tribu-nals lawyers have completely takenover the industrial disputes resolutionprocesses. This leads to a greaterdegree of legalization or what hasbeen known as juridification5 Thereshould be complete ban on lawyers

5 The term “juridification” does not exist in English.It has been borrowed from German. It refers to theextent to which the behavior of personnel and othermanagers in dealing with collective and individualemployment issues is determined by reference tolegal norms and procedures rather than tovoluntarily agreed norms (Saini 1995).



to appear before these bodies, ex-cept only at the argument stage ifnecessary where articulation of le-gal point might be in question. Thiswill save the ER from becoming over-legalized.

7. The Fate of Sections 11-A6 6 Sec-tion 11-A envisages that even incases of disciplinary action taken byan employer after a properly con-ducted domestic inquiry, if a laborcourt/tribunal finds that theemployer’s order of dismissal or dis-charge is not justified, it may set asidesuch an order and direct re-instate-ment of the workman on such termsand conditions as it thinks fit or givesome other relief to the workman in-cluding lesser punishment in lieu ofdischarge.

8. Strike/Lockout Notice & StrikeBallots: In the neo-liberal world,work stoppages are becoming lessrelevant. As mentioned before, un-der the IDA there is no provision forstrike/lockout notice in non-publicutility service operations. There is aneed to make such a provision, un-less strike is called under a grave andemergent situation (e.g. a lockoutdeclared in a emergent situation ofviolence, etc.). Also, there is a need

for provision for strike ballot beforegoing on strike, in which not less than50 per cent of the workers shouldvote in favor of the strike before alegal strike can be called.

9. Chapter V-B of IDA: Perhaps themost controversial issues in Indianlabor legislation is Chapter V-B of theIDA, which applies to factories, plan-tations and mines that employ 100 ormore workers. This chapter contains,among others, sections 25-M, 25-N,and 25-O. These sections provide forthe prior permission of the appropri-ate government before any workmanin such industries can be laid-off orretrenched or the undertaking isclosed down respectively. It has beenthe experience of industries that moststate governments have denied to-tally or unduly delayed such permis-sion, which is often done on extrane-ous considerations. Interestingly, In-dia is the only country in the world(besides Zimbabwe, which followedIndian law on this issue), which pro-vides for such a provision. This chap-ter was inducted in the IDA in 1976and the number of workers providedfor the purpose of its application thenwas 300 or more. This number waslater on reduced to 100 or more in1982. In a highly competitive world,some organizations are bound to failor perform low despite their best ef-forts. So it is important to ask, whatthe justification of this chapter todayis. How can we ask a non-viable or-ganization to continue to exist in itsoriginal form without making anychange in the employment structure

6 Section 11-A envisages that even in cases ofdisciplinary action taken by an employer after aproperly conducted domestic inquiry, if a laborcourt/tribunal finds that the employer’s order ofdismissal or discharge is not justified, it may setaside such an order and direct re-instatement of theworkman on such terms and conditions as it thinksfit or give some other relief to the workmanincluding lesser punishment in lieu of discharge.

Debi S. Saini


andthussuffer perennial losses? Nolaw is immutable and has to changein the changed context. Such provi-sions are bound to adversely impactforeign direct investment (FDI) in thecountry as well.

How can we ask a non-viable or-ganization to continue to exist inits original form without makingany change in the employmentstructure and thus suffer perenniallosses?

The new NDA government has themassive mandate of people; and theyhave from it high expectation of theeconomic turnaround, which is un-thinkable without effecting realisticlabor law reforms. Keeping this inview, this number for applicability ofchapter V-B may be reduced to 1000or more workmen in the first attempt.After some two years or so it can bescrapped altogether so that workerscan remain prepared for the same.

Simultaneously, retrenchment provi-sions can be made more attractive.Presently, under section 25-F and 25-FFF 15 days’ wage for every com-pleted year of service is provided asretrenchment/closure compensation,which is too meager. In actuality,companies that have effected re-trenchment/closure as a result of asettlement, through voluntary retire-ment scheme (VRS), have providedfar more attractive packages. It issuggested that apart from raising theemployment limit for applicability of

chapter V-B to 1000 or more work-ers, retrenchment compensationshould be such as to be perceived asan equally attractive option for theworker.Omkar Goswami CommitteeReport had suggested 45 days wagesfor every completed year of serviceas the retrenchment/closure com-pensation (Government of India,1993). This may also motivate theemployer to re-deploy and re-train thesurplus employees rather than re-trench them; at the same time, it willminimize the trade unions’ resistanceto retrenchment and promote greaterflexibility.

Retrenchment compensationshould be such as to be perceivedas an equally attractive option forthe worker.

10. Trade Union Multiplicity & Poli-tics: Especially after the globalization,one can witness steep diminution inthe trade union power in general. Itis almost impossible to organize atrade union in new organizations with-out the support and patronage of out-sider union federations. For example,in the case of Honda Motorcyclesand Scooters India Ltd. (HMSI)workers’ victory was unthinkablewithout the help and support ofGurudasDasgupta (Secretary ofAITUC &Rajya Sabha MP) and theCongress President Sonia Gandhi(Saini, 2006). However, if a tradeunion does not want outsiders in itsexecutive body that should remain achoice with it. It is good that through



the 2001 amendment to the TradeUnions Act, 1926, we have limited thepresence of outsiders in the unionexecutive from ½ to 1/3rd of the ex-ecutive members of the trade union,subject to a maximum of five. Thiscan be further reduced to 1/4th sub-ject to a maximum of three or four.As the economy progresses andworkers become still more mature todecide whether they want a union ornot by themselves, this number canbe reduced gradually.

The 2001 amendment to the TradeUnion Act 1926 has also provided aminimum number of persons whomust be members of the proposedtrade union at the time of registra-tion. This is 10 per cent of the totalworkforce or 100 whichever is lower.We should remove the number 100,and insist that any trade union thatwishes to register must have at least1/10th of the workforce as applicants,subject to a minimum of sevenwhichever is higher. We must keepin mind that in the developed world,there is mostly one trade union fed-eration at the national level. In theUK, we have just one trade unionfederation, the Trade Union Congress(TUC). The USA had only two, theAmerican federation of Labor (AFL)and Confederation of Industrial Or-ganization (CIO). The workers no-ticed that two was a crowd andproved antithetical to their interest.So they merged, after which it isknown as AFL-CIO. Also, a numberof trade unions in India do not sub-mit annual returns as per the law. It

should be provided that any union thatdoes not do so for three years or moreshould automatically stand de-regis-tered. This will lead to more respon-sible unionism.

11. Punishment &Fines for Labor LawViolation: If we look at the punish-ments provided and fines imposablefor violation of different pieces of la-bor legislation, it is clear that they areshockingly low in most cases. We stillhave Rs 10 or 50 or 100 as fines forsuch violations. Even imprisonmentprovided is just about one to six monthsin most cases, which almost nevertakes place, and the delinquent ismostly left by imposing meager fine.Similar is the situation for non-pay-ment of minimum wages or undue de-duction from wages, or delay in pay-ment of wages. Under the IESOA,there is no imprisonment for violatingthe law. It is just fine. The fines areso inadequate that the employers takethese provisions casually. Similar isthe situation under the IDA. Section29 envisages imprisonment for sixmonths and or a fine or both and forcontinuing breach with a further fineof rupees two hundred for every dayduring which the breach continues.Minimum imprisonment for the em-ployer and the workmen, contraven-ing any provision, should not be lessthan two years and must be increaseddepending upon the severity of theparticular violation. Even the UnfairLabor Practices (ULPs) are commit-ted by the parties with impunity. Thereis a strong case for making these sen-tences and fines realistic.

Debi S. Saini


Concluding Remarks

It is not quite correct to think thatthe Indian labor law is highly in fa-vor of the worker.

From the foregoing discussion it is dis-cernible that there is a clear case of re-form and re-definition of the rights andresponsibilities of the two sides on thelines suggested. At the same time, it isnot quite correct to think that the Indianlabor law is highly in favor of the worker.That is more a myth than reality in mostcases (Saini, 2003; 1997). However, someparts of the framework are not in tunewith the contemporary global and Indianrealities. Chapter V-B of the IDA is thereal villain of the peace. Most MNCswant simple, workable labor law frame-work. But they would have to work withinthe ethos of the agreed framework andthe constitutional values, and not adoptstrategies of exploitation of labor throughlow-wage strategies. In actuality, chap-ter V-B proves to be the only social pro-tection to the Indian worker as there isno system of unemployment insurancefor them like in the developed world.Therefore, the retrenchment/closurecompensation has to be realistic. Thepresent tokenism of just 15 days wagefor every completed year of serviceshould be changed through legislativeaction.

Further, for being more effective,trade unions will eventually have to formcoalition federations like in national gov-ernance such as UPA and NDA so thatfragmentation of the worker power can

be minimized. While industrial conflict hasassumed a different color and dimensiontoday, it has not withered away nor willit in the near future. The unions have afierce challenge ahead in order to sur-vive and be meaningful for a realistic role.They also have to devise and exploreworker-oriented meanings of conceptssuch as “flexibility, security and opportu-nity” more through cooperative and dia-logue than through adversarial means(Hyman, 1999). For a greater incidenceof social legitimacy trade unions have alsoto conduct themselves democraticallyand give up oligarchic functioning. TheGen Y worker has very different expec-tations from the employer as well as theunion. The worker would stay with theunion only if s/he sees any tangible gainsby being in the union.

The state cannot be oblivious to theneeds of the worker, as has been the casein the recent past. The worker is pre-pared for being violent if he is made tofeel desperate. That is the message fromsome of the incidents of industrial vio-lence from recent cases such as HMSI,Graziano, Maruti-Suzuki, NorthbrookeJute Mills, and many similar instances.The state ought not to feel complacentat the declining strikes and man days lostdata. This is not a symbol of effective-ness of the role played in IR by the stateagencies, but is largely due to declininglabor power. The state’s policy of indif-ference or being with the employer in theinterest of more FDI or regional indus-trial development is not sustainable. Itmust prepare its conciliation and adjudi-cation mechanisms for performing moreprofessional roles as per expectations.



References

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Baxi, U. (1994), “Industrial Justice Dispensation:The Dynamics of Delay,” in Saini (ed.)(1994).

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Dhavan, R. (1989), “Introduction,” in Galanter,Marc, Law and Society in Modern India.Delhi: Oxford University Press.

Government of Gujarat (1974), (First) Labor LawReview Committee Report(Desai Committee),

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Government of India (1993), Report of the Com-mittee on Industrial Sickness and Corpo-rate Restructuring (Omkar Goswami Com-mittee Report), Ministry of Finance, NewDelhi

Hyman, Richard (1999), “Imagined Solidarities:Can Trade Unions Resist Globalization?”in Leisink, Peter (ed.), Globalization andLabor Relations, Edward Elgar, Cheltenham(U.K.)Kochan, T., H. Katz & R. Mckersie(1986), The Transformation of American In-dustrial Relations, Basic Books, New York.

Mitchelle, R., Mahy, P.&Gahan, P. (2012), “Evo-lution of Labor Law in India: An Overviewand Commentary on Regulatory Objectivesand Development,” The Workplace and Cor-porate Law Research Group, Departmentof Business and Economics, Monash Uni-versity, Melbourne, Working Paper no. 18.

Munger, Frank (1991), “Afterward: Studying Liti-gation and Social Change”, 24(2), Law &Society Review:595.

National Labor Association (NLLA) (1994), “In-dian Labor Code-A Draft,” Friedrich EbertStiftung, New Delhi

Patil, B.R. (1998), “A Contemporary IndustrialRelations Scenario in India: with referenceto Karnataka,”Indian Journal of IndustrialRelations, 33 (3): 289–312.

Ramaswamy, E.A. (2000), Managing Human Re-sources: A Contemporary Text,Oxford Uni-versity Press, New Delhi.

Ramaswamy, E.A. (1994),The Rayon Spinners—Strategic Management of IndustrialRelations,Oxford University Press, Delhi.

Saini, Debi (2011), “Employment Law Frame-work: Structure And Potential Hurdles” In Budhwar, P. &Verma, A. (Eds.), DoingBusiness in India, London: Routledge: 23-45.

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Tiwari, R.N. & T.K. Ghosh (eds.) (1991).Mak-ing Labour Adjudication Effective. NewDelhi, Galaxy Publications.

VenkataRatnam, C.S. (2003), Negotiated Change:Collective Bargaining, Liberalization andRestructuring in India, Response (A Divi-sion of Sage Publications), New Delhi.

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By Invitationssas

Legal Reforms for the Self-Employed: ThreeUrban Cases

Martha Alter Chen, Roopa Madhav & Kamala Sankaran

Four out of five urban workers inmodern India are engaged in theinformal economy, and half ofthese are self-employed. This ar-ticle examines what legal reformsare needed for home-based pro-ducers, street vendors and wastepickers who together representone-fifth of the urban workforce.The article describes the condi-tions of employment and work pro-cesses of these groups, and intro-duces key organizations of theseworkers. It then examines the le-gal demands of these organiza-tions, grouped under: municipal,sector-specific, employment orcommercial, and macro-economic.Finally the article draws out les-sons for legal reforms for the self-employed including the need forlegal identity and incorporationinto economic planning.

Introduction

The need to balance job creation withbasic protection for workers — to makeeconomic growth inclusive — is a majorchallenge for the early 21st century. InIndia, as in most countries, labor laws reston the assumption of a clear employer-employee relationship, and commerciallaws rest on the assumption of incorpo-rated enterprises with documented ac-counts. But eighty per cent of the urbanworkforce in India is informal, and halfof urban informal workers are self-em-ployed (Chen & Raveendran, 2011, up-dated 2014). The mismatch between theexisting legal frameworks around employ-ment and the existing employment struc-ture creates a major challenge for policymakers and calls for significant legal re-form.

Labor laws rest on the assumptionof a clear employer-employee re-lationship.

At the beginning of the 21st century,employment grew at a faster rate per yearin urban India than in rural India(Chandrasekhar & Ghosh, 2007). As of

Martha Alter Chen is Lecturer in PublicPolicy, Harvard Kennedy School, AffiliatedProfessor, Harvard Graduate School ofDesign & International Coordinator, WIEGONetwork.E-Mail: [email protected] Madhav is Associate Professor, School ofHabitat Studies, Tata Institute of Social Sciences.E-Mail: [email protected]. Kamala Sankaranis Professor, Faculty of Law, University of Delhi.E-Mail: [email protected]




2004-05, over half (54%) of the urbanworking age (15+) population was in thelabor force, either actively working oractively seeking work: 79 percent of menand 24 per cent of women (ibid). But since2004-05, there has been a marked slow-down in employment growth in both ruraland urban India. By 2011-12, just underhalf (49%) of the urban working age popu-lation was in the labor force: 76 per centof men and 21 per cent of women (Chen& Raveendran, 2011, updated 2014). Thisslowdown in employment growth wasaccompanied by a decline in self-employ-ment, which had been growing. By 2011-12, the shares of self-employment andwage employment in total urban employ-ment had reverted to their 1999-00 levels:at 42 and 58 per cent, respectively (ibid).

However, the urban informalworkforce was almost evenly dividedbetween self-employment (51%) andwage employment (49%) in 2011-12.There are three main categories of theself-employed: employers (who hire oth-ers), own account workers (who runsingle person or family enterprises with-out hired workers), and unpaid contrib-uting family workers. In 2011-12, 38per cent of the urban informal workforce(39% of men and 31% of women) wereown account workers; 11 per cent (8%of men and 20% of women) were un-paid contributing family workers; andonly 3 per cent of men and 0.5 per centof women were employers (ibid).

This article examines what laws andregulations impinge on — and what legalreforms are needed for — three groups ofinformal self-employed in urban India:

home-based workers, street vendors andwaste pickers. In 2011-12, these threegroups combined represented one-fifth ofthe total urban workforce in India: home-based workers (15%), street vendors (4%)and waste pickers (1%). Home-basedwork was particularly significant forwomen: representing almost a third (32%)of the female urban workforce. The ar-ticle describes the conditions of employ-ment and work processes of these threegroups, and introduces key organizationsof these workers in India. It then exam-ines the legal demands of these organiza-tions of workers. Finally it draws out somelessons for legal reforms for the self-em-ployed in India and elsewhere. This articledraws on findings and recommendationsfrom three multi-country initiatives led bythe global network WIEGO (Women in In-formal Employment: Globalizing and Orga-nizing): an on-going program to improveofficial national statistics on informal em-ployment around the world; a 2012 studyof urban informal workers in 10 cities/9countries (including waste pickers in Puneand home-based workers plus street ven-dors in Ahmedabad); and a multi-yearproject on law and informality in four coun-tries (Ghana, India, Peru and Thailand).Many of the sector-specific findings, aswell as recommendations of the 10-citystudy and the 4-country project, are com-mon across the different cities and coun-tries. In other words, what is detailed be-low about legal reforms for home-basedworkers, street vendors and waste pickersis not unique to India.

