How would the labour lows effected the industrialists
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Answer:
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Explanation:
To anyone who is aware of the panoply of India’s restrictive labour regulations (about 200 labour laws, with over a fourth being central acts), it does not come as a surprise that India is unable to grasp its natural comparative advantage in labour-intensive products. Indeed, Indian producers find it cost-effective to use relatively capital-intensive production techniques and often produce fairly capital-intensive products, as shown by my research with Rana Hasan (Asian Development Bank) and Asha Sundaram (University of Auckland).
The Industrial Disputes Act (IDA) requires firms with 100 or more workers to seek government permission to retrench or lay off any worker. This permission is rarely granted. The Industrial Employment (Standing Orders) Act, 1946 requires employers in firms with 100 or more workers (50 or more in certain states) to seek permission even for reassigning a worker from one task to another. And the Trade Unions Act allows any seven employees to form a union, thereby using up a large proportion of the firm’s managerial resources in dealing with several unions within itself. Through this regulation, unions have the right to strike and represent workers in legal disputes with employers. Last but not the least, the The Contract Labour (Regulation And Abolition) Act, 1970 restricts, and even prohibits, the use of contract workers for certain tasks. Thus, these labour regulations effectively prevent firms from using labour-intensive methods of production. Also, since these laws hold above certain threshold employment levels, firms often have an incentive to remain small and “informal".
Exploiting cross-state variations, based on state-level amendments to central labour acts (allowed by the Constitution) and the varying degrees of their implementation, Tim Besley and Robin Burgess at the London School of Economics have found that state-level manufacturing output and employment go down in the formal sector but go up in the informal sector, as we move from less to more restrictive regulatory schemes. Thus, when labour laws squeeze the relatively productive formal sector, there is a spillover of their output and employment into the low-productivity informal sector.
There is also considerable evidence that restrictive labour regulations have prevented India from reaping the full potential benefits, including in output, productivity and employment, from opening the economy. The adverse impact of India’s labour regulations on benefits from international trade is not surprising since these gains are generated through reallocation of resources across firms and industries, which restrictive labour regulations can impede and distort.
Clearly, the main policy implication of this discussion is the urgency of labour reforms. Small steps, especially at the state level, have been taken recently. The IDA threshold has been raised from 100 to 300 workers in Andhra Pradesh, Haryana, Madhya Pradesh, Maharashtra, Rajasthan and Uttarakhand. Rajasthan has also raised the membership threshold of a union to 30% of a firm’s employment. At the central level, a unified web portal for the self-reporting of compliance with 16 central acts has been set up. Inspections take place only when triggered by a built-in algorithm within the portal, reducing possible harassment by inspectors.
Further reforms should include, as suggested by Jagdish Bhagwati and Arvind Panagariya, the exclusion of non-confirmation of a worker on probation and downsizing in response to changes in demand and technology from IDA’s definition of retrenchment. Also, more flexibility in task reassignment should be allowed within the Industrial Employment (Standing Orders) Act. Besides, no more than a single union should be allowed within any firm. And, finally, more labour laws should be covered within the newly installed self-reporting web portal. All of these changes will provide Indian producers more flexibility in responding to shocks and make them more competitive.