Key Reform for India: Relax Government Controls on Corporate Downsizing

By Aman Y. Thakker —

Workers use a gas filling station at an SRF Factory in Rajasthan, India. Source: ILO in the Asia and the Pacific’s flickr photostream, used under a creative commons license.

  • Status: In Progress The Ministry of Labour relaxed rules to allow fixed-term, contract employees to work in all sectors, but has not comprehensively addresses the restrictions under the Industrial Disputes Act, 1947.
  • Difficulty: High Successive governments have attempted to amend the Industrial Disputes Act in Parliament but have fallen short due to strong political opposition.

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

Prime Minister Narendra Modi has made boosting economic growth, improving the ease of doing business in India, and stimulating domestic manufacturing through his “Make in India” scheme a key priority for his government. 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 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.

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, “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.” It 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 Pradesh, Rajasthan, Madhya 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. However, just as these states have used their power to amend to raise the number, states are also empowered to lower the number as West Bengal did in 1980, lowering the number of employees to 50.

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.

Employers now have some more options, with a recent announcement by the Ministry of Labour to allow 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 NDA 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 Thakker is a Research Associate with the Wadhwani Chair in U.S.-India Policy Studies at CSIS. Follow him on twitter @AmanThakker.


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