Home-Based Workers

Home-based workers produce goodsor services for the market from their own

Legal Reforms for the Self-Employed


homes or adjacent grounds and premises:stitching garments and weaving textiles;making craft products; processing andpreparing food items; assembling orpackaging electronics, automobile parts,and pharmaceutical products; sellinggoods or providing services (laundry, hair-cutting, beautician services); or doingclerical or professional work, amongother activities. Although they remainlargely invisible, home-based workers areengaged in many branches of industryand represent a significant share (14%)of the urban workforce in India, particu-larly among women workers (32%).

Inadequate housing is a commonlycited problem by home-basedworkers.

For home-based workers, whose homeis also their workplace, housing is an es-sential productive asset. Inadequate hous-ing is a commonly cited problem by home-based workers. A small house hampersproductivity: as the home-based workercannot take bulk work orders because shecannot store raw materials and her workis interrupted by competing needs for thesame space of other household membersand activities. Poor quality housing allowsgoods and raw materials to be damaged.Monsoon rains force home-based work-ers to suspend or reduce production, asequipment, raw materials or finishedgoods get damaged when roofs leak orhouses flood; products (e.g. incense sticks)cannot dry due to leaks and humidity; andorders are reduced due to decreased de-mand and/or difficulties associated withtransport during the rains (Chen, 2014).

When the home is also the workplace,basic infrastructure services are essen-tial for the productivity of work, espe-cially electricity and water. The acces-sibility and cost of public transport is alsoa key factor for home-based workerswho commute to markets on a regular, ifnot daily, basis to buy raw materials andother supplies, to negotiate orders, andto sell finished goods. A recent study ofhome-based workers in Ahmedabad (In-dia), Bangkok (Thailand) and Lahore(Pakistan) found that transport accountedfor 30 per cent of business expenses; andof those who had to pay for transport,one quarter operated at a loss (ibid). Thedistance between the home-basedworker’s home and the market, contrac-tor, or customers she deals with is criti-cal, affecting the cost of transport. Whenhome-based workers are relocated toperipheral areas they often have pooraccess to public transport and their trans-port costs rise sharply.

There are two basic categories ofhome-based workers: independent self-employed workers who take entrepre-neurial risks; and sub-contracted work-ers who depend on a firm or its contrac-tors for work orders, supply of raw ma-terials and sale of finished goods. Thissecond category of home-based work-ers, the sub-contracted workers, is offi-cially referred to as “homeworkers”.Since they are not directly supervised byan employer, provide their ownworkspace and equipment, and covermany of the non-wage costs of produc-tion including power and transport,homeworkers are often classified as self-employed. However, because they are



dependent on a firm or its contractor forwork orders, raw materials, and sale offinished goods, they are sometimes clas-sified as wage workers. In reality, sub-contracted home-based workers – orhomeworkers – occupy an intermediatestatus in employment between fully in-dependent self-employed and fully depen-dent employees (Raveendran et al, 2013:2). Also, many self-employed home-based workers are not fully independent:as they have limited access to capital,knowledge of markets, bargaining power,and control in commercial transactions.

Because they work at home, bothgroups of home-based workers tend toremain isolated from other workers in theirsector (apart from those in their neigh-borhood) and to have limited knowledgeof markets and market prices. These fac-tors limit their ability to bargain for morefavorable prices and piece rates or to ne-gotiate with government for basic infra-structure and transport services.

While home-based workers arepresent in most branches of economicactivity, they are concentrated in manu-facturing, trade and repair services: in In-dia in 2011-12, 73 per cent of womenhome-based workers were in manufac-turing, 14 per cent in trade, 4 per cent of-fered education services, and 3 per centprovided lodging or ran small eateries(Raveendran et al, 2013). Among womenhome-based in the manufacturing sector,29 per cent produced hand-rolled ciga-rettes (bidis), 26 per cent stitched or em-bellished garments, 22 per cent wove tex-tiles, 6 per cent produced food or bever-ages; 7 per cent produced wood or cork

products (mainly incense sticks), and 5 percent made furniture (ibid). Compared towomen home-based workers, a lowerpercent of men home-based workers werein manufacturing (41%) and a higher per-cent were in trade (35%) and other ser-vices, including repairs (6%) (ibid).

Home-based workers and their ac-tivities are affected by governmentpolicies and practices, notably landallocation, housing policies, basicinfrastructure services, and publictransport.

Home-based workers and their ac-tivities are affected by government poli-cies and practices, notably land alloca-tion, housing policies, basic infrastructureservices, and public transport. This isbecause their homes are their work-places; and they have to commute tomarkets and transport supplies/goods toand from their homes. Legal reformsshould support policy interventions thatupgrade settlements with large concen-trations of home-based workers to en-sure they have adequate shelter, water,sanitation and electricity. If and whenhome-based workers and their familieshave to be relocated, efforts should bemade to ensure the relocation sites have,from the outset, adequate shelter, basicinfrastructure, transport services, andaccess to markets.

Home-based workers also need le-gal rights and protections against unequaland, often, exploitative value chain prac-tices and relationships. Home-basedworkers have limited scope for negotia-



tion or leverage: due in large part to theirisolation in their homes but also to exclu-sionary urban policies or practices andto unequal or exploitative value chaindynamics. To demand and secure theirrights, home-based workers need in-creased bargaining power, which comeswith being organized and being invited tohave a seat at the policymaking, rule-set-ting or negotiating table. Thus, for home-based workers, belonging to their ownorganizations and having supportive in-termediaries are critically important.

There are many organizations ofwomen home-based workers in India anda South Asia regional network ofhome-based workers (Home Net SouthAsia) headquartered in India (seewww.homenetsouthasia.net). The Self-Employed Women’s Association (SEWA),a trade union of some 2 million informalwomen workers, has organized home-based workers in 11 states of India. It isthe lead organization in the regional net-work. SEWA has led the way in advocat-ing for social protection and pension cov-erage to home-based workers; negotiat-ing welfare boards for different catego-ries of home-based workers; and negoti-ating higher piece rates for sub-contractedhome-based workers who manufactureincense sticks, bidis, and garments.

Street Vendors

Street vendors offer a range of goodsand services from streets and other openpublic spaces. They represent 4 per centof the urban workforce across India(Chen & Raveendran, 2011, update2014). In large cities such as Mumbai

and Delhi there are 250 thousand or morestreet vendors (Bhowmik, 2014). Somestreet vendors come from castes or com-munities for whom street vending is a he-reditary occupation. Others are migrantsor laid-off workers for whom street vend-ing affords low-end but steady employ-ment. Also, many home-based produc-ers of garments, textiles, crafts or cookedfood sell their goods in street markets.Street vendors offer working people, andeven middle class consumers, a conve-nient place to buy goods at low prices;serve as key links in the wider urban dis-tribution system; and enrich the culturallife of cities.

In India and elsewhere, there arethree basic categories of street vendors:those who buy goods, typically fromwholesalers, and sell them at a margin(e.g. those who sell fresh fruit and veg-etables); those who make, manufacture,or transform goods and sell them directlyto consumers (e.g. cooked food ven-dors); and those who provide or performservices from a street or other open pub-lic space (e.g. barbers) (Roever, 2014).Those who buy-and-sell “are challengedto find good prices from suppliers; keepother costs, such as transport and stor-age, to a minimum; and sell at volume togenerate profit” (Roever, 2014: 10).Those who transform goods “must finda place to make their goods, usually athome or in the street, but sometimes at aworkshop or other unused space; thenthey must find a place to sell them toconsumers. They must also find a placeto store unsold goods, or to store theequipment used to make the goods (suchas portable stoves or juice machines for



cooked food or prepared drink vendors).The work of these vendors entails valueaddition and is sometimes more depen-dent on workplace infrastructure, suchas electricity and running water, than buy-sell traders” (ibid: 10). Service provid-ers tend to “have fewer challenges whenit comes to transporting goods, althoughthey may need machinery or tools to bestored at or transported safely to theirvending post. However, they are oftenreliant, like manufacturers, on electricityand/or need either specialized training orsubstantial access to capital to purchasethe necessary machinery, tools or inputs”(ibid: 11).

Within these basic categories, streetvendors can be further differentiated bya) whether they sell perishable or durablegoods; b) whether they work on theirown, with family workers, or with hiredworkers; c) whether they are indepen-dent, tied through credit-purchases to awholesaler, or sell on commission for for-mal retailers; and d) whether they sell incentral business districts or more periph-eral areas, around wholesale markets,near transport nodes, religious institutionsor educational institutions, or near resi-dential areas.

More so than home-based workers,street vendors are directly affected bythe regulations and policies of city gov-ernments and the practices of city offi-cials. Across most cities of India, andother countries, government policies orpractices undermine the ability of streetvendors to pursue their livelihoods.Abuse of authority by the police and lo-cal officials is the most common com-

plaint: this “includes police harassment,demands for bribes, arbitrary confisca-tions of merchandise, and physical abuse.These practices tend to take place in ur-ban policy environments that do not de-fine a role for street trade or offer a vi-able space to accommodate it. In thatcontext, street traders also rank the lackof a fixed and secure workplace andevictions from (or demolitions of) exist-ing workplaces among the most signifi-cant negative drivers” (ibid: 25). A studyof street vendors and public space inAhmedabad found that local leaders col-lect “protection” money each day, weekor month from street vendors in theirmarket areas which they hand over tothe police after taking their cuts: theamount paid differs by whether the streetvendor sells from the pavement or froma push cart (Brown et al, 2012).

Where cities attempt to regulatestreet vending, the licensing and permit-ting practices and their associated taxes,fees, tolls and levies have a significantimpact on vendors. Most vendors “payall manner of tolls, levies, and fees – aswell as bribes – to use public space”(Roever, 2014: 26). But most streetvendors lack urban infrastructure ser-vices at their vending sites, including run-ning water and toilets, electricity, andwaste removal. “Prepared food vendorsmust cook at home or ferry water to their

Across most cities of India andother countries, government poli-cies or practices undermine theability of street vendors to pursuetheir livelihoods.



stalls, street tailors and hairdressers stopworking when the power goes out, andmarket vendors spend time and moneyorganizing ad-hoc waste removal sys-tems where city services fail” (Roever,2014: 26). The fact that most cities donot consult with street vendors aroundsuch practices only compounds the prob-lem.

The license regime for streetvending is opaque and repressive.

When they operate without a license,street vendors in India are considered il-legal under most municipal acts: leavingthem subject to treatment as criminalsunder the Indian Penal Code and to rent-seeking in the granting of licenses. Butthe license regime for street vending isopaque and repressive. Many cities haveinappropriate license ceilings: for in-stance, in Mumbai, where there are anestimated 250,000 street vendors, themunicipal corporation arbitrarily fixed aceiling of only 14,000 licenses; and eventhese were not issued for many years(Bhowmik, 2000). In Kolkata, streetvending without a license is a non-bail-able offense (ibid.)

Estimates suggest that street vendorsoccupy only two percent of urban landbut are legally barred from doing so. A2000 study of street vending in seven cit-ies of India found that only two cities,Bhubaneswar and Imphal, made provi-sions for street vendors in their city plans(ibid). The other five cities, Ahmedabad,Bangalore, Delhi, Kolkata, Mumbai andPatna, earmarked spaces in their plans

for hospitals, parks, offices, residentialcolonies, and bus and rail terminals butexcluded the vendors who naturally con-gregate around these areas, providingessential goods and services at low costs.Increasingly, cities around India, and else-where, are allocating public space forlarge-scale modern retail – malls andshopping arcades – while continuing toneglect small-scale traditional retail.

Because they congregate in publicspaces street vendors come to know theircommon harsh treatment by local au-thorities. Because they often are bannedor evicted from their vending sites streetvendors know the value of collective ac-tion. As a result, more so than othergroups, street vendors have organizedthemselves into trade unions and asso-ciations. The National Alliance of StreetVendors of India (NASVI) based inDelhi, is a federation of 715 street ven-dor organizations, trade unions and sup-port organizations (NGOs). SEWA haslarge numbers of street vendors amongits members across in many cities across11 states of India. SEWA and NASVI ledthe long campaign for a national law ofstreet vending, passed in March 2014,and continue to advocate for the law tobe implemented.

Waste Pickers

Roughly one per cent of the urbanworkforce in India is engaged in wastecollection and recycling (Chen &Raveendran, 2011, updated 2014). Wastepickers are those who do the primarycollecting and sorting of waste, reclaim-ing reusable and recyclable materials.



Waste pickers may collect householdwaste door-to-door or from the curbside;commercial and industrial waste fromdumpsters; or litter from streets and ur-ban waterways. Some work on munici-pal dumps.

Treated as nuisances by authoritiesand with disdain by the public, waste pick-ers are usually ignored within publicpolicy processes and frequently sufferlow social status and self-esteem. Theyare particularly susceptible to violence bythe police. They may face exploitationand intimidation by middlemen, which canaffect their earnings. Most crucially, theyare negatively impacted by theprivatization of municipal solid wastemanagement services which increasescompetition for waste and makes the re-cycling activities of waste pickers ille-gal.

Handling waste poses many healthrisks to workers. These are even greaterfor informal workers due to their unpro-tected exposure to contaminants and haz-ardous materials on a day-to-day basis.Risks include contact with fecal matter,paper saturated by toxic materials, bottlesand containers with chemical or healthresidues, contaminated needles, andheavy metals from batteries (Cointreau,2006). A lack of worker protection andpoor access to health care aggravatethese risks. Waste pickers face greatrisks of injury, especially those who workat open dumps and may be run over bytrucks or become the victims of surfacesubsidence, slides and fires. They are alsoexposed to great quantities of toxicfumes. Waste pickers also endure ergo-

nomic hazards such as heavy lifting, staticposture and repetition, and may have highincidences of low back and lower ex-tremity pain (ibid.).

There are many organizations and anational alliance of waste pickers in In-dia. Many of these organizations are le-gally incorporated and/or function as atrade union or cooperative, collectivelybargaining for access to waste and wastecollection contracts. If they secure acontract, these organizations then legallyincorporate a cooperative and/or func-tion as a cooperative, collectively provid-ing a service. What is distinct about theorganizations of waste pickers is that theyhave to both collectively bargain for ac-cess to waste and waste collection con-tracts and, if they receive a contract,collectively provide a service. The or-ganizations have to perform, that is, thefunctions of both a trade union and a co-operative.

SEWA has been organizing wastepickers since the late 1970s, beginningin Ahmedabad city but now coveringcities across several states: Bihar,Gujarat, Delhi, and more. SEWA hascreated nearly 90 waste pickers coop-eratives to help its members negotiatecollective work contracts and access tocredit, training, and markets. TheKagad Kach Patra KashtakariPanchayat (KKPKP) Union in Pune hasalso created a waste picker cooperativewhich has secured a contract for col-lecting and sorting waste from the PuneMunicipality. Hasiru Dala, an organiza-tion of waste pickers in Bangalore, hasteamed up with the IT sector to create



a cloud-based technology wherebyhouseholds and firms that generatewaste can procure waste managementservices directly from waste pickers andtheir organizations. Safai Sena is an as-sociation of waste pickers in Delhi sup-ported by Chintan, an environmental re-search and action group. The Allianceof Indian Waste Pickers (AIW), a na-tional network of 35 organizations in 22cities, facilitates peer support, learningand advocacy among waste picker or-ganizations and support NGOs.

Waste pickers collect, recover andrecycle a sizeable share of thewaste generated by cities and,thus, contribute to both cleaningthe cities and reducing carbonemissions.

Individually and collectively, theseorganizations have made the case – andgenerated credible evidence – thatwaste pickers collect, recover and re-cycle a sizeable share of the waste gen-erated by cities and, thus, contribute toboth cleaning the cities and reducing car-bon emissions.1 But municipal govern-ments across India continue to issuesolid waste management contracts toprivate companies who compete withthe waste pickers for waste and do notreclaim recyclables, thus contributing tocarbon emissions.

