Unravelling the puzzle


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IF a Martian were to land in India and observe the prevailing scenario of labour and listen to the clamour surrounding labour law reforms, she would surely be deeply puzzled. On the one hand, she would hear the insistent demand from employers and an influential section of the policy makers for deregulating labour laws, claiming that the labour laws in India are among the most rigid in the world, allowing little flexibility to the employers to adjust their labour force according to business requirements in a rapidly globalizing world and thereby deterring prospective investors from undertaking new investments. Moreover, that the laws are both far too many and enforced by a bloated rent seeking labour inspectorate.

On the other hand, if she were to look around in any of the major manufacturing hubs or industrial clusters, she would see millions of workers on contract and experiencing precarious employment conditions, and not only in the thousands of small workshops in the informal sector. Also that 60% of workers in the so-called large organized sector, say in a major automobile firm, are engaged on conditions where their services can be dispensed with of at any time and without even minimal social security. Had she gone and asked the HR manager of the firm just how they had acquired this enormously flexible workforce if the labour laws were really so rigid, she would most probably have been told that it was precisely the inflexible labour laws that had forced the management to take recourse to this method of acquiring flexibility. But then if all that the management wanted was to adjust their workforce according to changing business conditions, why were the contract workers paid wages that were one-third or even less than the regular wages when they did similar work, and why were the temporary workers not given the minimum social security and health benefits?


Had the Martian persisted she might have discovered that this enormous expansion of contract and temporary workers had occurred only in the last two decades. In the 1980s only 7% of the workers in the manufacturing sector in India were contract workers, a figure which had risen to 35% by 2012. Surely, she might have wondered whether the laws had been changed to allow this flexibility to the managers and would have been surprised to learn that no major changes (except for minor amendments) in labour laws have been effected since 1982. How then would one explain to the incredulous Martian the main reason why labour law reforms are being demanded (i.e. flexibility) given that they already seem to have been effected despite no formal change in law?

Coming now to the refrain about the burden of Inspector Raj, it would have surprised the Martian to learn that there were only some 3000 odd labour inspectors throughout the country who were authorized to check violation of labour law provisions, such as the Minimum Wages Act of 1948, in nearly 78 lakh establishments, or about 2500 establishments per inspector. In Maharashtra, the most industrialized state in the country in 2010, each labour inspector had to inspect some 5800 establishments. It was, therefore, quite understandable that while in the 1980s nearly 80% of the establishments were inspected annually, the figure had come down to 17% by 2010. In Uttar Pradesh for many years now no inspection can take place without the District Magistrate’s permission. What this abysmal level of inspection and consequent evasion of law has resulted in is a spike in industrial accidents over the last decade.

But what about the onerous provisions of the Industrial Disputes Act of 1947 (Chapter Vb of ID Act) which forced the employers of factories and establishments employing more than 100 workers to seek permission from government to retrench or layoff workers? What is interesting is that the debate on this issue has persisted without much empirical evidence about how often governments have refused permission and delayed restructuring, specially in the last decade. Supriya Sharma ’s detailed investigation in Rajasthan reveals that not only were permissions granted fairly regularly, what was more surprising was that owners of many large establishments had restructured, closed and reopened establishments without having sought permission from the government. Empirical evidence of whether this provision has deterred restructuring and impacted employment levels remains at best ambiguous and weak.


What then explains the puzzle of de facto ‘flexibility’ and de jure ‘rigidity’ of labour laws referred to by Rob Jenkins as ‘reform by stealth’? There seems to have been three processes by which this ‘flexibilization’ has been smuggled in without ostensible changes in law. The first is the gradual withdrawal of activist state intervention and a whittling down of inspection and enforcement of laws over time. The second has been through the process of judicial pronouncements which, in many instances, have seen reversal of ‘pro-labour’ trends of judgement in the last two decades. Finally, most of the ‘reforms’ have been initiated at the state level rather than by central legislation, prominent amongst which was the radical recasting of the Contract Labour Act by the Andhra Pradesh government which redefined ‘core’ and ‘non-core’ functions of a firm. This process of flexibilization was, of course, aided by the weakening of the trade union movement and its inability to mount a serious challenge or provide an alternative, as it became tied down to the defence of an increasingly narrow section of the ‘permanent labour’. This weakness has been evident in the sharply declining trend of labour disputes initiated by workers since the 1980s (after the Bombay textile strike of 1982) and specially over the last two decades, so much so that person days lost to strikes are now much lower than those lost due to lockouts.


All this, of course, has accelerated what has been called the informalization process and entrenchment of structural dualism in the labour market. This has in no way hampered capital accumulation. In fact, all recent data quite clearly show that precisely during the period when there has been mounting complaints of overprotection of labour, the share of profits has soared while the share of wages have sharply plummeted. For instance, in organized manufacturing where the clamour for deregulation is the highest, we find that the share of profits have tripled, from 20% to 60% of net value added while labour share has fallen by exactly the same proportion since the 1980s.

