AgenciesIndia has some of the most extensive and burdensome labour laws in the world. It is a complex web of nearly 50-55 laws of which the labour and employment ministry administers 40. This amounts to over 30,000 compliances and over 3,000 intimations or filings, which together comprise over half of the regulatory burden facing enterprises. The laws also make it nearly impossible to lay off permanent workers even when business conditions are seriously adverse, denying firms the opportunity to be flexible, nimble and competitive.
Firms have responded by substituting capital for labour, or using temporary contract labour, to keep the number of regular workers below the thresholds at which various labour laws come into effect. Consequently, formal sector employment growth is slow, and vast numbers toil in the informal economy with scarcely any employment certainty or social security coverage.
Over the years, some states have attempted to reform the laws and simplified regulations. Before 2014, Uttar Pradesh, Andhra Pradesh, Punjab, Gujarat, Karnataka, Orissa and Rajasthan reduced inspectors. Gujarat, Punjab, Rajasthan and Maharashtra introduced self-certification. In UP, labour inspectors could carry out inspections only after consent from certain officers and after providing advance information about the inspection. Andhra Pradesh introduced self-certification for IT and IT-enabled services, biotechnology, export-oriented units, units in export processing zones and tourism-based enterprises.
Post-2014, Rajasthan, Madhya Pradesh, Maharashtra, Gujarat and Haryana initiated significant labour reforms. Earlier, the Industrial Disputes Act, 1947, covered establishments employing 100 or more workers. Rajasthan, Haryana, Gujarat and Maharashtra amended the threshold to 300 or more workers. Similarly, the Factories Act, 1948, was amended to cover only establishments that employ 20 or more workers (using power) and 40 or more workers (not using power). The earlier threshold was 10 or more workers (using power) and 20 or more workers (not using power).
In Madhya Pradesh, any application under different labour statutes is deemed approved if not disposed of in 30 days. In Haryana, after reforms, the Contract Labour Act will not apply to establishments employing up to 50 workers. The earlier threshold was 20.
A recent analysis carried out by us examines the impact of state labour law reforms on indicators like output, new industrial units, formal sector employment, capital investment and the size of industrial units. It uses Annual Survey of Industries (ASI) data covering 2000-01 to 2017-18 for over 600,000 cross-sectional units. The series are adjusted using appropriate inflation indices to avoid real versus nominal confusion.
The states are classified into those with flexible and inflexible labour laws, as per the classification in the Economic Survey 2018-19. They are also classified according to manufacturing intensity (gross value added from manufacturing per capita). This results in four types of states: high manufacturing flexible (Delhi, Gujarat, Haryana, Himachal Pradesh, Karnataka, Odisha, Tamil Nadu, Telangana, Maharashtra, Punjab, Uttarakhand); high manufacturing inflexible (Chhattisgarh, Goa, Kerala); low manufacturing flexible (Andhra Pradesh, Madhya Pradesh, Rajasthan, UP); and low manufacturing inflexible (Assam, Bihar, Jharkhand, West Bengal).
Opt for Flexi-Growth?
The growth rates of various indicators are compared across 2000-01 and 2014-15. The starting point was chosen before major labour reforms commenced. The endpoint represents the time when multiple earlier reforms were completed (barring in Rajasthan). Data are analysed using worker number-based firm size categories.
The analysis suggests that the inflexible states have lower growth of large industrial units and regular worker employment. The number of units grew 93% in high manufacturing flexible states compared to 52% for high manufacturing inflexible states. In low manufacturing flexible states, the number of units grew by 55%, with evenly distributed growth in nearly all size categories. In low manufacturing inflexible states, the number of units grew by 73%, largely driven by the asymmetric growth of small units (0-100) of 87%.
Worker numbers grew by 77% in high manufacturing flexible states compared to 2% for high manufacturing inflexible states. The corresponding figures were 21% and –14%, respectively, for flexible and inflexible low manufacturing states.
Contract labour hiring spiked in firms with 301-500 workers in all state categories, indicating policy constraints at this level. Capital growth was higher than the growth of worker employment in all states. This indicates a degree of substitution of regular workers with capital and contract labour.
There was no dramatic difference in output growth of firms between flexible and inflexible states. This indicates that firms in inflexible states can work around labour law constraints, perhaps using the contract labour route. Which means that state-level labour law reforms did increase regular worker employment propensity in the flexible states. However, even in flexible states, the changes have not been pervasive enough to encourage firms to overcome their preference for contract labour. An alternative classification that uses state per-capita income instead of manufacturing intensity also gives broadly similar results.
Rajasthan was the first state to carry out additional labour reforms in 2014. These are examined by comparing Rajasthan (a low manufacturing intensity, flexible labour law state) with low manufacturing flexible and inflexible states, as well as high manufacturing, flexible labour law states from 2013-14 to 2017-18. Rajasthan’s performance, in terms of growth of industrial units, was high (18%) and more comparable to the high manufacturing intensity, flexible labour law states (16%) than its low manufacturing peers (4% for flexible ones and 6% for inflexible ones, although with negative growth for larger units).