Legal Demands

The common legal rights that all threesectors demand and have pursued includethe right to identity and dignity as work-ers, the right to work, the right to orga-nize and to have their organizations rep-resented in relevant policy-making andrule-setting processes, and the right tosocial protection coverage. There are on-going legal struggles - with some victo-ries - to extend the right of identify asworkers to include own account workersand unpaid contributing family workers andto expand the right to work to include theright to livelihood. Organizations of in-formal workers are gaining increased of-ficial recognition and, to a lesser extent,increased representation in official policy-making and rule-setting processes.

In India, as elsewhere, there isgreater reception to the demand for so-cial protection than to the other legal de-mands of informal workers (Sankaran &Madhav, 2013). In India, several stateshave been willing to set up welfare fundsand to invite companies to contribute toindustry-specific welfare funds; to ex-pand existing funds and schemes; to setup new health and pension schemes forinformal workers. The national healthinsurance program, Rashtriya SwasthyaBima Yojna, is being extended to coverinformal workers, including constructionworkers, domestic workers and streetvendors. But the rules and proceduresof this program are not very favorablefor these workers or easy to navigate.

Indeed, “a complex range of sector-specific regulatory laws impact workers

1 A 2009 report by Chintan estimates that informalrecycling in Delhi reduced carbon dioxide (CO2)emissions by 962,133 tons last year — roughlyequivalent to taking 175,000 vehicles off the road(Chintan,2009).



in the informal economy, especially own-account workers and the self-employedmore generally” (ibid: 5). For example, theright to access public resources - whetherwaste, urban space, or urban services (ba-sic infrastructure and transport) - is fun-damental to all sectors: key legal battlespit the privatization of these public re-sources against the demands for the rightto livelihoods of informal workers (ibid).

The laws and regulations that impingeon urban informal workers, especially theself-employed, can be broadly catego-rized as follows: 2

• municipal regulations that specifywho can do what, where; determineaccess to - and use of - public re-sources; and balance conflictingneeds and uses

• sector-specific regulations thatgovern specific sectors (e.g. manu-facturing, trade, waste)

• employment and commercial regu-lations that govern economic trans-actions and relationships

• macro-economic regulations andpolicies that govern taxation, expen-diture and investment.

What follows is the specific legaldemands of the three groups of urbaninformal self-employed under each ofthese categories:

2 This typology is an expanded version of a typologyof regulations developed by Kamala Sankaran andRoopa Madhav who directed the 4-country projecton Law and Informality of the WIEGO networkand its local partners in each country (Sankaran &Madhav, 2013).

Municipal Regulations

Overly strict separation of landuses (such as single-use zones) cannegatively impact the livelihoodsof urban informal workers.

Zoning, land allocation, and relo-cation policies: Overly strict separationof land uses (such as single-use zones)can negatively impact the livelihoods ofurban informal workers. It is importantto promote a balanced mix of uses thatfruitfully interact with each other. In re-gard to home-based production and streettrade, “it is important to distinguish notonly land uses but also the scale of theuses – because, for example, a small tai-lor workshop may enrich a residentialneighborhood while a sewing factory maycause undue nuisance” (Nohn, 2011:4).Distinguishing both land uses and thescale of uses would allow policy makersto better address the needs of home-based workers and street vendors. In thecase of home-based work and streetvending, “it may be advisable to let neigh-bors decide whether or not such activi-ties are desirable in the neighborhood”(ibid). Most critically, evictions and relo-cations of homes and other workplaces,especially to the periphery of cities at adistance from markets, contractors andcustomers, pose a direct threat to the live-lihoods of the urban self-employed.

Access to - and use of - public re-sources and services:most self-em-ployed informal workers in urban areasrely on access to public resources fortheir livelihoods: for example,



• public land and housing for home-based workers

• public space for street vendors

• waste for waste pickers

• public space/warehouses for sortingand storage for street vendors andwaste pickers

• basic infrastructure services at theirhomes for home-based workers and attheir natural markets for street vendors

• public transport for all three groups

The policies and regulations that de-termine access to public resources andservices are often biased against theworking poor in the urban informaleconomy, who are not considered to beproductive and are not, therefore, in-cluded in most urban plans or local eco-nomic development plans. Most criti-cally, privatization of public resourcesand services often poses a direct threatto the livelihoods of the urban self-em-ployed.

Privatization of public resourcesand services often poses a directthreat to the livelihoods of the ur-ban self-employed.

On the other hand, policies, legisla-tion and regulations that seek to protectthe sustainable use of public resourcesand the environment may contribute toprotecting livelihoods of the urban infor-mal self-employed. For instance, policyor regulatory choices to protect the en-vironment through composting and re-covery of recyclables can protect the

livelihoods of a large number of wastepickers. Similarly, policy or regulatorychoices to protect public green spacesmight also support the livelihoods ofstreet vendors by allowing them to vendaround these spaces as part of the cul-tural landscape.Also, policy or regula-tory choices to protect the environmentmight support home-based production,which leaves less of a carbon footprintthan production in workshops and fac-tories.

Balance of conflicting needs andusers:Some legal and regulatory frame-works seek to balance competing inter-ests of different groups - citizens, infor-mal workers, other economic actors.Here are two key examples that affectstreet vendors:

• use of public space, such as sidewalks- street vendors

• public health regulations - street foodvendors

Citizens have the right to use side-walks and to be assured that street foodis safe. In such cases when competinginterests are legitimate, the legal demandsof street vendors need to be carefullychosen and negotiated.

Sector-Specific Regulations

Informal workers and their activitiesare affected by laws, regulations andpolicies that govern specific sectors ofthe economy: some of these fall underthe jurisdiction of municipal govern-ments, others under state or provincial



governments, and still others under thenational government. Regulations thatgovern specific manufacturing industriesshould in principle cover home-basedworkers in those sectors: for example,home-based workers who producehand-rolled cigarettes (bidis) should beentitled to certain protections and ben-efits mandated in two laws from the1960s governing the bidi industry. Also,welfare funds set up for workers in spe-cific manufacturing industries shouldcover home-based producers in thoseindustries. But in both cases, home-based producers need to be organizedand have supportive intermediaries toleverage these protections and benefits.

Street vendors are impacted by theregulations governing the location, man-agement and fee structure of wholesalemarkets. Marketing costs at the whole-sale markets include market fees, com-mission fees, loading and unloadingcharges. How much is incurred by sell-ers to or buyers from these markets isdetermined by local multi-stakeholdercommittees that manage wholesale mar-kets and often differ for sellers/buyersof different goods such as fruits versusvegetables. And, as noted earlier, wastepickers are directly impacted by whetheror not municipal governments decide toprivatize solid waste management or re-tain public responsibility for social wastemanagement.

Employment & CommercialRegulations

In the 10-city study of the urban in-formal economy, in addition to hostile

government policies and practices, unfairpractices by suppliers, buyers and com-petitors were identified as key negativedrivers in the urban informal economy(Chen, 2014; Roever, 2014). There arefew regulatory frameworks that addressvalue chain dynamics and relationshipsand those that exist typically address theconcerns of sub-contracted, not self-employed, informal workers. Yet the in-formal self-employed are also often de-pendent on other actors in the value chainand this dependence renders them vul-nerable to exploitation. Home-basedworkers often rely on specific suppliersor buyers as they lack market knowl-edge; street vendors often rely on spe-cific wholesalers who sell them goods oncredit; and waste pickers often sell tospecific waste traders as they too lackmarket knowledge: in all such cases, theinformal self-employed are not able tonegotiate reasonable prices for what theybuy or sell or protect themselves whenthe goods they buy or supplies they aregiven turn out to be of poor quality.

Macro-Economic Regulations

In addition to hostile government poli-cies or practices and unfair value chaindynamics, fluctuating demand and risingprices are key macro factors that impactnegatively on the urban informal economy(Chen, 2014; Roever, 2014). Therefore,ensuring steady markets and reasonableprices for their inputs and products is ofcritical importance to the informal self-employed. Whether or not prices shouldbe set by governments or markets is hotlydebated. Other accepted domains ofmacro-economic regulations and policies



- taxation, expenditure and investment -are not particularly sensitive to the spe-cific needs of the informal self-employed(Sankaran & Madhav, 2013). The wholeissue of taxation and the informaleconomy needs to be better understoodand addressed: most informal workerspay taxes and operating fees of variouskinds but feel they get little in return fromthe government (Chen, 2014; Roever,2014). The informal self-employed whopay value added tax (VAT) on suppliescannot easily claim tax rebates to whichthey might be entitled if their enterpriseswere legally incorporated (Valodia,2014). Further, one important means toincrease and stabilize demand for thegoods and services of the informal self-employed is government procurement,notably: contracts to supply goods andservices to public institutions such asschools or hospitals; and also contractsto provide waste management services.

Legal Reform in Action

What does it take to bring about legalreforms in support of informal workers?Consider the case of legal reforms forstreet vendors. In the late 1990s, SEWAand the National Alliance of Street Ven-dors of India (NASVI) conducted studieson street vending in seven major cities ofIndia (Bhowmik, 2000). The findings ofthis study were presented at a large meet-ing of street vendors in Delhi in 2001, or-

ganized by SEWA and NASVI in collabo-ration with the Ministry of Urban Devel-opment. At this meeting, the governmentpromised to set up a taskforce to draft anational policy on street vending. Thispolicy was approved by the cabinet ofIndia in 2004. The same year, the gov-ernment set up a National Commission onEnterprises in the Unorganized Sector(NCEUS), which was mandated, amongother tasks, to review the national policyon street vendors. A new policy was ap-proved in 2009.

While SEWA and NASVI had advo-cated for the national policy, they felt thata national policy was not enough: thatstreet vendors also needed legal rights.They argued that street vending was notjust an issue of urban policy but ratheran issue of the legal right to livelihood(Bhowmik, 2014). They began organiz-ing meetings and demonstrations of streetvendors in all their constituencies acrossIndia to demand a uniform law to protectthe livelihoods of street vendors by regu-lating street vending in an appropriate andtransparent way.

The Street Vendors (Protection ofLivelihoods and Regulation of Vending)Act was passed by the Lok Sabha (LowerHouse of the Parliament of India) in Sep-tember 2013 and by the Rajya Sabha (Up-per House) in February 2014, and receivedthe assent of the President of India inMarch 2014. The Act aims to provide live-lihood rights and social protection to streetvendors and to regulate and improve theprevailing license system. “The Act statesthat no existing street vendor can be dis-placed until the local authorities conduct

Fluctuating demand and risingprices are key macro factors thatimpact negatively on the urban in-formal economy.



a census of street vendors in the concernedurban centre. All existing vendors haveto be provided with permits for conduct-ing their business and a Town VendingCommittee (TVC) will supervise the ac-tivities of the vendors. This commit-tee, which will be the main policy makingbody on street vending, comprises munici-pal authorities, policy, the health depart-ment and other stakeholders. Represen-tatives of street vendors will constitute40% of its membership and women willcomprise 33% of the street vendors’ rep-resentatives” (Bhowmik, 2014:1).

The Act came into force on May 1,2014. NASVI, SEWA and street ven-dors around the country welcomed thisAct as a major victory as it mandates thatstreet vendors should be protected, notjust regulated, and specifies clear proce-dures for regulation and registration, in-cluding the local vending committeeswith street vendor representatives.

Legal Reforms for the SelfEmployed

Legal reforms in support of the infor-mal workforce in general, and the self-employed in particular, will require trans-forming the debates and mindsets aboutthe informal economy. So long as the in-formal economy is viewed as illegal oreven criminal and informal workers areblamed for being illegal or criminal, theywill continue to remain under the punitive,rather than the protective, arm of the law.And yet most of the working poor in Indiaare engaged in the informal economywhere they are trying to earn an honestliving in a hostile regulatory environment.

What is required is focused and sustainedattention to determine which policies, lawsand regulations impinge - directly or indi-rectly, negatively or positively - on work-ers in each sector of the informal economy.This will require on-going efforts to en-sure that informal workers in all sectorsare visible in labor force and other eco-nomic statistics, that in-depth case stud-ies of specific groups of informal work-ers are prepared, and that organizationsof informal workers have a voice in rel-evant policy-making and rule-setting pro-cesses. It will also require that informalworkers and their activities are recognizedand valued as the broad base of theworkforce and economy in India and areincorporated into economic planning at alllevels of government.

Legal reforms for the informalworkforce in general, and the self-em-ployed in particular, will also requiretransforming existing legal and regulatoryframeworks.Here are some common is-sues or themes for future legal reformsthat have emerged from the legalstruggles summarized in this article:

Legal Recognition

Underpinning the many legal demandsraised by different groups of informal work-ers is a primary demand for legal recogni-tion and status (Sankaran & Madhav,2013). This demand for legal recognitionhas several inter-related dimensions. First,informal workers want to be recognized asbeing legal, not illegal. Through their legalstruggles, they try to highlight that the ex-isting regulatory frameworks force themto operate illegally: if their residential area



is zoned for single-use (home-based work-ers), if not enough licenses are issued(street vendors), or if waste is privatized(waste pickers), these informal workersand their activities are considered illegal.Second, informal workers want to be rec-ognized as economic agents who contrib-ute to the economy, to the city, to societyand want to be integrated into local eco-nomic development and city plans. Third,they want legal recognition of their organi-zations and the related right of representa-tion. Fourth, most informal workers, withthe exception of employers who hire oth-ers, want to be recognized as workers3 and,more specifically, to have their organiza-tions recognized by the Workers Group inthe tripartite system of the International La-bor Organization.

Informal workers want to be rec-ognized as economic agents whocontribute to the city, to society andwant to be integrated into local eco-nomic development and city plans.

Access Rights

The livelihoods of informal workers,especially the self-employed, depend on

access to resources, especially to publicresources and services. As notedthroughout this paper access to key pub-lic resources are essential to the liveli-hoods of the three groups: for home-based workers, housing in central loca-tions; for street vendors, vending sites ingood locations, ideally in existing naturalmarkets around transport nodes, institu-tions, and residential areas; for wastepickers, access to waste and also to solidwaste management contracts; for home-based workers and street vendors, basicinfrastructure services at their work-place; for street vendors and waste pick-ers, space to sort and store goods. Andfor all three groups, accessible and af-fordable public transport is essential.Evictions from established places of workas well as privatization of public re-sources and services are major threatsto their livelihoods. For urban informalworkers, most of these access rights aregoverned by municipal regulations: a mixof the regulations governing the resourcesthemselves, including balancing compet-ing users and interests, as well as regu-lations governing who can do what, andwhere.

Municipal Regulations

Urban informal workers demandmore inclusive municipal laws, policiesand plans that take into account theircontribution to the city economy and in-tegrate their needs. In addition to inte-gration into city plans and local economicdevelopment, each group of urban infor-mal worker needs municipal governmentsto guarantee certain specific rights:home-based workers need housing rights

3 The right of own account workers to be recognizedas workers, belonging to the Working Group of theInternational Labor Organization, was endorsed inClause 4 of the ILO Resolution on Decent Work &the Informal Economy, 2002 which reads:“Workersin the informal economy include both wage workersand own-account workers. Most own-accountworkers are as insecure and vulnerable as wageworkers and move from one situation to the other.Because they lack protection, rights andrepresentation, these workers often remain trappedin poverty” (ILO, 2002).



and mixed-use zoning of the areas wherethey live and work; street vendors needlicenses (or permits) and secure vendingsites, ideally in the natural markets wherethey have always vended; and wastepickers need access to waste and theright to bid for solid waste managementcontracts. Underlying all of these sec-tor-specific demands is a commonstruggle against the tendency of munici-pal governments to privilege formal com-mercial enterprises over informal com-mercial enterprises and the leisure andconsumption of the rich over the workand production of the poor. What isneeded is a fundamental transformationof the vision of cities to embrace eco-nomic diversity - the informal and tradi-tional alongside the formal and modern -and a fundamental transformation of thepolitical economy of cities to reduce thedisadvantage of the working poor in theurban informal economy.

Employment & Commercial Rights

A key, but challenging, area of legaldemands by informal workers is forrights pertaining to their working condi-tions as well as their economic relation-ships and transactions. Many informalworkers do not operate within the boundsof traditional labor jurisprudence, whichis premised on establishing an “employer-employee relationship”, notably the self-employed but also sub-contracted work-ers and even some informal wage work-ers (such as domestic workers).

But the informal self-employed alsodo not operate within the bounds of tra-ditional commercial jurisprudence which

is premised on formal establishments ofa certain size. Therefore, in their legalstruggles, many organizations of informalworkers turn to the state to be the arbi-ter and regulator of working conditionsand relationships. But governments andthe organizations of informal workershave struggled to formulate an effectiveresponse to this demand (Sankaran &Madhav, 2013). More can, and should,be done to modify and extend employ-ment and commercial regulations tomatch and cover the various types of in-formal workers.

