3 Reasons why labour market is hindering India’s growth
Moneylife Digital Team 18 August 2014
According to Morgan Stanley, current labour laws in India incentivize firms either to remain small, employing fewer workers, or to use capital- intensive approaches. No wonder, the share of India’s manufacturing sector in GDP of is one of the lowest among EMs
India’s track record in terms of creating productive jobs has been slow so far. One of the key issues stifling productive job growth is labour market regulations in the country. In addition, multiplicity of laws, rigidities in the system and trade unions play a major role in holding back India's labour market environment, says Morgan Stanley in a research report.
"Labour regulations in India are seen to be complex, rigid, time-consuming, and one of the main impediments to job growth in the organized sector. However, it is important to note that most labour regulations are seen to stifle job growth in the manufacturing sector. The services sector (mainly IT/ITES, retail comes under a different) has largely escaped stringent government, administrative requirements. Moreover, labour laws also create segmentation in the labour force – ultimately, the labour provisions meant to safeguard worker interests are applicable only to the much smaller organized labour force, which is about 16% of total. Thus, majority of the workers in India are not covered by regulations that are needed to protect their interests," the report says.
Labour law is a concurrent subject under the Indian constitution, which implies that both the central government and state governments have the right to formulate laws on the subject. This has resulted in multiplicity of laws, at times with overlapping jurisdictions. Currently there are 44 central laws and about 160 state laws on the subject (ILO, 2013). Many of the laws are archaic, dating to pre-independence – creating an urgent need for an overhaul of the laws to attune them to present realities. 
Indeed, there are multiple laws governing a single area. For instance, there are 19 laws governing conditions of work and industrial relations, 14 laws on social security and labour welfare, etc. Here we have only mentioned the central laws applicable to these areas. 
According to Morgan Stanley, a fallout of the cumbersome labour law structure is that the organised sector has remained small, accounting for only 16% of the total employment and the bulk of labour force is employed in the unorganised sectors.
In addition, Morgan Stanley says, the regulations are also viewed as increasing rigidities in the labour market, owing to restrictive conditions on hiring and laying off workers, closure of plants, and dealing with trade unions.
"Though India does not have the provisions for collective bargaining, the emergence of various trade unions leads to bargaining at an individual firm level. Moreover, the most pressing issue faced by industry is that trade unions tend to get associated with/backed by different political parties, leading to politicization of trade unions and making it difficult for employers and employees to resolve the issues," the report added.
Comparing labour regulations in India with other countries, Morgan Stanley says, most other nations do not have a stringent requirement of prior approvals and consultations (hire and fire practice), apart from Pakistan and Sri Lanka. The report says there is dire need to reform labour laws, especially related with trade unions.
Under Indian law, there is scope for multiple trade unions in a single factory – e.g., a company with 700 workers can have 70 trade unions. In most other countries, the requirements for minimum membership for trade unions to be recognized are higher than those in India, reducing the scope for multiplicity of unions. 
Morgan Stanley says, it believes India needs to amend provisions,  which allow outsiders to be office bearers. Currently one-third of the office bearers or five (whichever is less) can be outsiders. India also needs to introduce a strike ballot such that a strike can be called only if it is supported by a qualifying majority. Moreover, under the Industrial Disputes Act there is no provision to give advance notice for a strike unless industries are mentioned under public utilities, contrary to the general practice in many countries. Thus,  there is a need to amend this to introduce a mandatory advance notice for all firms, it added.
Indian policy makers are slowly paying attention to the fact that tight labour market regulations are having a negative impact, especially on manufacturing sector job growth. There has been a lot of discussion of this, yet governments have stopped short of making any full-fledged changes to the laws to reduce the rigidities in the system, Morgan Stanley says.
From the early days of its formation, the new government has been making announcements of its intention to boost manufacturing sector jobs. Indeed, Prime Minister Narendra Modi again made a firm commitment on the need to work towards boosting manufacturing exports in his speech on Independence Day.
Morgan Stanley said, apart from amending the laws, the state governments will need to initiate effort to bring about a change in attitude among local field officers and inspectors who are in charge of enforcement of labour laws.
A comprehensive review and restructuring of labour laws is required to make them more attuned to the present economic realities. "We believe that the central and state governments have recognized the need to initiate labour law reforms in order to boost manufacturing sector jobs. So far the governments have taken a piecemeal approach – but there now appears to be serious effort by the central government and some of the state governments to revive the manufacturing sector," the report says.
Morgan Stanley says it is cautiously optimistic about amendment to labour laws by the Central Government, since getting approval in the Upper House (Rajya Sabha) for some sensitive changes could be a challenge with a lack of majority for the ruling coalition. It says, "We are more optimistic about state governments going ahead with meaningful labour law reforms. The recent amendments to labour laws by Rajasthan are a case in point."
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