Worker numbers grew by 37% in Rajasthan. In contrast, for high manufacturing inflexible states, they grew 15%, for low manufacturing flexible states 20%, and for low manufacturing inflexible states –4%.
An abiding trend, irrespective of manufacturing intensity and labour law flexibility, is increasing capital intensity (in terms of capital per worker and capital per factory). This may be capturing increasing capital intensity due to both structural and technological change. It could also reflect the substitution of labour with capital due to labour law constraints. The key takeaway is that if capital intensity has an increasing trend, employment gains from labour law reforms may be muted.
In 2001-02, both flexible and inflexible high manufacturing states had similar wages rates, while both types of low manufacturing states had similar wage rates. However, by 2017-18, wage rates in inflexible high manufacturing states were the highest. On the other hand, flexible low manufacturing states saw a larger rise in wages than inflexible low manufacturing states.
To capture changes in the diverse forms of employment, we compared the ratio of total employment (including contract workers, family employees, persons designated as managerial, etc) to regular workers. This showed a sharp drop in 2013 for flexible low manufacturing states, indicating that labour reforms that brought greater flexibility may have positively impacted the employment of regular workers in proportion to other categories.
In flexible high manufacturing states, the ratio shows a slight rise. In the inflexible low manufacturing states, the ratio has risen more drastically, and surpassed that in the flexible low manufacturing states. This indicates that regular workers are being substituted by other employment categories such as contract labour, family employees or support staff perhaps due to lack of reforms.
We also carried out regression analysis to control for factors other than labour laws that may impact worker employment. The number of workers is sought to be explained by the wage rate, fixed capital and value of output for each state-industry combination analysed over time (panel data). Other state-specific control variables that impact employment (rail density, industrial disputes per worker, man-days lost per worker, crime index, road per population and gross enrolment ratio) are included.
The regression results, when interpreted in totality, tell a valuable story.
De is commissioner, income-tax (officeron-special duty), and Sinha is additional private secretary (research) to chairman, and Dudani and Jayasimha are assistant consultants, Economic Advisory Council to the Prime Minister
Firms have responded by substituting capital for labour, or using temporary contract labour, to keep the number of regular workers below the thresholds at which various labour laws come into effect. Consequently, formal sector employment growth is slow, and vast numbers toil in the informal economy with scarcely any employment certainty or social security coverage.
Over the years, some states have attempted to reform the laws and simplified regulations. Before 2014, Uttar Pradesh, Andhra Pradesh, Punjab, Gujarat, Karnataka, Orissa and Rajasthan reduced inspectors. Gujarat, Punjab, Rajasthan and Maharashtra introduced self-certification. In UP, labour inspectors could carry out inspections only after consent from certain officers and after providing advance information about the inspection. Andhra Pradesh introduced self-certification for IT and IT-enabled services, biotechnology, export-oriented units, units in export processing zones and tourism-based enterprises.
Post-2014, Rajasthan, Madhya Pradesh, Maharashtra, Gujarat and Haryana initiated significant labour reforms. Earlier, the Industrial Disputes Act, 1947, covered establishments employing 100 or more workers. Rajasthan, Haryana, Gujarat and Maharashtra amended the threshold to 300 or more workers. Similarly, the Factories Act, 1948, was amended to cover only establishments that employ 20 or more workers (using power) and 40 or more workers (not using power). The earlier threshold was 10 or more workers (using power) and 20 or more workers (not using power).
In Madhya Pradesh, any application under different labour statutes is deemed approved if not disposed of in 30 days. In Haryana, after reforms, the Contract Labour Act will not apply to establishments employing up to 50 workers. The earlier threshold was 20.
A recent analysis carried out by us examines the impact of state labour law reforms on indicators like output, new industrial units, formal sector employment, capital investment and the size of industrial units. It uses Annual Survey of Industries (ASI) data covering 2000-01 to 2017-18 for over 600,000 cross-sectional units. The series are adjusted using appropriate inflation indices to avoid real versus nominal confusion.
The states are classified into those with flexible and inflexible labour laws, as per the classification in the Economic Survey 2018-19. They are also classified according to manufacturing intensity (gross value added from manufacturing per capita). This results in four types of states: high manufacturing flexible (Delhi, Gujarat, Haryana, Himachal Pradesh, Karnataka, Odisha, Tamil Nadu, Telangana, Maharashtra, Punjab, Uttarakhand); high manufacturing inflexible (Chhattisgarh, Goa, Kerala); low manufacturing flexible (Andhra Pradesh, Madhya Pradesh, Rajasthan, UP); and low manufacturing inflexible (Assam, Bihar, Jharkhand, West Bengal).
Opt for Flexi-Growth?