Finally, legal reforms for the infor-mal workforce in general, and the self-employed in particular, will require fun-damental rethinking regarding regulationsand the informal economy. To begin with,there is a common assumption that theinformal economy - and those who workin it - are outside the reach of the stateor its laws.But, as the evidence presentedin the article has illustrated, the informalworkforce and their activities are not out-side the reach of the state or its laws.Rather, often they are inside the punitivearm of the law but outside the protectivearm of the law.

The informal workforce and theiractivities are not outside the reachof the state or its laws.

Secondly, labor and employment lawshave limited salience for the informalself-employed. In urban India in 2011-12, only 3 per cent of men informal work-ers and half a per cent of women infor-mal workers hired others. The vast ma-



jority of the informal self-employed areown account workers or unpaid contrib-uting family workers (Chen &Raveendran, 2011, updated 2014).

Thirdly, a wide range of policies, lawsand regulations have salience for the in-formal self-employed: from municipal tosector-specific to commercial regulationsto macro-economic. What is required toreduce the legal risks and barriers facedby the working poor in the informaleconomy - and thereby to increase theirearnings and productivity - is to assessand monitor the impact of all laws, regu-lations and policies on their livelihoodsand lives. At present, most laws, regula-tions and policies relating to the function-ing of cities and the economy ignore theproductive roles and contributions of theworking poor, relegating them to the do-main of social policies.What the workingpoor in the informal economy want andneed is legal recognition and legal pro-tection as economic actors as well as in-tegration into economic planning at alllevels.

References

Bhowmik, Sharit K. (2000), Hawkers and theUrban Informal Sector: A Study of StreetVending in Seven Cities, Delhi: NationalAlliance of Street Vendors of India(NASVI).

____________. (2014), “Street Vendors in Indiaget Legal Protection”. Global LaborUniversity’s Global Labor Column. Num-ber 174, June 2014.

Bhowmik, Sharit K. & Debdulal Shaha (2012),“Street Vending in Ten Cities in India” .Delhi: National Alliance of Street Vendorsof India.

Brown, Alison, Michal Lyons, & DarshiniMahadevia (2012), “Claiming Urban Space:Street Vendors in Ahmedabad” Law, Rightsand Regulations in the Informal EconomyESRC-DFIC Research Project. CardiffUniversity, London South Bank University,and Centre for Urban Equity, CEPT Uni-versity.

Chandrasekhar, C.P. & Jayati Ghosh. (2007),“Recent Employment Trends in India andChina: An Unfortunate Convergence?” Pa-per presented at ICSSR-IHD-CASS semi-nar on “Labor Markets in India and China:Experiences and Emerging Perspectives,”28-30 March 2007, New Delhi.

Chen, Martha Alter (2014), “Informal EconomyMonitoring Study Sector Report: Home-Based Workers.” Cambridge, MA, USA:WIEGO.

Chen, Martha A. & G. Raveendran (2011 updatedin 2014), Urban Employment in India: Re-cent Trends and Patterns. WIEGO Work-ing Paper (Statistics) No. 7. Cambridge,MA, USA: WIEGO.

Chintan (2009), Cooling Agents: An Examinationof the role of the Informal RecyclingSectorin Mitigating Climate Change, New Delhi,India: Chintan.

Cointreau, Sandra (2006), Occupational and En-vironmental Health Issues of Solid WasteManagement – Special Emphasis onMiddle- and Lower-Income Countries, TheWorld Bank Urban Papers, 2. Washington,D.C., The World Bank.

International Labour Organization (2002), Reso-lution on Decent Work & the InformalEconomy, Geneva, Switzerland: ILO.http://www.ilo.org/public/english/stan-dards/relm/ilc/ilc90/pdf/pr-25res.pdf

Nohn, Matthias (2011), Mixed-Use Zoning andHome-Based Production in India. WIEGOTechnical Brief (Urban Policies) No. 3.Cambridge, MA, USA: WIEGO

Raveendran, Govindan , Ratna M. Sudarshan &Joann Vanek (2013), Home-Based Workers



in India: Statistics and Trends. WIEGOStatistical Brief No. 9. Cambridge, MA,USA: WIEGO.

Roever, Sally (2014), Informal Economy Moni-toring Study Sector Report: Street Vendors.Cambridge, MA, USA: WIEGO.

Sankaran, Kamala & Roopa Madhav (2013), Le-gal and Policy Tools to Meet InformalWorkers Demands: Lessons from India.WIEGO Legal Brief No. 1. Cambridge, MA,USA: WIEGO.

Valodia, Imraan (2014), Taxation in the InformalEconomy, WIEGO Working Paper, forth-coming. Cambridge, MA, USA: WIEGO.

By Contribution

Turnover Intentions among Indian SoftwareProfessionals

Gloryson R B Chalil & L Prasad

The paper explores the influence ofMaslach’s three burnout dimensions(Depersonalization, Personal Accom-plishment and Emotional Exhaustion) onvarious Job Attitudes in combinationwith Work Environmental factors, rep-resented by Organizational Politics andDistributive Justice. Job Satisfaction isconceptualized as Intrinsic and Extrin-sic components to identify the relativeimportance in the development of Turn-over Intention. Results indicate the rela-tive importance of Intrinsic Satisfaction;there was no empirical support for hy-potheses involving Extrinsic Satisfac-tion. Results also indicate that processmodel of burnout is not applicableamong software professionals. Organi-zational Politics became a central vari-able through multiple significant rela-tionships with other study variables.The paper discusses the theoretical andmanagerial implications of these resultsand identifies various themes for futureresearch.

Introduction

During the past 20 years, In-formation Systems function hasexperienced a rapid growth in al-most every organization resultingin the development of more com-plex and specialized jobs for soft-ware professionals (Hurang,2001). Employment relationshiphas also undergone a dramaticshift wherein employees prefer tomove across various organizationsduring the course of their work-ing life without any commitment.For most of the software firms,retention of the organizationalknowledge is closely linked withthe ability to retain the employees.Approximately two thirds of theIT managers who participated inLongenecker & Scazzero (2003)study reported serious consider-ation about leaving the currentorganization. Turnover of Infor-mation System professionals hasshown relationship with failed sys-tem projects and inadequate de-ployment of organization’s re-sources (Igbaria & Guinmaraes,1999). As one of the largest avoid-

Gloryson R B Chalil is Professor at XLRI, Xavier School ofManagement, Jamshedpur 831001. E-mail:[email protected] Prasad is Professor at IIM Bangalore 560076




able expenses, preventing employee turn-over becomes an area of prime concernfor most of the software firms.

Organizational issues cause moreturnover than technological issues amongmanagers in software firms(Longenecker & Scazzero, 2003). Itmeans majority of the factors drivingsoftware professionals’ retention are con-trollable for most organizations. This studyis an attempt in that direction and makesthree important contributions to the re-lated literature. An inverse relationshipbetween Turnover Intention and Job Sat-isfaction has been established in the lit-erature. As the first contribution, thispaper treats Job Satisfaction as two com-ponents, Intrinsic and Extrinsic Satisfac-tion to identify the relative importance ofboth in the development of Turnover In-tention. Second, we consider the influ-ence of three Burnout dimensions onvarious Job Attitudes in combination withWork Environmental factors, representedby Organizational Politics and Distribu-tive Justice. Third, Distributive Justice hasgot comparatively less attention withinjustice literature in comparison with otherfacets of justice. This study contributesmore towards the literature on this un-derstudied facet of Justice.

Burnout among SoftwareProfessionals

Burnout among software profession-als has been examined only to a limitedextent in literature. Salanova, Peiro &Schaufeli (2002) in their review on therelationship between the use of informa-tion technology and Burnout have identi-

fied just three empirical studies withcomplementary results. Software profes-sionals are reported to suffer from eithersimilar or higher stress than many of theircolleagues (Hurang, 2001). Analysis oftypical software professionals has pro-vided evidence of work overload, roleambiguity, and role conflict.

The three-dimensional conce-ptualization used by Maslach and hercolleagues and its various modifications(Maslach, Schaufeli & Leiter, 2001) is stillthe most popular inventory to measureBurnout. Emotional Exhaustion is char-acterized by the lack of energy and afeeling that one’s emotional resources areused up. It will usually coexist with feel-ings of frustration and tension. Deper-sonalization is characterized by the ten-dency of employees to treat people asobjects. They start to display a detachedand emotional callousness, and becomemore cynical towards coworkers and cli-ents. Diminished Personal Accomplish-ment refers to the tendency to evaluateoneself negatively. Empirical evidencesuggests that Burnout is a process thatgradually develops over time resulting invarious process models (Lieter &Maslach, 1988).

We also propose relationship amongthe three dimensions, leading to the de-velopment of Burnout among softwareprofessionals. Depersonalization is con-sidered a dysfunctional coping and thosesoftware professionals who are not ableto balance the work stressors will exhibita tendency to distance themselves fromjob. Decreasing involvement with workmay result in reduced accomplishments

Turnover Intentions


and inability to achieve success, as in past,may lead to increasing Emotional Exhaus-tion. A process model with Depersonal-ization as the starting point and EmotionalExhaustion as the final stage will help usconsider Emotional Exhaustion as theconnecting link between Burnout andvarious Job Attitudes such as Job Satis-faction, Organizational Commitment andTurnover Intention as in existing litera-ture (Brown & Benson, 2003; Moore,2000). Hence

H1a: Burnout development among soft-ware professionals follows a se-quence wherein Depersonalizationleads to reduced Personal Accom-plishment and reduced Personal Ac-complishment leads to EmotionalExhaustion.

Job Attitudes

Various review papers and meta-analysis have identified Job Satisfactionand Organizational Commitment as inter-vening variables in turnover process(Hom& Griffith, 1995; Tett& Mayer,1993). Job satisfaction is generally rec-ognized as a multifaceted construct withintrinsic and extrinsic job elements andresearch on software professionals em-phasized the need to treat them sepa-rately (Hars&Ou, 2002).

Highly motivated individuals, who arestrongly committed to their work, aremore prone to suffer from Burnout.Working in a stressful environment willresult in development of Burnout amongsoftware professionals with high intrin-sic work motivation. Managers may fol-

low a tendency to assign critical projectsto highly regarded employees, and thesehigh performers find themselves trappedin an exhaustive situation which will ulti-mately result in a higher propensity toleave the job (Moore, 2000). Employeeswho get trapped in an exhaustive situa-tion may not be able to derive satisfac-tion in those motivators which had beenintrinsically rewarding before. Hence,

Employees who get trapped in anexhaustive situation may not beable to derive satisfaction in thosemotivators which had been intrin-sically rewarding before.

H2a) Greater the Emotional Exhaustionamong software professionals,lowertheir intrinsic Job Satisfaction.

While conducting research on profes-sionals involved in open-source projects,Hars &Ou (2002) identified certain ex-trinsic rewards important to softwareprofessionals. Mainstream literature onBurnout and Job Satisfaction has treatedboth Extrinsic and Intrinsic Satisfactionas a combined variable with a negativerelationship. Another objective is to com-pare the relative strength of the relation-ship of Emotional Exhaustion with bothExtrinsic and Intrinsic Satisfaction. Em-ployees suffering from Burnout may notbe able to appreciate extrinsic factorssuch as pay, quality of supervision andadministration of fringe benefits. Hence,

H2b) Greater the Emotional Exhaustionamong software professionals lowertheir extrinsic Job Satisfaction.



Studies that have analyzed the rela-tionship with Job Satisfaction, Organiza-tional Commitment and Turnover havecome up with conflicting results. Whilesome researchers predict a direct nega-tive relationship between Job Satisfac-tion and Turnover (Tett& Meyer, 1993)majority of studies conducted across awide range of employees suggest a me-diator role played by Organizational Com-mitment (Griffeth, Hom&Gaertner, 2000;Price & Mueller, 1986). Degree of Jobsatisfaction is associated with specificand tangible facets of job and requiresrelatively lesser time to develop thanOrganizational Commitment. Commit-ment with an organization develops overa period of time and more stable in na-ture. Satisfaction/dissatisfaction withextrinsic and intrinsic aspects of the jobinfluences the development of organiza-tional commitment over a period of time.Hence,

H3a) Greater the Intrinsic JobSatisfaction,greater the Organiza-tional Commitment.

H3b) Greater the Extrinsic Job Satisfac-tion, greater the Organizational Com-mitment.

Organizational Commitment is astrong predictor of Turnover.

Organizational Commitment is astrong predictor of Turnover (Griffeth etal, 2000;Tett & Meyer, 1993). Mayer &Allen (1991) have come up with three-component conceptualization of Organi-zational Commitment involving affective,continuance and normative commitment

components. Affective Commitment re-fers to (a) strong belief and acceptanceof the goals and values of the organiza-tion (b) readiness of employees to exertconsiderable effort on behalf of the or-ganization and (c) represents a strongdesire to remain as a member of the or-ganization. Committed employees mayhave a desire to remain within the com-pany because they identify the successand future of the organization with them-selves and therefore exhibit a reducedTurnover Intention. Hence,

H4) Greater the Organizational Commit-ment lower the Turnover Intention.

Work Environment

Previous research has shown the in-fluence of Work Environment factors onJob Satisfaction and Turnover Intention(Griffeth et al, 2000). This study focuseson Work Environment factors such asOrganizational Politics and DistributiveJustice to study its interaction with Burn-out dimensions in the development of JobAttitudes.

Understanding Organizational Justiceas a Work Environment is important fororganizations because of its relationshipwith Job Attitudes such as Job Satisfac-tion and Organizational Commitment andsubsequently to their propensity to searchfor another job (DeConinck & Stilwell,2004). It has four distinct justice dimen-sions such as distributive, procedural, in-terpersonal and informational justice.Several studies have showed DistributiveJustice as a better predictor of Job Sat-isfaction than procedural in line with Dis-

Turnover Intentions


tributive Dominance Model suggested byLevanthal (1980). Distributive Justice hasits roots in Equity Theory. Employeesdetermine whether an outcome was fairby calculating the ratio of one’s contri-butions such as experience and effortsto outcome such as pay and promotionand then comparing this ratio with thatof others. Any perceived inequity in thiscomparison process may result in dissat-isfaction. Some of the previous studies(DeConinck & Stilwell, 2004) have stud-ied the relationship of Distributive Jus-tice with extrinsic factors such as paybut not on intrinsic factors. In line withEquity Theory we hypothesize a positiverelation with both extrinsic and intrinsicfactors. Hence,

H5a) Greater the Distributive Justicegreater the Intrinsic Satisfaction.

H5b) Greater the Distributive Justicegreater the Extrinsic Satisfaction.

Despite the sound theoreticalgrounding, very few studies have testedthe linkage between Burnout and Justice(Brown & Benson, 2003). Most of theemployees consider themselves as goodperformers and expect equitable and fairreturns for the same. Lack of Distribu-tive Justice may prohibit the fulfillmentof this expectation, and the employeewho believes in the inability of the sys-tem to reward him fairly may feel emo-tionally depleted. Repeated occurrenceof such incidents resulting in emotionaldepletion will finally lead to EmotionalExhaustion. Hence,

H5c) Greater the Distributive Justicelower the Emotional Exhaustion

Organizational Politics refers to theset of behaviors designed to maximizethe self-interest, either in short term orlong term and has a dysfunctional con-notation in this study. Work Environmentwith a dominant political atmospherecould result in development of negativeattitude among employees such as di-minished Job Satisfact ion (Witt ,Andrews & Kacmar, 2000), Organiza-t ional Commitment (Cropanzano,Howes, Grandey &Toth, 1997) andgreater Turnover Intentions(Cropanzano et al., 1997). In this con-text individual’s perception about thepolitics attains more significance ratherthan the objective reality that exists inan organization. While individual em-ployees perceive themselves as a vic-tim of Organizational Politics, they getdissatisfied with both the extrinsic andthe intrinsic rewards allotted to them, andexhibit a drop in Organizational Com-mitment. Other set of employees, whoconsider politics as undesirable maychoose to withdraw from the organiza-tion as a means to avoid political activi-ties. Hence,

H6a) Greater the Perceived Organiza-tional Politics lower the Intrinsic Sat-isfaction, Extrinsic Satisfaction andOrganizational Commitment, andgreater the Turnover Intentions.

