Allow Companies to Conduct Layoffs Without Government Permission

By Aman Thakker —

Source: Scalino’s flickr photostream, used under a creative commons license.

Status: Not Started On March 18, 2018, the Ministry of Labour relaxed rules to allow fixed-term, contract employees to work in all sectors. However, restrictions under the Industrial Disputes Act, 1947 remain unaddressed, and a hindrance to further economic growth.

High Difficulty: Legislation, With OppositionThis reform requires a legislative change. While successive governments have attempted to amend the Industrial Disputes Act in parliament, they have fallen short due to strong political opposition, especially from powerful labor unions in India and political parties that depend on such unions for votes.

This is the twelfth installment in a new series of articles on the India Reforms Scorecard: 2019-2024 by the staff and experts at the Wadhwani Chair in U.S.-India Policy Studies. The series seeks to provide analysis on why reforms marked as “Incomplete” or “In Progress” have not been completed, and the impact such reforms can have on specific sectors or the economy at large.

Prime Minister Narendra Modi has made generating economic growth, improving the ease of doing business in India, and stimulating domestic manufacturing through his “Make in India” scheme, key priorities for his government in, both, his first and second terms. However, these goals depend on the government making key strides to reform governance of the labor market in India, particularly, by relaxing its restrictions on corporate downsizing.

The Current State of Play

The Industrial Disputes Act, 1947 (IDA) currently regulates disputes between employers and workers, such as strikes, lockouts, layoffs, and dismissals. In particular, Chapter V-B of the IDA prohibits the layoff of any worker from any firm that employs a “specified number” without the written permission of the government. While the law originally specified that any firm employing 300 or more workers needed permission to initiate layoffs, an amendment to the IDA in 1984 made downsizing more difficult by reducing the number to 100 employees or more.

Need for Reform

This restriction on downsizing and layoffs is an impediment to industrial growth, and businesses regularly advocate for its repeal. In 2005, a World Bank study by Ahmad Ahsan and Carmen Pagés found that, “lifting chapter V-B could add about 880,000 registered manufacturing jobs.” A more recent report on suggested labor policy reforms by the Federation of Indian Chambers of Commerce and Industry (FICCI), in 2014 stated that Chapter V-B had “significantly contributed to industrial sickness” in India.

Calls from within government have been coming for longer, with the Inter-Ministerial Working Group on Industrial Restructuring, and the Committee on Industrial Sickness calling for the repeal of Chapter V-B of the IDA in 1992 and 1993, respectively. More recently, the report of the Second National Commission on Labour noted that, “prior permission is not necessary in respect of lay off and retrenchment in an establishment of any employment size. Workers will, however, be entitled to two months’ notice or notice pay in lieu of notice, in case of retrenchment.” The report further recommended that as an initial step, Chapter V-B be amended to raise the “specified number” of employees back to 300, which would give smaller firms more flexibility to maintain competitiveness.

While the central government has been unable to make progress on these recommendations, state governments, which have the power to amend central government legislation, have taken certain steps to relax government restrictions. Andhra PradeshRajasthanMadhya Pradesh, and Assam, have used their power to raise the “specified number” in Chapter V-B from the current 100 workers to the original 300 workers. Rajasthan was the first, and the Finance Ministry noted in the 2019 Economic Survey that the average firm size in Rajasthan has already risen above the national average. However, just as these states have used their amending power to raise the number, states are also empowered to lower the number of workers, as West Bengal did in 1980 to 50 employees.

Loopholes and Workarounds

As a result, companies have taken advantage of certain loopholes available to them to avoid triggering the IDA. The World Bank study by Ahsan and Pagés found that Chapter V-B served as a serious disincentive for employers, who remained hesitant to hire more employees than the threshold mandated by the IDA, sacrificing growth to maintain flexibility. Moreover, employers also made use of the voluntary retirements provision, which do not require government permission, and could be obtained by paying workers a lump-sum settlement to retire.

In Prime Minister Modi’s first term, the Ministry of Labour did give employers some more options, allowing fixed-term contract labor in all sectors, which are not granted protections under the IDA. However, this is a workaround, not a “fix.” If this widening of contract labor rules triggers a massive shift to unprotected contract labor across industries, there is a potential political risk as these workers may demand to transition to full-time employees.

Economic growth, ease of doing business, and improving local manufacturing are key priorities for the Prime Minister Modi-led New Democratic Alliance government. However, to make progress on these goals, it must reform India’s archaic and complex labor laws. It can begin with relaxing the restrictions on corporate downsizing by amending or repealing Chapter V-B of the Industrial Disputes Act, 1947.

Mr. Aman Y. Thakker is an Adjunct Fellow (Non-resident) with the Wadhwani Chair in U.S.-India Policy Studies at CSIS and the J.B. and Maurice C. Shapiro Scholar at St. Antony’s College at the University of Oxford. Follow him on twitter @AmanThakker.

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