The growth rates of various indicators are compared across 2000-01 and 2014-15. The starting point was chosen before major labour reforms commenced. The endpoint represents the time when multiple earlier reforms were completed (barring in Rajasthan). Data are analysed using worker number-based firm size categories.
The analysis suggests that the inflexible states have lower growth of large industrial units and regular worker employment. The number of units grew 93% in high manufacturing flexible states compared to 52% for high manufacturing inflexible states. In low manufacturing flexible states, the number of units grew by 55%, with evenly distributed growth in nearly all size categories. In low manufacturing inflexible states, the number of units grew by 73%, largely driven by the asymmetric growth of small units (0-100) of 87%.
Worker numbers grew by 77% in high manufacturing flexible states compared to 2% for high manufacturing inflexible states. The corresponding figures were 21% and –14%, respectively, for flexible and inflexible low manufacturing states.
Contract labour hiring spiked in firms with 301-500 workers in all state categories, indicating policy constraints at this level. Capital growth was higher than the growth of worker employment in all states. This indicates a degree of substitution of regular workers with capital and contract labour.
There was no dramatic difference in output growth of firms between flexible and inflexible states. This indicates that firms in inflexible states can work around labour law constraints, perhaps using the contract labour route. Which means that state-level labour law reforms did increase regular worker employment propensity in the flexible states. However, even in flexible states, the changes have not been pervasive enough to encourage firms to overcome their preference for contract labour. An alternative classification that uses state per-capita income instead of manufacturing intensity also gives broadly similar results.
Rajasthan was the first state to carry out additional labour reforms in 2014. These are examined by comparing Rajasthan (a low manufacturing intensity, flexible labour law state) with low manufacturing flexible and inflexible states, as well as high manufacturing, flexible labour law states from 2013-14 to 2017-18. Rajasthan’s performance, in terms of growth of industrial units, was high (18%) and more comparable to the high manufacturing intensity, flexible labour law states (16%) than its low manufacturing peers (4% for flexible ones and 6% for inflexible ones, although with negative growth for larger units).
Worker numbers grew by 37% in Rajasthan. In contrast, for high manufacturing inflexible states, they grew 15%, for low manufacturing flexible states 20%, and for low manufacturing inflexible states –4%.
An abiding trend, irrespective of manufacturing intensity and labour law flexibility, is increasing capital intensity (in terms of capital per worker and capital per factory). This may be capturing increasing capital intensity due to both structural and technological change. It could also reflect the substitution of labour with capital due to labour law constraints. The key takeaway is that if capital intensity has an increasing trend, employment gains from labour law reforms may be muted.
In 2001-02, both flexible and inflexible high manufacturing states had similar wages rates, while both types of low manufacturing states had similar wage rates. However, by 2017-18, wage rates in inflexible high manufacturing states were the highest. On the other hand, flexible low manufacturing states saw a larger rise in wages than inflexible low manufacturing states.
To capture changes in the diverse forms of employment, we compared the ratio of total employment (including contract workers, family employees, persons designated as managerial, etc) to regular workers. This showed a sharp drop in 2013 for flexible low manufacturing states, indicating that labour reforms that brought greater flexibility may have positively impacted the employment of regular workers in proportion to other categories.
In flexible high manufacturing states, the ratio shows a slight rise. In the inflexible low manufacturing states, the ratio has risen more drastically, and surpassed that in the flexible low manufacturing states. This indicates that regular workers are being substituted by other employment categories such as contract labour, family employees or support staff perhaps due to lack of reforms.
We also carried out regression analysis to control for factors other than labour laws that may impact worker employment. The number of workers is sought to be explained by the wage rate, fixed capital and value of output for each state-industry combination analysed over time (panel data). Other state-specific control variables that impact employment (rail density, industrial disputes per worker, man-days lost per worker, crime index, road per population and gross enrolment ratio) are included.
The regression results, when interpreted in totality, tell a valuable story.
- State labour law reforms had a distinctly positive impact on employment once they came into full effect after 2013.
- High manufacturing states had more employment generation after 2013, perhaps indicating some impact of clustering and early effects of ‘Make in India’.
- High manufacturing flexible states did not have any additional employment gains compared to low manufacturing flexible states. Instead, the larger benefits of labour law reforms accrued to the less affluent low manufacturing states.
- Good infrastructure (roads and railways), reduction in industrial disputes and related disruptions (disputes and man-days lost), low crime and better education and skill-building resulted in significant employment generation.
- Controlling for other factors, the decline in employment across time was arrested in the post-2013 period.
- The impact of education and skill-building is significant post-2013, perhaps indicating skill-biased technical changes as the manufacturing sector matures and imbibes global trends.
De is commissioner, income-tax (officeron-special duty), and Sinha is additional private secretary (research) to chairman, and Dudani and Jayasimha are assistant consultants, Economic Advisory Council to the Prime Minister
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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