A Work Environment characterizedby high-perceived Organizational Politicswill not ensure fairness among everyemployee of the firm. Unfairness in dis-tributing outcome can occur in two ways(Brown & Benson, 2003) in a politicallydysfunctional Work Environment (a) al-



location of high rewards to favorites (b)setting up of unrealistic targets for theemployees who are not considered asfavorites of power centers. Hence,

H6b) Greater the Perceived OrganizationalPolitics lower the Distributive Justice.

All hypothesized relations with direc-tions are given in Fig. 1

Fig. 1 Hypothesized Model & Variables Included in the Study

Methodology

The participants were softwareprofessionals working in a mediumsized firm in Bangalore, India. In or-der to ensure the familiarity with or-ganizational fairness and establishedpractices we limited our sample tothose employees who have a minimumexperience of two years in the currentfirm. Through HR department of theorganization, we contacted the em-ployees and 100 of them volunteeredto participate in the study and filledthe questionnaire. The mean age was

29.8 years with a standard deviationof 4 within the range between 23 and46 years. Eighty percent of the re-spondents were males representing thetypical gender ratio existing in most ofthe IT firms. 63 percent of the par-ticipants were married while 30 per-cent of the entire sample has one ormore kids. Average work experienceof the participants was 6.7 years witha standard deviation of 3.8 years. Toensure the confidentiality, researchervisited the organization and collectedthe filled questionnaires directly fromrespondents.

Turnover Intentions


Measures

To measure Burnout, twenty-two-item Maslach Burnout Inventory (Maslach& Jackson, 1981) was used generatingseparate scores for the three subdimensions,viz., Emotional Exhaustion,Depersonalization and Reduced PersonalAccomplishment. Emotional Exhaustionwas measured with nine items (a = 0.82)like ‘I feel emotionally drained during mywork’; Depersonalization measured withfive items (a = 0.64) like ‘I feel I treatpeople in an impersonal manner’; and,Reduced Personal Accomplishment mea-sured by eight reverse coded items (a=0.75) like item ‘I have accomplished manyworthwhile things in this job’.

Spector (1997) developed a 36 jobitem measure for Job Satisfaction withnine sub dimensions such as pay, promo-tion, supervision, fringe benefits, contin-gent rewards, operating conditions, co-workers, nature of work and communi-cation. Two sub dimensions that failedto report acceptable reliability were re-moved from further analysis. Seven ofthe remaining sub dimensions were clas-sified into Extrinsic and Intrinsic Satis-faction. Thus Extrinsic Satisfaction ismeasured by adding all items under thesub dimensions of Pay, Supervision,Fringe Benefits and Communication (ex-cept one item), while Intrinsic Satisfac-tion had Promotion, Contingent Rewardand Nature of Work as sub dimensions.Reliability scores for both were 0.87 and0.79 respectively.

Ferris &Kacmer’s (1992) five-itemmeasure for Organizational Politics was

used, with a scale reliability of 0.78. Asample item was ‘There are cliques andin-groups which hinder effectivenesshere’. Distributive Justice was measuredby a six-item scale developed by Price& Muller (1986) with a scale reliabilityof a= 0.88. Items reflect the way inwhich management considers the effort,results produced, roles and responsibili-ties in deciding rewards. Allen and Mayer(1990) devised a measure for AffectiveCommitment with six items. One sampleitem is ‘this organization has a great dealof personal meaning to me’. This studyreported a reliability of a= 0.73, for thismeasure. A six point Likert scale wasused to measure Burnout dimensions, JobSatisfaction measures, OrganizationalPolitics, Distributive Justice and Affec-tive Commitment.

Turnover Intention measured using asingle reverse coded item reads as‘length of time you planned to stay in thecompany’. Options given were rangedfrom less than one year to more than fiveyears as five possible answers. Otherstudies have either supported or used asimilar kind of measure for similar con-structs (Wanous, Reichers &Hudy,1997).

Analysis

Path Analysis using StructuralEquation Modeling (SEM) was em-ployed to test the model presented inFig. 1, since it provides a simultaneoustest for various study hypotheses.Model parameters were est imatedthrough the maximum likelihood methodusing LISREL 8.5. Several commonly



used fit indices were used to assess theoverall model fit (Jöreskog & Sörbom,1993): the Chi-square statistic; theAdjus ted Goodness-of-Fi t Index(AGFI); the Normed Fit Index (NFI),and the Comparative Fit Index (CFI)and the Root Mean Square Error ofApproximation (RMSEA). InsignificantChi-square value is desirable for SEM,since it suggests sufficient closenessbetween the model developed fromsamples covariance matrix and the truepopulation covariance matrix. Signifi-cance of the specific relationships wasestimated by t-values.

Results

Descriptive statistics and correla-tions are presented in Table 1.Chronbach’s a reliabilities are in paren-thesis along the diagonal.

Initial analysis of the hypothesizedmodel has produced fit indices below theacceptable levels. Hypothesized modelindicated a significant (p < 0.001) Chi-square value of 51.72 with 21 degrees offreedom. Since all other fit indices (AGFI= 0.78, NFI = 0.74, CFI = 0.80) are be-low the suggested limit of 0.90, we ex-amined the Modification Indices for theo-retically feasible improvement. Two ad-ditional paths were added to the modelin two steps based on suggested Modifi-cation Indices. We added a path fromDepersonalization to Emotional Exhaus-tion (MI = 29.79) first and then anotherone from Reduced Personal Accomplish-ment to Affective Commitment. Finalmodel indicated a non-significant (p >0.001) Chi-square value of 11.92 with 18 Ta

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Turnover Intentions


degrees of freedom with acceptable fitindices (AGFI = 0.93, NFI = 0.94, CFI =1.00). Improvements in fit indices as a

result of incorporating paths based on twoModification Indices are presented inTable 2.

Table 2 Fit Indices for Various Nested Models

Nested Chi square Df p value RMSEA AGFI NFI CFI Largest MIModels

I 49.53 20 < 0.001 0.12 0.77 0.75 0.80 29.79I A 20.19 19 >0.1 0.03 0.90 0.90 0.98 8.58I B 11.92 18 >0.1 0.00 0.93 0.95 1.00 3.09

Among Burnout dimensions the pathestimate from Depersonalization to Re-duced Personal Accomplishment (t value= -1.15) and Reduced Personal Accom-plishment to Emotional Exhaustion (tvalue = -1.26) turned out to be insignifi-cant, while the path estimate from Dep-ersonalization to Emotional Exhaustion,as suggested by Modification Index re-mained significant (Standardized pathcoefficient = 0.53, t value = 6.60). Thusresults do not support Hypothesis 1 sug-gesting a process model on Burnout de-velopment.

Hypothesis 2 received partial supportwherein the path coefficient from Emo-tional Exhaustion to Extrinsic Satisfac-tion has not got empirical support (t value= 0.80), while the path coefficient to In-trinsic Satisfaction got strong support(standardized path coefficient = -0.22, tvalue = -2.86). In a similar manner thepath towards Organizational Commit-ment from Intrinsic Satisfaction (stan-dardized path coefficient = 0.60, t value= 5.25) got empirical support, while thepath from Extrinsic Satisfaction becameinsignificant (t value = 0.45). Thus re-sults produce partial support for Hypoth-esis 4. Organizational Commitment ex-

hibited a very strong significant path(standardized path coefficient = -0.43, tvalue = -3.76) in expected direction sup-porting Hypothesis 5.

The two hypotheses dealing with therelationship between Work Environmentfactors and two forms of Job Satisfac-tion got partial support. The path fromDistributive Justice to Intrinsic Satisfac-tion (standardized path coefficient = 0.27,t value = 4.94) got very strong empiricalsupport while the path to Extrinsic Satis-faction became insignificant (t value =0.32). There was a very strongly signifi-cant path from Organizational Politics toIntrinsic Satisfaction (standardized pathcoefficient = -0.26, t value = -4.05), andan insignificant path (t value = -1.18)between Organizational Politics and Ex-trinsic Satisfaction. Results also exhib-ited moderately strong path to Organiza-tional Commitment (standardized pathcoefficient = -0.21, t value = -2.42), in-significant path to turnover (t value = -0.49) and finally very strong path to Dis-tributive Justice (standardized path co-efficient = -0.59, t value = -5.16) sup-porting hypothesis 6(b). Final model withsignificant path coefficients is given inFig. 2.



Discussion

The effects of Job Attitudes on turn-over under various contexts have beenwell documented. But the combined ef-fects of Work Environment and Burnoutdimensions are yet to be explored. Ex-amination of various facets of Job Satis-faction is useful, in understanding thereasons behind employee dissatisfactionand in subsequent preparation of an ac-tion plan for resolving the dissatisfaction(DeConinck et al., 2004). Categorizationof satisfaction measures into Intrinsic andExtrinsic factors and identification of the

relative importance in a turnover model,serves as the initial attempt in this direc-tion.

Any study on the combined effect ontwo distinctive sets of psychological con-structs starts with identification of itsconnecting link. Our path analysis resultsclearly point to Intrinsic Satisfaction asthe connecting link between work envi-ronment and Burnout dimensions in thedevelopment of various Job Attitudes.This constitutes the major theoreticalcontribution of this study and has greatsignificance to practitioners.

Fig. 2 Final Model and Standardized Solution from Path Analysis

* : p < 0.05 ** : p < 0.01*** : p < 0.001

Turnover Intentions


Most of the software jobs are highlydemanding in terms of: (1) high workloadrequiring the employees to put in addi-tional hours of extra work, (2) role ambi-guity due to the inherent need to work inclose relation with people outside theirrespective fields, (3) lack of sufficientand timely information and (4) nearlyimpossible deadlines.

According to conservation of re-source theory, Burnout occurs as a re-sult of losing certain valuable resourcesrequired to meet demands. Lack of re-source will lead to Burnout and result incertain behavioral and attitudinal out-comes like coping responses, TurnoverIntentions, and attitudinal changes likeerosion of Organizational Commitment,Job Involvement and Job Satisfaction.Since certain demands that could triggerstrain in the form of Physical and Emo-tional Exhaustion are inherent and in-separable to this profession, one solutionis to increase the availability of resourceswithin the job context. Empirical findingsof this study emphasize on the need toprovide more Intrinsic Satisfaction interms of higher autonomy, regular feed-back about performance, and identifiablepiece of work requiring variety of skills.These initiatives will keep their IntrinsicSatisfaction high and help them derivebetter satisfaction from their job. It willresult in positive cascading effect on otherrelated Job Attitudes like increased Or-ganizational Commitment and lowerTurnover Intentions.

Previous research has also failed toget empirical support for the link betweenIntrinsic Satisfaction and Emotional Ex-

haustion. Houkes et al., (2003) has lon-gitudinally studied the relation among In-trinsic Motivation, Emotional Exhaustionand Turnover Intention in two samplesconsisting of bank employees and teach-ers. While proving empirical evidence forIntrinsic Motivation and Turnover Inten-tion, they failed to establish a link be-tween Intrinsic Motivators and EmotionalExhaustion.

Work Environment factors have adirect impact on Intrinsic Satisfac-tion while the same is lacking withExtrinsic Satisfaction.

Work Environment factors have adirect impact on Intrinsic Satisfactionwhile the same is lacking with ExtrinsicSatisfaction. Huang & Van de (2003) intheir study across 46 nations conclude thatcertain basic necessities are a must toensure Intrinsic Satisfaction. In our study,similar results were not obtained due totwo possible reasons. Software profes-sionals are getting a relatively higher payand better working conditions than theircounterparts in other professions andhence Extrinsic Satisfaction in terms ofpay cease to motivate them further. Theyhave already shifted to next level of needs(Maslow, 1954) and the current needs arebetter represented by factors included inIntrinsic Satisfaction. Another possiblereason can be explained in terms of thejob market condition wherein softwareprofessionals are always in demand.Hence, those software professionals whoare extrinsically dissatisfied with the or-ganization start searching for alternativeemployment and move out of the organi-



zation within a short span of time. Orga-nization may try to retain crucial employ-ees by revising their extrinsic rewards tothe possible extent. As a result, at anypoint of time, the number of extrinsicallydissatisfied employees in an organizationis negligible.

At any point of time, the numberof extrinsically dissatisfied em-ployees in an organization is neg-ligible.

Our study has not found any supportfor the relation between Extrinsic andIntrinsic Satisfaction. Highest Modifica-tion Index between these two variablesis 1.75, which is not significantly strongenough to add a path between them. Thisindicates partial support for two-factortheory (Herzberg, 1959). Further studiesare required to confirm the same in thecontext of software professionals.

Organizational Politics (OP) seemsto be the central variable in this modelinfluencing Distributive Justice, IntrinsicSatisfaction, and Organizational Commit-ment. Consistent with existing literature,our study found an inverse relation be-tween OPand Job Attitude. Given the factthat politics is inevitable in every organi-zation, management should take proac-tive steps to minimize the selfish motivearising out of it, by increasing availablesupportive mechanisms within the orga-nizational context.

Lack of a link between Work Envi-ronment factors and Burnout dimensionswas a surprise finding, which requires

further exploration in future studies. Inline with the relationship between WorkEnvironment factors, Burnout dimensionsexhibit a link with Intrinsic Satisfaction(but not Extrinsic Satisfaction) throughEmotional Exhaustion.

Our path analysis results failed tosupport hypothesized process model ofBurnout development. While EmotionalExhaustion remains as the core compo-nent of Burnout, Reduced Personal Ac-complishment seems to develop indepen-dently with a negative impact on Organi-zational Commitment. This result is con-sistent with previous research (Lee &Ashforth, 1996), which describes differ-ential impact of Burnout dimensions onJob Attitudes. While Emotional Exhaus-tion exhibited an indirect relationship withOrganizational Commitment through In-trinsic Satisfaction, Reduced PersonalAccomplishment has shown a direct re-lation. Realization of a parallel (or simul-taneous?) development of these dimen-sions, will help the managers develop arange of concurrentpreventive and sup-portive measures to tackle the develop-ment of Burnout.

While our analysis has revealed in-teresting findings, many of them are in-dicative due to some limitations associ-ated with this work.The study was basedon the perceptual data collected from asingle organization. In such a scenario,actual turnover data would have helpedin building a better model, rather thanTurnover Intention. In a job market domi-nated scenario, many of the turnover in-cidents are guided by impulsive decisionsrather than rational decisions. Finally,

Turnover Intentions


cross sectional nature of this study, mayresult in inherent weaknesses associatedwith most of the contemporary researchof this type.

References

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Huang, Xu, & Van de Vliert, E. (2003), “WhereIntrinsic Satisfaction Fails to Work: Na-tional Moderators and Intrinsic Motiva-tion”, Journal of Organizational Behavior,24: 159 - 79

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By Contribution

Powerful Leadership &Excellence in PublicEnterprises

V N Srivastava

Leadership emerges from thecore values of the organisation.It has been regarded as an im-portant and powerful driver ofexcellence when adequatelybacked by globalization issuesand flexibility in leaders’ styledynamisms. This paper touchesupon the cornerstones of theconcepts and constructs sur-rounding powerful leadershipand therefore, cuts acrossthrough and between variousintervening concepts such asleadership, culture and alsochange. It provides a spectrumof leadership phenomena to ex-plain the possible kind of lead-ership that is needed for the pub-lic sector enterprises to excel. Itsupports the theoretical under-pinnings with a host of datathrough a study of a cross-sec-tion of senior managers in theorganizations.

Introduction

Within the literature on leadership,generally, there is a clear recognition ofthe link between leadership and culturein the process of change (Schein, 1992;Afsanesh, 1993; both cited in Parry &Proctor-Thomson, 2003; Kotter, 1998).Only through leadership can one developand nurture a culture that is adaptive tochange (Kotter, 1998:166). According toSchein (1992, cited in Parry & Proctor-Thomson, 2003), transformational lead-ership behavior such as directing atten-tion to critical incidents, reacting to cri-sis, role modeling, formal statements andtelling stories, legends and myths influ-ence culture. Kilmann (1985) believesthat leadership is critical because, asorganisational culture develops andchange, they also need to be managedand controlled. According to Bass(1998), survival of the organisation de-pends upon the shaping of the cultureinitiated by effective leaders, particu-larly during change efforts. Kotter &Heskett (1992:84) state that the singlemost visible factor which distinguishesmajor cultural changes that succeedfrom those that fail is ‘competent lead-ership at the top’. They inspire and helpcreate adaptive culture.

V N Srivastava is Professor, New Delhi CampOffice, Centre for Organisation Development,Hyderabad. E mail: [email protected]


V N Srivastava


Romig (2001) reports that today’sorganisational leaders required a new kindof person having great managerial lead-ership talents and who did not depend ontop-down organisational superiority andsubordination. Reference is to powerfulleadership in dealing with normal humanresponses such as fears, insecurity, self-doubt, confusion, etc firmly and sensitively,give support where it is needed and standfirm in the face of strong resistance. Theyhelp to create enhanced capacity in theirpeople and who, in turn, become the stew-ard of all the organisation’s stakeholders(McLagan & Nel, 1996). According tothem, the new style of leadership requireschanges throughout the organisation andculture by looking deep within and trans-forming themselves, creating direct rela-tionships with employees, helping manag-ers and front line to change, acting as fo-cused visionary and increasingorganisational strengths.

Excellence in Leadership

In achieving organisational develop-ment and excellence, the role of a suc-cessful entrepreneurial and/ orintrapreneurial leader is important and theleader has to be a powerful one who cancommunicate and inspire by appropriatemeans, the level of competence neces-sary to influence a group of individualsto become willing participants in the ful-fillment of innovational goals (Darling &Beebe, 2007). They create new ideas,new products and services, new policies,new procedures and effective communi-cation networks. According to Nurmi &Darling (1997) these leaders believe in“attention through vision”, “meaning

through communication”, “trust throughpositioning” and “confidence through re-spect”. Through the vision they take theirorganisations beyond the horizon and theestablished map.

Leadership is prime and leader-ship excellence emerges from thecore values of the organisation.

In Kanji’s Business ExcellenceModel (Kanji & Moura, 2001), leader-ship plays a prime role for the creationof excellence in organisations. Accord-ing to them, leadership is prime and lead-ership excellence emerges from the corevalues of the organisation. Bennis &Nannu (1985, cited in Northhouse, 1997)state that “management controls, ar-ranges, does things right; leadership un-leashes energy, sets the vision, does theright thing”. This view is shared by Kotter(1990) when he states that the overrid-ing function of the management is to pro-vide order and consistency inorganisations, whereas the primary func-tion of leadership is to produce changeand movement (Kanji & Moura, 2001).Georgiades & Macdonell’s (1998) modelalso puts leadership at the center of ef-fective functioning of an organisationwith three main leadership tasks: estab-lishment of the vision, the alignment ofthe culture, and specification of manage-ment practices. According to Nadler &Tushman (1990), leaders need to providea focal point for the energies, hopes andaspirations of people and serve as rolemodels whose behaviors, actions andpersonal energies demonstrate the de-sired behavior for concrete outcomes.

Powerful Leadership in Public Enterprises


Kanji’s model of leadership (Fig. 1)incorporates critical success factors forleadership identified as vision, mission,strategy and key issues which are es-sential for achieving excellence in lead-ership. To emerge as a powerful leader,therefore, the major challenge is man-

aging effectively the relationshipsamong the globalization issues, theorganisation’s vision, mission and strat-egy, and leader’s style dynamisms. Themeaning of each of the model’s con-structs and relationships among them isexplored in Fig. 1.

Fig. 1 Kanji’s Leadership Structural Equation Model

Source: Adapted from Kanji & Moura (2001:710).

Global Leadership

The emergence of global leadershipis the offshoot of what we call the man-agement challenges of globalization is-sues, which need to develop executivesto manage and lead from a global per-spective (Mendenhall et al., 2003). Lead-ership began to be regarded as morecomplex and challenging to driveorganisations towards excellence. Schol-ars came up with identical findings thatdeveloping global leadership and businesscompetence in leaders was a high prior-ity (Gregersen et al., 1998; Suutari, 2002;Mendenhall et al., 2003). Osland et al.(2006) identified challenges emanatingfrom global contexts such as geographic

reach in terms of business operations,cultural reach in terms of people and in-tellectual reach in terms of developmentof global mindsets. Lane et al. (2004)argued that, as a term, globalization at-tempts to describe a complexity of fourdifferent kinds—multiplicity, interdepen-dence, ambiguity and cross-cultural dif-ferences. The field of global leadershipdevelopment has started developing andscholars are undertaking continuous re-search and surveys to contribute to thisfield in the nascent stage of development.

Some scholars have conceded thatmost competencies associated with lead-ership from the domestic and traditionalleadership literature are necessary to lead

V N Srivastava


globally. The global context places highdemands on the deployment of these com-petencies that for all intents and purposesrender the phenomenon very differently(Mendenhall, 2008) and the study of globalleadership therefore becomes necessary.Osland &Bird (2006) distinguish betweenglobal and domestic leadership in terms ofissues related to connectedness, boundaryspanning, complexity, ethical challenges,dealing with tensions and paradoxes, pat-tern recognition, and building learning en-vironments, teams and community, andleading large-scale change efforts acrossdiverse cultures. Living and working con-stantly in a global context, and experienc-ing the ongoing intensity of the dimensionsof complexity (Lane et al., 2004) can trig-ger a transformational experience withinmanagers (Osland, 1995). These powerfultransformational or crucible experiences(Osland, 1995, Bennis & Thomas, 2002)have been found to produce newmental models in the individual—newworldviews, mindsets, perceptual acumen,and perspectives that simply do not existwithin the people who have not gonethrough such a series of experiences in aglobal context.

Powerful Leadership

Combining the strong aspects of whatcan be had from the traditional leadershipliterature and those that are essential fromthe global leadership literature has producedsomething that can be called as powerfulleadership to make domestic organisationsnot only successful, but also achieve highorganic growth amidst the severe chal-lenges thrown or likely to be thrown by glo-bal organisations in the domestic place. It

is in this context that a review of globalleadership literature will help develop anappropriate framework of ‘powerful lead-ership’ to have a distinct competitive ad-vantage over global organisations. Domes-tic organisations, too, have to function to-gether with global corporations as operat-ing in isolation in the context of massiveglobalization phenomenon today is impos-sible. Tichy et al. (1992, cited inMendenhall, 2008) wrote about “trueglobalists”, as they called them, who have(i) a global mindset; (ii) a set of global lead-ership skills and behaviors; (iii) energy,skills, and talent for global networking; (iv)the ability to build effective teams; and (v)global change agents skills. These leadersdevelop people and organisations simulta-neously. Kets de Vries & Mead (1992)developed a list of leadership qualities thatincluded envisioning, strong operationalcodes, environmental sense making, abilityto instill values, inspiring, empowering,building and maintaining organisational net-works, interpersonal skills, pattern recog-nition and cognitive complexity, and hard-ness. Rhinesmith’s (2003) articulation ofglobal mindset has two components— in-tellectual intelligence and emotional intelli-gence. Both lead to business acumen andpersonal management. Articulating the vi-sion, mission and strategy of an organisationis an important attribute of a leader (Ketsde vries et al., 2004). Goldsmith et al. (2003)identified 15 dimensions of global leader-ship and noted that 10 of their dimensionsare also found in domestic leadership andcontinue to be important. They aredemonstration of integrity, encouraging con-structive dialogues, creating shared vision,developing people, empowering people, cus-tomer satisfaction, maintaining competitive



advantage, leading change, achieving per-sonal mastery and anticipating opportuni-ties. Powerful leadership will also requirepossession of shared leadership, buildingpartnerships and traits of thinking globally.

Goldsmith et al. (2003) list the follow-ing important leadership competencies todrive future organisations towards excel-lence: genuinely listening to others, creat-ing and communicating a clearorganisational vision, becoming a role modelfor living the very same organisational val-ues, uniting an organisation into an effec-tive team, clearly identifying priorities andfocusing on a vital few, building partner-ships across the company, and constantlytreating people with respect and dignity.Leadership competencies to lead in the 21st

century in domestic organisations can bedrawn from McCall & Hollenbeck’s (2002)model of global executives. The model isdeveloped based on interviews with globalexecutives (who are also global leaders)and focuses on the interaction and part-nership between the individual and theorganisation. Most of the competencies areappropriate for leading public and privatesector enterprises and a great deal of at-tention is paid to this model as these canbe powerful drivers of organisations to-wards excellence.

A Powerful Leader

The important competencies requiredto make a powerful leader, among oth-ers, can be: leading and managing oth-ers—selection; development, motivationand team building; dealing with problem-atic relationships—headquarters, bosses,unions, government, media, politics; and

developing good leadership qualitieswithin self and others. According toChopard (2002, cited in Winter, 2003), tosuccessfully manage high performingorganisations who, worldwide, are oper-ating in an environment of increasingvolatility, high performance leadership isthe only way. Leadership will be requiredto be nurtured at all levels across theorganisation. Between 1984 and thepresent day, three things have changed:scale from national to global, speed fromsteady to fast, and standards from localto world class. Nelson Mandela influ-enced the world from his prison cell, andwe are talking of a leadership which ispowerful and can influence anorganisation in the most turbulent state(Winter, 2003). Powerful leadership isbound to make a difference as they in-spire creativity in the groups they lead.Efforts such as creative problem solvingand strategy are essential to the work ofleaders in the knowledge economy(Leonard & Swap, 1999).

Organisational leaders are continu-ously resorting to one or the other trans-formation efforts with a strong determi-nation to transform and turnaround to-wards making it a great organisation.However, as Kotter (1995) reports, mosttransformation efforts fail, particularlybecause a critical mistake in any of thephases has a devastating impact, slow-ing momentum of pace of change andsometimes negative hard-won gains.

Leadership will be required to benurtured at all levels across theorganisation.

V N Srivastava


Also, many change leaders—internal orexternal—may have relatively lesserexperience in renewing organisationsand even very capable people oftenmake at least one big error (Kotter,1995). Eight steps listed by Kotter(1995) relate to establishing a sense ofurgency, forming a powerful guidingcoalition, creating a vision, communi-cating the vision, empowering others toact on the vision, planning for and cre-ating short-term wins, consolidatingimprovements and producing still morechanges and institutionalizing new ap-proaches. Starting a transformation pro-gram, cascading it down below, and see-ing it achieving transformational goalsthrough the aggressive cooperation ofmany individuals are important. A para-lyzed senior management has too manymanagers and not enough leaders.Enough real leaders are required in anorganisation (Kotter, 1995), particularly‘powerful leaders’ for driving and lead-ing change towards its transformationand excellence. If a change target isthe entire company, the CEO is the key;if it is needed in a division, the divisiongeneral manager is the key. At all thesekey positions, great leaders, powerfulleaders or change champions areneeded. Kotter’s analysis towards cre-ating a powerful guiding leadership coa-lition to have a minimum mass forsomething worthwhile to be happeningis helpful in understanding the success-ful transformation efforts.

According to Locander & Leuchauer(2006), the phrase, “simultaneous loose-tight properties” used by Peters &Waterman (1982) captures the essenceof the leadership paradox of structure.Organisational units require to be sostructured that work can be effectivelycoordinated, performed and assessedwithout robbing employees of their dig-nity, stifling their creativity, and inhibit-ing their ability (Locander & Leuchauer,2006). Kotter & Heskett (1992: 146) iden-tify successful leaders as those who re-peatedly communicate their vision, allowpeople to challenge these messages andstimulate middle managers to take up thecause and provide leadership themselves.These are characteristics of transforma-tional leadership and are described byBass & Avolio (1993) to be made of fivekey compositions: idealized attributes,idealized influence behavior, inspirationalmotivation, intellectual stimulation, andindividual consideration. Idealized influ-ence and idealized attributes describeleaders who act as role models, can betrusted, are respected and demonstratehigh ethical standards. Inspirational mo-tivation involves arousing team spirit,motivation and enthusiasm. It also de-scribes the process of creating vision forthe future. Intellectual stimulation de-scribes leadership that supports and en-courages innovation and creativity. Inaddition, intellectual stimulation encour-ages the followers to question old as-sumptions. As the fourth transformationalleadership style, individualized consider-ation occurs when leaders pay attentionto the developmental needs of the fol-lowers, and develop personalized inter-actions and relationships (Bass & Avolio,

If a change target is the entirecompany, the CEO is the key.



1997). Osterman (1994) found that con-cern for employees’ well being was aprimary factor contributing to innovationwithin an organisation. Podsakoff et al.(1990) defined similar constructs oftransformational leadership, includingidentifying and articulating a vision, pro-viding an appropriate model, and foster-ing acceptance of goals. Bass (1998) andPodsakoff et al. (1990) conceptualizedtransformational leadership as promotingflexibility, adaptability and innovation intheir followers and their organisations.Gill et al. (1998) believe that the ‘newpost-bureaucratic organisation’ will re-quire transformational leadership for en-hancing flexibility, horizontal networks,high-trust relationships, adaptability tochange and uncertainty, innovation andempowerment of employees. Such a phe-nomenon will lead to the necessary re-invention of organisational cultureswhich, in turn, will lead to organisationalsuccess. According to Valle (1999), be-cause of the changing nature of publicservice, the public sector requires newleadership that will promote flexibility andadaptability in organisations and in indi-viduals. Public sector leadership mustprovide clear and pronounced vision, ef-fective communication, and inspired mo-tivation towards organisational goals.Leaders who inspire and help createadaptive organisational cultures possessthe qualities of transformational leader-

ship as described by Bass (1998). Thismay more appropriately be referred toas performance culture. Nutt & Backoff(1993) highlight factors such as using ide-als (visions) that are co-created in theplace of objectives or goals, moving tobe proactive rather than threat driven,adopting innovative ideas, emphasizingparticipation of key stakeholders, reduc-ing hierarchical distinctions, and empow-ering followers.

A powerful leadership must, how-ever, use power and trust dimensions ju-diciously while leading. Kotter &Schlesinger (1979) defines power as “ameasure of a person’s potential to getothers to do what he or she wants themto do, as well as to avoid being forced todo what he or she does not want to do”.Machiavelli (1950) suggested fear andlove as the main base of power. Hersey& Blanchard (1982) proposed sevenbases of power—coercive, legitimate,expert, reward, referent, information, andconnection. Pareek (1997, 2003) havegiven six bases of power in the coercivepower group—organisational position (le-gitimate power), punishment (coercivepower), charisma (charismatic power),personal relationship (emotional power),closeness to the source of power (re-flected power), and withholding informa-tion or resources (manipulative power).He has also proposed six persuasivepower bases—reward (reinforcingpower), expert power, competencepower, behavior power (being a rolemodel), extension power (empathy, car-ing and helping others), and logical power(based on information and the rationaleof the information).

Public sector leadership must pro-vide clear and pronounced vision,effective communication, andinspired motivation towardsorganisational goals.

V N Srivastava


Followership

According to Kellerman (2007), in anera of flatter, networked organisationsand cross-cutting teams of knowledgeworkers, it is not always obvious whoexactly is following (or, for that matter,who exactly is leading) and how they aregoing about it. Reporting relationships areshifting and new talent-management toolsare constantly emerging. A confluence ofchanges—cultural and technological—has influenced what subordinates wantand how they behave. Leaders need tounderstand bosses better and to under-stand the dynamics between them andtheir followers.

At times they also act by withhold-ing support from bad leaders, throwingtheir weight behind good ones, andsometimes claiming commanding voicesfor those lower down in the social ororganisational hierarchy (Kellerman,2007). CEOs share power and influencewith a range of players, includingboards, regulators, and shareholder ac-tivists. Expertise can—and often does—trump position as an indicator of whoreally is leading and who is really fol-lowing (Drucker, 1967, ci ted inKellerman, 2007). Kellerman also pointsout that relationship between superiorsand their subordinates is not one-sidedand nor are all followers one and thesame. Followers too act in their ownself-interests as leaders do. While fol-lowers may lack authority, at least incomparison with their superiors, they donot lack power and influence. Accord-ing to Waterman (1994), to be a trueleader, one needs to give up control in a

narrow sense to have control in a muchbroader sense.

Public Sector Leadership

Leaders, according to Goldsmith etal. (2003), can not embody all of theneeded critical capabilities. However, inthe present times of globalization issues,where the very changed nature of busi-ness organisation (merged, behavior,outsourced and virtual) is beginning todictate organisations, shared leadershipis expected to gain prominence as theoperating model of the future. In future,there will be fewer “all knowing” CEOs;instead, leadership will be widely sharedin executive teams. New demands forcollective responsibility and accountabil-ity will emerge, as will competencies forsharing leadership. Not one person only,but more than one person will leadorganisations collectively (Osland, 2008,cited in Mendenhall, 2008:51-52). Lead-ers style dynamism is about high perfor-mance leadership, developing leadershipat all levels, shared leadership, and de-veloping a second in command.

According to him, “high performanceleaders” must harness two energies thatare the “performance drivers”—mentaland relationship energy, and two energiesthat are “performance enablers”—physi-cal and emotional energy. Performanceleaders can not build and capitalize on theknowledge, creativity and relationships

Shared leadership is expected togain prominence as the operatingmodel of the future.



unless their physical energy (endurance)and their emotional energy (resilience)permit. Many leaders invest vast time andeffort in increasing their knowledge andrelationships and then fail to use theseresources because of physical and emo-tional fatigue. Though some reviews hadconcluded that the situational leadershipmodel has some logical and internal incon-sistencies and lacks empirical support, ithas been found to be adequately repre-senting reality. Blank et al.’s (1990)framework also provides supportive evi-dences and is based on the assumptionthat subordinates’ maturity moderates theleadership task relationship behaviors withindicators of leader effectiveness.

Research Based Analytics

A qualitative research methodologywas carried out using individual inter-views and focus group discussions toassess the important isues that typicallyare associated with the achievement andnurturance of excellence. About 20 indi-vidual interviews of about 20 senior man-agers in public enterprises and 4 focusgroup discussions (6 - 7 in each group)were carried out.

Three important factors identifiedthat was felt to be important related to:

1. Top Management Leadership

2. Leadership Effectiveness

3. Super-Speciality Centered Leader-ship

Within each of these factors of pow-erful leadership, it was found that there

are some sub factors which gives somekind of identity to leadership and they arediscussed under each identified factor.

Top Management Leadership

The top leadership in public enter-prises needs to be full of dynamism andis evidenced by the fact that it is highlytalked about also at every place in theorganisation even when he has left theorganization. His examples are oftencited and have often left a deep mark oneverybody’s mind. The important subfactors of this phenomenon of leadershipthat came out were:

i) Vision Document Development:Development of a vision documentappears a theoretical exercise; how-ever, it is important in traversing somedistance in a planned way, though,mere development of a documentdoes not guarantee or ensures achiev-ing excellence. Referring to such aninitiative by one of the public sectorCMDs of public sector HydropowerCompany, a group of employees men-tioned:

“The present CMD has got a visiondocument developed: ‘Hydro Power50000 MW initiative’. In this, projectsworth 50000MW are identified andvision document prepared for devel-opment across the country. Policymakers have been persuaded andthere is a constant push for hat bythe top leadership. Vision documentof public enterprises is a very valu-able document related to public en-terprises vision and mission fulfill-

V N Srivastava


ment. The present CMD’s strengthsare talked about as regards dynamismis concerned”.

Vision document of public enter-prises is a very valuable documentrelated to public enterprises vi-sion and mission fulfillment.

The powerfulness is being continu-ously talked about by people below.“What the great ones do, the less prattleoff” (Shakespeare in Julius Ceaser). Thisis an important indicator of powerfulnessof leadership.

ii) Turnaround Leadership: “In one ofthe public sector enterprises, a leaderwho had a stay of more than 7 yearsin the organisation is regarded as aturnaround leader because of whomthe organisation is what it is today.The state of public enterprises whenhe took over as a CMD was not verygood and was a 3500 MW company.However with his strategies, drivesand plans it had had a continuousgrowth of projects, JVs etc and theprojects finalized by him have startedgiving results now”.

iii) Global Leadership Initiatives:“Public enterprises have started mak-ing a concerted drive towards achiev-ing a place in the international com-munity by beginning to providingconsultancy services to developingcountries in their areas of core com-petence such as hydropower engi-neering by an enterprise in hydro-power generation”.

“It is a good thing. Achieving a world-wide status is one of the missions of pub-lic enterprises”.

iv) Leadership Ownership:”In somepublic enterprises, leadership hasbeen changing frequently and hasbeen for durations ranging between1–7 years, which in one case report-edly had the longest duration of 7years. The next longest duration was5 years. It is observed and also re-ported that there has been a maxi-mum growth of the said public en-terprises during this period.”

Continuity of leadership is an impor-tant issue for higher organic growth. En-terprise may spirally go up or even godown.

Leadership Effectiveness

i) Assertive Leadership: “A wide-spread feeling persists of the Minis-try not giving free hand to some pub-lic enterprises and making frequentinterferences in functioning. Morethan half of the time of the top lead-ership would be getting away in man-aging these interferences. At times,many CMDs act assertively, givinghigh empowerment to people and aresupportive to innovative ideas andinitiatives. As assertive leaders, theyaptly manage what is called the ‘in-terferences’ coming from the bu-reaucratic and governmental regimes/ processes, and not put them forthas limitations and constraints forachievements. A high clarity of di-rections with every decision has high



impacts in terms of motivation to-wards achieving excellence”.

ii) Developing Managers as Leaders:“There is no specific initiative fordeveloping leaders for taking up po-sitions at various plants, projects, re-gions, etc. It is purely based on se-niorities, competencies, exhibition oftalents in positions held and also thepersonal choice of CMD. This is animportant factor as evidenced bymany respondents saying, ‘it isCMD’s team’. Through this processvery dynamic heads of projects havebeen identified. In some places,projects have been completed in arecord period of time and is amongone of the talked about projects is anexample. Heads of projects are gen-erally given freedom to choose theirteam and members are not forcedupon him for deliveries in the project.They are generally from among thosewho have earlier worked in the pastwith him and according to thoseproject heads, they are capable ofgiving results, have gone through theproject hardships”.

iii) Powerful Followers: “Powerful fol-lowers, defacto the ‘leaders of to-morrow’ have made to the top levelsincluding the ‘board’ level. They havereached those levels by greater trust,support, and empowerment andshared leadership processes. Theyhave reached these positions by wayof strength of their hard work. Theyhave the capacity to take theorganisation forward. There are alsosome at the chief level, plant level,

who have huge capacity but do notget freedom need to be made goodfollowers by giving good support tothem. The followers wanting to takechallenging tasks, if are supported intrue spirits, will become very goodfollowers who will be the future lead-ers.

iv) Developing Leadership Skills:“Leadership development initiativesare mostly by way of exposing em-ployees to leadership concepts andchallenges for change and growth.There is also high emphasis of de-veloping leadership among officers atManager and above upto ExecutiveDirector through processes such ascompetency mapping, assessmentand development centers”.

v) Coaching Subordinates: “When-ever a subordinate is in a fix to de-cide between one he is being askedto do and what he is actuallywantingto do is basically confronted withvalue laden issues, superiors havebeen found in some instances to giv-ing their subordinate a patient hear-ing and facilitating him to take themost appropriate decision. The effortobserved has been to buildingstrength in the subordinate and de-velop or adapt more flexibility in lead-ership than remaining in a state ofrigidity which is important for gettingresults”.

vi) Project Leadership Challenges: Insome public enterprises particularlythe hydropower enterprises, the lead-ership has been admired for theircapacity to achieve amidst odds, as

V N Srivastava


cited by some respondents: “Eachproject has a typical problem withrespect to geographical and geologi-cal conditions, and tunneling opera-tions for dam construction requiresdifferent strategies. Various issuesalso require to be handled particularlyrelating to environment, water, apartfrom technical drives required. Apowerful leadership for completingprojects before time is required”.

vii) Developing Subordinate: “Therehave been many instances wheresubordinates have been developedby superiors. They have been infor-mally guided and coached to obtainhigher qualifications and that hashelpd in raising knowledge levels ofpeople in the organisation”.

Super-Speciality CenteredLeadership

“Based on three different nature ofwork involved in setting up hydro powerplants, such as investigation, design andconstruction, the technical employeeshave developed specialized skills(super speciality) in their respective ar-eas of working. Organisation has beenparticular about this and has providedseveral opportunities to those who havedeveloped these kinds of specialities byproviding international consultancy”.

i) Leadership Development by Un-derstudy: “There has been a processof placing junior or new appointeesat officer and supervisory levels tothose having engineering degree anddiploma but do not have experience.By working with those who have

been working on various projects fora long time these employees havebeen developing but of late sincethere has been reduced intakes atentry levels and so this process ofdeveloping as an understudy has alsoreduced. This has however been avery effective way of developing highlevel of technical competence amongnovice engineers and diploma hold-ers”.

ii) Work Pressure Management: “Thetop leader has to manage high pres-sure from various quarters, centralgovernment, state government, localpolitical leaders, union, and many oth-ers including difficult working condi-tions. In one project of a public sec-tor, the tunnel boring machine gotstuck in the mountain. The same isthere and the decision is to be takenby the government and also to someextent political as local people areinvolved”. The environmental clear-ances are a part of public sectormanagement and needs to be handledas per the environmental policies.

Conclusions

Leadership needs to be given dueimportance to in public enterprises. Pub-lic enterprises need to focus on develop-ing effective leadership skills for trans-forming organisatons, and leading andmanaging change. A good leadership cantransform an organization and helpachieve excellence. There are severalskills in those leaders and it is suggestedthat organizations undertake plannedLeadership Skills Development programsat various levels.



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By Contributionsas

Strategy & Structural Dimensions – A ComparativeStudy of Four Industries

Bindu Gupta & Ajay Singh

This study examines the linkagebetween organization’s strategyand structural dimensions. Thereare significant differencesamong the organizations in termsof structural dimensions and thestrategy used. Prospector strat-egy is used more in the IT indus-try, analyzer strategy in thebanking industry and reactorstrategy in power industry. Ver-tical linkages and formalizationare more used in the power sec-tor, horizontal linkages in auto-mobile sector, centralization inbanking sector. When the orga-nization uses reactor as dominantstrategy, vertical linkages andformalization were perceivedmore. Horizontal linkages aremore prevalent in the organiza-tion using prospector strategyand organizations using the ana-lyzer strategy were found to behigh on centralization.

Introduction

Organization Structure is a dy-namic element which can change overtime as a consequence of new organi-zational and environmental conditions.It reflects the way in which informa-tion and knowledge are distributedwithin an organization and it substan-tially influences the distribution and co-ordination of the company’s resources,the communication processes and thesocial interaction between organiza-tional members (Chen & Huang, 2007).It can be frequently customized so thatstaff could have access to and acquirenew and varied knowledge that wouldhelp them to overcome a range of prob-lems, fluctuations and diverse situations(Lloria, 2007). Studies (e.g., Dodgson,1993; Fiol & Lyles, 1985) also havesuggested that structures have an in-fluence on the organization’s learningability. Researchers further suggest thatorganizational personnel are meaning-less unless some type of structure isused to assign people to tasks and con-nect the activities of different peopleor functions (Denison, 2000; Drucker,1974).

Bindu Gupta is Associate Professor, IMTGhaziabad. E-mail: [email protected] Ajay Singh IsAssociate Professor, IIM Lucknow, Ghaziabad.E-mail: [email protected]


Organizational structure may ob-struct or support the capacity ofthe organization to adapt, innovateor improve its ability to add valuefor its customers.

Organizational structure may obstructor support the capacity of the organiza-tion to adapt, innovate or improve its abil-ity to add value for its customers and toits performance. One of the purposes ofthe study was to understand the organi-zational strategy and structure in Indianorganizations belonging to different indus-try segments. It also examines the rela-tionship between strategy and structure.Although, there have been rich theoreti-cal and empirical descriptions aboutstructure and strategy (e.g., Schaffer &Litschert, 1990; Tse, 1991), this studyintends to examine it further in the In-dian context. The rationale behind arethat the Indian culture is different fromthe western culture. Research suggeststhat when national and organizationalcultures come into conflict, the nationalculture is likely to dominate (Hofstede,1980; Pang et al., 1998).

Peters and Waterman (1982) and oth-ers reported that organizations in theUnited States (US) are influenced bynational cultural values: there have beenfocus on open and honest communica-tion and teamwork and staff are beingempowered to make decisions(Mwaura et al. , 1998). Hofstede(1980) found that in cultures with highpower distance relationships, employeeshave limited expectations for participa-tion in decision making. Given such cul-

tural considerations, the findings pertain-ing to the relationships between strate-gic orientation, organization structure andperformance may not apply in the Indiancultural context, as Indian culture hasbeen rated high on power distance andalso differ on other value dimensionsfrom US culture.

Organizational Structure

Child (1972) defined organizationalstructure as “the formal allocation ofwork roles and the administrative mecha-nisms to control and integrate work ac-tivities including those which cross for-mal organizational boundaries”. Daft(1998) stated that organization structuredetermines the formal reporting commu-nications and represents the levels whichexist in administrative hierarchy and alsospecifies the extent of the managers’control. The people’s formal communi-cations, job status in an organization, theextent of accessing information, job de-scriptions, resource allocation, rules andregulations, compliance and implement-ing the rules, co-ordination between theactivities, depend on designing organiza-tional structure (Ergenli et. al., 2007). Tounderstand the organizational structure,number of structural dimensions has beenidentified in various studies. Among themany structural dimensions, formaliza-tion, integration, centralization and com-plexity are commonly used in describingstructural characteristics.

Centralization is the degree to whichemployees are empowered to make de-cisions. When decisions are kept at thetop, an organization is centralized,

Strategy & Structural Dimensions




whereas in decentralized organizations,decisions are delegated to lower organi-zational levels (Daft, 1998). Formaliza-tion can be defined as the extent to whichan organization uses rules and proce-dures to prescribe behavior such as thedetails on how, where, and by whomtasks are to be performed (Fredrickson,1986). In the organization with higherlevel of formality, there are many bureau-cratic and rigid rules and set procedures,and little individual freedom of action(Ahmed, 1998).

Complexity describes many, usuallyinterrelated, parts of an organization(Fredrickson, 1986). Structural integra-tion refers to the coordination of activi-ties among the different specializationswithin the firm (Miller, 1987). The morethe complexity increase, higher is the needfor structural integration in the organiza-tion which can be in the form of verticalor horizontal linkages. Vertical linkagesare used to coordinate corporate activi-ties between the top and the bottom ofthe organization. Top management con-trols planning, problem solving, decision-making and directing (Hyden, 1994;Hankinson, 1999). Horizontal linkageshelp to integrate the different functions,units and expertise in the organization.

These structural dimensions influ-ence firms’ ability to perform efficientlyor effectively. Studies indicates that mem-bers in highly centralized organizationshad less motivation to learn, and wereless efficient and slower in making deci-sions (Duhaime & Schwenk, 1985; Slevin& Covin, 1995). An organization withhigher degree of formalization and cen-

tralization may make it easy to avoidchaos, inconsistency, and duplicated ef-forts, especially within a large, complexorganization (Adler, 1999). Chen et al.,(2009) reported that formalization andcentralization of organizational structurewould affect staff’s absorption capacity,and further affect organizational innova-tion performance.

An innovative organization needsopen channels of communication, decen-tralization and informal decision making,and flexibility in processes and proce-dures. Loosely coupled decision linkagesand loosely identified job descriptions areconducive to greater entrepreneurial andinnovative activity (Mintzberg, 1979).Azadegan, (2008) opined that an organi-zation with lower centralization has bet-ter capabilities for organizational innova-tion. Chen and Chang (2012) reportedthat the higher the degree of organiza-tional centralization, the lower the ab-sorptive capacity of the organization, andthen the lower the degree of organiza-tional innovation.

Organizational Strategy

Organizational strategy can be de-fined as a plan for interacting with thecompetitive environments to achieve or-ganizational goals (Daft, 1998). Throughits strategy, an organization selects and

An organization with higher de-gree of formalization and central-ization may make it easy to avoidchaos, inconsistency, and dupli-cated efforts.



interprets its environment, and adapts itsstrategy to the requirements of the envi-ronment (Porter, 1985). Miles and Snow(1978) classified strategy types as de-fender, analyzer, prospector, and reactor.Defenders are internally oriented organi-zations. They stress efficiency, and aretightly organized firms focused on main-taining a niche with a limited range ofproducts or services (Miles & Snow,1978). They try to protect their marketsthrough lower prices, high-quality, well-targeted products, and superior deliverywhile not often being at the forefront ofindustry developments. The prospectorshave an external focus and assumes morebusiness risk and attempt to be “first tomarket” with new products and services.These firms emphasize more in maintain-ing the image of an innovator in productterms than securing high profitability(McDaniel & Kolari, 1987). The structureof these firms is characterized by a lowdegree of formalization and routine, de-centralization and lateral as well as verti-cal communication, emphasizing aspectssuch as innovation and flexibility.

Analyzers blend the characteristicsof both the prospector and defender ori-entations (Miles & Snow, 1978). They arerarely first-in with new services or intonew markets, but are often second-inwith better offerings. The analyzer par-titions its technology so that it can serveits stable domains with efficient technolo-gies and its dynamic domains with flex-ible and effective technologies. They in-clude flexibility as well as stability, adopt-ing structures that can accommodate bothstable and changing domains.

Reactor organizations do notpresent any consistent pattern ofresponse behavior to environmen-tal conditions.

Reactor organizations do not presentany consistent pattern of response be-havior to environmental conditions andtheir actions are mostly reaction to out-side forces, such as the economy, com-petitors, or market pressures.

Strategy & Structure

Why some organizations outperformothers? The answer is grounded on thecontingency perspective. It advocates thatorganizational structure follows from afirm’s strategic choices in response to itsenvironment and successful firm perfor-mance to some degree results from a properfit between environment, strategy andstructure (e.g., Chandler, 1962; Child,1972). It provides a motivation for an or-ganization in misfit to move into fit to gainthe higher performance that fit produces(Burns & Stalker, 1961).

Porter (1980) claims that organiza-tions require a high degree in all of thestructural dimensions in order to imple-ment generic strategies. Miller (1988)reported that integration and formaliza-tion are relevant for performance forspecific strategic types. Zeffane (1989)reported that certain structural dimen-sions must be present with given strate-gies in order for the firm to achieve highperformance level. All these indicate thata ‘fit’ or, alternatively, an interaction be-tween strategy and structure is relevant



to performance, hence managers mustdesign the organization correctly if it isto be effective for a particular strategy(Fiedler, 1984; Feghhi Farahmand, 2005).

Objectives of the Study

a) To examine the structural dimensionof the Indian organizations belongingto different industry segments

b) To examine the strategy used by theIndian organizations belonging to dif-ferent industry segments.

c) To examine the relationship betweenstrategy and structure in the Indiancontext.

Hypotheses

H1:There are significant differences inthe structural dimensions used byorganizations from different industrysegments.

H2:There are significant differences inthe strategy used by used by organi-zations from different industry seg-ments.

H3:Organizations following defenderstrategy are high on formalization,centralization and vertical linkages.

H4:Organizations following prospectorstrategy are high on both vertical andhorizontal linkages.

H5:Organizations with analyzer strategyare high on centralization and hori-zontal linkages.

H6:Organizations following reactor strat-egy are high on centralization andformalization.

Methodology

Data were collected by means ofquestionnaires that were sent throughelectronic mail. Overall 1000 question-naires were mailed, and 431 usable ques-tionnaires were received, with responserate 43.1 percent of respondents. Therespondents came from 16 organizationsfrom four industries namely, Banking(34.2%), Information Technology(22.3%), Power (18.3%), and Automo-bile (20.3%). Those selected for the studyare high performance organizations withintheir industry segment and represent aright mix of public, and private sectors.

The average age of participants was34.08 years, average experience in cur-rent organization being 4.96 years. Onlythose employees were requested to re-spond to questionnaire who have mini-mum three years of experience with thepresent organization. With respect to thelevel of qualifications, 65 percent weregraduates; and 35 per cent were post-graduates. Male respondents accountedfor 70 percent and 30 percent were thefemales.

Banking: Banking in India has a longand detailed history of more than 200years. It includes nationalized banks, pri-vate banks and specialized banking insti-tutions. Nationalized banks are the big-gest lenders in the country because ofthe size of the banks and the penetrationof the network. According to a WorldBank report, there are around 3.5 ATMsand less than seven bank branches per100,000 people and there will be improve-ment in near future as the Government



aims to have maximum financial inclu-sion in the country. (http://www.ibef.org/industry/banking-india.aspx).

Information Technology: This isamong the rapidly growing industries inIndia and has created a brand equity foritself in the global markets. According tothe report by Confederation of IndianIndustry (CII), India’s IT-business pro-cess outsourcing (BPO) industry revenueis expected to cross US$ 225 billion markby 2020. The report by Internet andMobile Association of India (IAMAI) andIMRB International suggests that Indiais expected to become world’s second-largest online community after Chinawith 213 million internet users by Decem-ber 2013 and 243 million by June 2014.All these reports suggest the potential ofgrowth in this industry.

Power: India is the 5th largest powerproducer and one of the most diversifiedsectors in the world. The PlanningCommission’s 12th Plan projects that to-tal domestic energy production wouldreach 669.6 million tons of oil equivalent(MTOE) by 2016–17 and 844 MTOE by2021–22 (http://www.ibef.org/industry/infrastructure/power-sector-india.aspx).

Automobile: India is predicted to beamong the world’s top five auto-produc-ers by 2015, with the increasing growthin demand with rising income, expandingmiddle class and young population basealong with a large pool of skilled man-power and growing technology (http://w w w . i b e f . o r g / i n d u s t r y / i n d i a -automobiles.aspx). Experts opine that indeveloped economies, automobile manu-

facturers buy more components and ser-vices from suppliers than they are usedto and are increasingly relying on themto reduce costs, improve quality, and de-velop new processes and products fasterthan their rivals’ can.

Measures

Business Strategy: A multi-item scaledeveloped by Parnell (1997), based onthe work of Conant et al. (1990) was usedfor operationalizing the Miles and Snowstrategic typology. There were a total of12 questions with each consisting of fourstatements, one for each possible strat-egy. Each respondent was required toindicate which statement is true for his/her organization. The twelve responsesfor each participant in each organizationwas used to classify the business into oneof the four strategy categories, depend-ing on which strategy received more thanor equal to 50 percent responses.

Structure: Structural configurationwas measured by fourteen items designedto determine the dimensions, includingvertical linkages (3 items), horizontal link-ages (2 items), centralization (5 items), andformalization (4 items). These structuraldimensions were measured using a scaleranging from [1] strongly disagree to [5]strongly agree. Reliabilities are as follows:.65 for vertical linkages, .60 for horizon-tal linkages, .65 for centralization and .77for formalization.

Results

Business Strategy: Table I shows themean scores for all the strategies for each



industry. The results of ANOVA withrepeated measure on strategy indicatedthe significant difference in the use ofthese four strategies (F (3, 428) = 110.60,p, 0.00). The result of ANOVA also in-dicated the significant differences in dif-ferent industries for the use of prospec-tor, analyzer, defender, and reactor strat-egies (F (3, 427) = 13.98, p <, 0.00; F (3,427) = 106.83, p <, 0.00.; F (3, 427) =8.90, p <, 0.00; and F (3, 427) = 113.10, p<, 0.00), respectively. Thus the resultssupport the stated hypotheses (H1) thatthere are significant differences in the useof strategy by the organizations from dif-ferent industries. The mean scores indi-

cate that prospector strategy is usedmore in IT sector and less in power in-dustry. Analyzer strategy is used most inbanking sector. Reactor was reported tobe used more in power sector (Table I).Defender was reported the least usedcategories across all strategies. There-fore, further in the analysis, no organiza-tion was categorized as belonging to de-fender strategy.

Table 1 Mean Scores for Business Strategies

Industry P A D R

Automobile Mean 2.80 3.09 2.13 3.91N 92 92 92 92Std. Deviation 1.55 1.33 1.40 1.38

Banking Mean 3.12 4.69 1.53 2.63N 155 155 155 155Std. Deviation 1.55 1.60 1.53 1.22

Information Mean 4.05 3.19 1.80 2.95technology N 101 101 101 101

Std. Deviation 1.93 2.28 1.27 1.99Power Mean 2.77 .72 2.41 6.09

N 83 83 83 83Std. Deviation 1.03 .85 .91 1.08

Note: P- Prospector Strategy; A- Analyzer Strategy; D – Defender Strategy; R-Reactor Strategy

Structural Dimensions: Table 2shows the mean scores for all structuraldimensions for each industry. The resultsof ANOVA with repeated measure onstructural dimensions indicated the signifi-cant difference in the use of these struc-tural dimensions (F (3, 427) = 41.27, p,0.00). The result of ANOVA indicated thesignificant differences among industriesfor the use of vertical linkages, horizontallinkages, centralization, and formalization

(F (3, 427) = 77.54, p <, 0.00; F (3, 427) =48.68, p <, 0.00.; F (3, 427) = 40.49, p <,0.00; and F (3, 427) = 103.26, p, 0.00),respectively and support the stated hy-potheses (H2). The mean scores indicatethat vertical linkages are more used inpower sector than in IT sector. Horizon-tal linkages were reported in automobilesector centralization was reported morein banking sector and formalization ishighly prevalent in power sector (Table 2).

There are significant differences inthe use of strategy by the organi-zations from different industries.



Table 2 Mean Scores for Organizational Structural Dimensions

Industry Vertical Horizontal Centralization Formalizationlinkages linkages

Automobile Mean 3.73 4.00 3.89 4.07N 92 92 92 92Std. Deviation .62 .66 .38 .41

Banking Mean 3.75 3.71 4.11 3.49N 155 155 155 155Std. Deviation .68 1.01 .55 .65

Information Mean 3.12 2.93 3.37 3.40Technology N 101 101 101 101

Std. Deviation 1.15 .98 1.17 1.13Power Mean 4.81 2.78 3.23 5.00

N 83 83 83 83Std. Deviation .24 .28 .27 .00

Strategy Structure

Table 3 shows the mean scores oforganizational structural dimensions fordifferent strategies used by differentorganizations. Results of ANOVA indi-cated significant differences in the useof structural dimensions namely verti-cal linkages, horizontal linkages, central-ization, and formalization with respectto the dominant strategy used by orga-nizations (F (2, 428) = 60.84, p <, 0.00.;

F (2, 428) = 23.19, p <, 0.00; F (2, 428)= 19.54, p <, 0.00.; and F (2, 428) =82.70, p, 0.00), respectively. Verticallinkages and formalization are perceivedmore when organization was reportedto use reactor as dominant strategy.Horizontal linkages are more prevalentin the organization which followed pros-pector strategy. Organizations using theanalyzer strategy were found to be highon centralization than organizations us-ing other strategies.

Table 3 Means Scores for Organizational Structural Dimensions for Different Strategies

Strategy Vertical Horizontal centralization Formalization linkages linkages

Analyzer Mean 3.34 3.29 3.96 3.34N 167 167 167 167Std. Deviation .96 1.17 1.02 .98

Prospector Mean 3.76 3.87 3.73 3.24N 127 127 127 127Std. Deviation .81 .76 .56 .53

Reactor Mean 4.38 3.13 3.42 4.50N 137 137 137 137Std. Deviation .64 .66 .42 .68

Discussion & Conclusion

As the earlier researches suggestmanagers must design the organization

correctly if it is to be effective for a par-ticular strategy (Fiedler, 1984; FeghhiFarahmand, 2005), the present researchfocused on identifying the strategy and



structural dimensions adopted in the In-dian organizations and their alignmentwith the strategy of the organizations.The contribution of the study lies in ex-amining the differences in the strategyand structure of organizations belongingto different industry sectors. The busi-ness environment varies for different in-dustries and influenced by number of fac-tors such as stakes of government, num-ber of competitors, entry of global play-ers, maturity of the industry, governmentregulations for the new entrant, require-ment of capital, scope of innovation, de-pendence on the suppliers etc. which arelikely to influence the internal character-istics of the organizations. The findings ofthe study support the hypotheses proposedfor investigation and suggest that there aresignificant differences among organiza-tions belonging to different industry seg-ments in terms of structural dimensionsand strategy. Also the use of structuraldimensions varies depending on the strat-egy adopted by the organizations. Thesefindings support those of Gupta, (2011) inthe Indian context examining the differ-ences in the use of strategy by organiza-tions from different industry segments.

The use of structural dimensionsvaries depending on the strategyadopted by the organizations.

Organizations from the IT sectorwere reported to use the prospector strat-egy, and banking organizations the ana-lyzer strategy. Organizations from auto-mobile and power sectors have beenfound to use reactor strategy. Differentexplanations can be given for the same.

Miles and Snow (1978) proposed thatorganizations develop relatively enduringpatterns of strategic behavior to co-alignthe organization with the environment.Prospectors perceive a dynamic, uncer-tain environment and maintain flexibilityto combat environmental change andseek to identify and exploit new productsand market opportunities. Indian IT in-dustry started to cater to the needs ofglobal clients, now going through a shiftand there are a lot of opportunities forgrowth in this sector as opined by ex-perts. These facts may justifyrespondent’s perception of the organiza-tions using the prospector strategy. Re-garding the power sector, the electricitygeneration capacity in India is the fifthlargest in the world, still there are num-ber of issues such as a substantial per-centage of population still in blackouts,frequency of power cuts, industrial cus-tomer facing problem, and regulations bystate government etc. may be the rea-sons why power sector has been reportedusing reactor strategy.

Given the dependence on suppliers forauto parts, developing horizontal linkagesbecomes the major need of organizationsfrom automobile sector. In the power sec-tor any single mistake can be very expen-sive, that is why control and coordinationis achieved through vertical linkages andformalization. Organizations belonging tobanking sector were perceived high in cen-tralization, the reason may be that the dif-ferent branches of the bank spread overdifferent geographies are controlled by thepolicy framework of corporate office andbanking sector is governed by regulationsby Reserve Bank of India. For IT sector,



most of the responses came from the em-ployees working on client’s projects, andthat may be the reason why employeesperceived that there is high degree of cen-tralization and formalization.

As regards the relationship betweenstrategy and structure, the direction isviewed differently by different authors.Some studies view structure as follow-ing strategy while others say strategyfollows structure (Fredrick, 1986).While, the direction of causality betweenstrategy and strategy is beyond the scopeof this study, our results indicate thatthese two are interrelated and need tobe aligned to ensure organizational suc-cess and support the findings of earlierstudies.

The more proactive and aggres-sive a firm’s strategic posture is,the more flexible its organizationalstructure would have to be.

Organizations with the prospectorstrategy need to have a structure whichcan respond to particular control, coor-dination and learning problems createdby a high degree of organizationalinnovativeness. Organizations with pros-pector strategy use more horizontal andvertical linkages and less centralizationand formalization compared to organiza-tions using other strategies. These find-ings are in alignment with Day (1986)who views that the more proactive andaggressive a firm’s strategic posture is,the more flexible its organizational struc-ture would have to be, to allow it to takeadvantage of new technologies, new

markets, and other changes in the value-added system. The overuse of verticallinkages and formalization may be thereasons the organizations reported usingreactor strategy are not able to sense thechanging environmental forces and havereacted when are faced with crisis.Nahm et al., (2003) also indicated that aformalized structure may result in em-ployees losing their courage of innova-tion, independence and learning opportu-nity. Organizations using analyzer strat-egy were reported to use more central-ization, the reason being that manage-ment wants to make sure that there isfree flow of ideas as well as effectiveimplementation of the same.

Implications of the Study

This study suggests that the organi-zations that operate in different competi-tive environments and rely on differenttypes of strategies should have differentstructural dimensions which help them tomeet the unique demands of the competi-tive environment. The results obtained bythe study have implications for Indianorganizations:

(1) Organizations in the InformationTechnology sector need to use moreprospector strategy as there is lot ofuntapped market in this sector andscope for growth and innovation.

(2) Organizations in the banking industryneed to have blend of defender andprospector strategies, which can helpthe organizations to do its traditionalroles of monetary transactions as wellas to come with the new products



and services to meet the needs ofcustomers.

(3) Organizations with prospector strat-egy should support it with morevertical and horizontal linkages,which help to bring successful in-novation.

(4) Organizations which are high on ver-tical linkages and formalization arenot able to identify and use the rightstrategy to position themselves.

Conclusions

This study endorses the contention thatstructural dimensions need to be alignedwith strategic intent. As the organization’sstrategy evolves, managers need to cre-ate or modify systems and structures toeffectively implement the type of strat-egy selected. The findings of the study canbe used as guidelines to select the rightstrategy and structural dimensions for theorganizations to suit their environment.

The present study has also some limi-tations that need to be addressed in fu-ture research. The study could have as-sessed the performance of the organiza-tions in terms of both financial and non-financial indicators which can be strongindicators of how the congruence be-tween strategy and structural dimensionsinfluence organization’s effectiveness.Yet, some inferences can be made as theorganizations surveyed were among thetop in the country. Further the study didnot examine the differences among or-ganizations belonging to same industrysegment as Indian organizations vary interms of ownership, i.e. public, private

and multinational organizations. Futurestudy can examine the differences in or-ganizational strategy and structural di-mensions with respect to size, ownershipetc. The findings of the study suggest thatstructural dimensions and relationshipsbetween strategy and structure do notvary in different cultural contexts, how-ever, conclusive statement can be madeonly with a cross cultural study. The au-thors opine that trend can be the same indifferent cultural contexts but the extentof implementation may vary dependingon cultural values of a nation.

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