However, purely instrumental and contextual reasons will not suffice for explaining the paradox of rising profits and increasing flexibilization of labour without major changes in labour law or why informalization and de facto deregulation has proceeded apace precisely when all attempts to change the formal regulatory structure has failed repeatedly. The puzzle is not merely in the gap between the formal architecture of labour law and the substantive changes but also why there is such a clamour by a section of the policy makers and business elite for dismantling the ‘fig leaf’ of formal regulation? It would, therefore, be necessary to shift the frame of the current debate on labour reforms and re-embed it in a historical context.


The central feature of the labour law system in India is the strong presence of the state and it is this overweening presence that the demand for deregulation seeks to push back. The origin of the state-dominated labour regulations in India is often traced to the ‘import substitution, planned development’ period of post-independence India (1950-1976). However, this view is grossly mistaken. Practically all of the most significant labour laws – Industrial Disputes Act, Trade Union Act, Industrial Employment (Standing Orders) Act, Workmen’s Compensation Act, Payment of Wages Act, etc. – were enacted in the colonial period between 1926 and 1947. State intervention in the labour market had acquired deep roots in the 19th century when a series of laws were enacted to facilitate mobilization of labour under penal contract system, both in India for the export and extractive industries and plantations in India and British overseas colonies.

In all these laws we find a curious mixture of welfare and coercion by which capitalists were provided enormous private power to restrain and immobilize labour. The regulation of Indian industry began with the enactment of factory laws beginning in 1881 under pressure from the Lancashire industry which saw the Indian cotton mills’ unrestrained use of women and child labour and long hours of work up to 16 hours a day as ‘unfair competition’. Regulation remained weak and piecemeal till after the First World War, but interestingly we find in these ‘factory laws’ the beginnings of the practice of definitional thresholds so that a large part of the ‘traditional’ and small industries were deliberately kept out of the purview of regulation.

A major shift is noticeable post the First World War period in the 1920s. Goaded by the newly instituted International Labour Organization (ILO) and widespread industrial unrest following the war, the colonial state took the first measures to institute what we can call the modern labour law regime. The penal contract system was abolished and trade unions were given immunity against criminal prosecution for legitimate industrial dispute (1926). A series of welfare legislation such as the Workmen’s Compensation Act 1923, Maternity Benefit Act and Payment of Wages Act 1936 were enacted, alongside the revamped Factory Law of 1922. Common to all these laws, however, was the limited scope and definitional ‘threshold’ that excluded the vast majority of workers in establishments below a certain size or of a certain status.


The keystone of the emergent labour law regime, however, came about with a series of legalisation enacted since the 1920s, culminating in the Industrial Disputes Act of 1947. A spurt of industrial action in the late 1920s, chief among which was the famous seven month long general strike in the Bombay Cotton Mills in 1928 and 1929 led by the communists trade union, the Girni Kamgar Union, led to the passage of the Trade Disputes Act of 1929 which formalized state intervention in industrial disputes, with provisions prohibiting strikes and lockouts in public utilities and specifying the process of adjudication by the establishment of a board of conciliation or a court of enquiry for arbitration and adjudication under state authority. That this act was passed when the communist trade union leaders were incarcerated for long periods under charges of conspiracy and sedition needs to be emphasized, as also the fact that in the Imperial Legislative Council moderate trade unionists like N.M. Joshi opposed the provisions of the act, tooth and nail. A significant incident associated with this act is that Bhagat Singh threw a bomb and courted arrest, while it was being fiercely debated in the Imperial Legislative council. The aim of the act was to tie down and channelize the rising working class movement into legally approved channels away from militant strike action. In this it was only partially successful.


Renewed state intervention in labour relations during World War II, driven by the need for uninterrupted war time industrial production, led to the promulgation of the Defence of India Rule 81-A, under which all industrial disputes were subjected to compulsory adjudication, and strikes and lockouts were banned. A rash of strikes during the immediate post World War period was met by the Interim Government with the hurried passage of the new Industrial Disputes Act of 1947.

Interestingly, the passage of the Industrial Disputes Act of 1947 (ID Act) in March 1947 even before the formal independence of India retained the relevant sections of the Defence of India Rules ( 81 A) and elaborated on the adjudication machinery of the Trade Disputes Act of 1929. Under the ID Act, the government acquired enormous discretionary power to declare industries as public utilities, forcing industrial disputes for conciliation and adjudication and prohibiting strikes and lockouts during the conciliation and adjudication process and in the binding period for tribunal awards. Though it was explicitly designed to restrain the labour movement and promote ‘industrial peace’ through curbing strikes and lockouts, in effect it also militated against the development of a healthy collective bargaining system.

The nature of state intervention and its explicit aim of curbing collective bargaining is clearly brought out in the Statement of Object and Reasons accompanying the original bill in March 1947 and is worth quoting: ‘The power to refer disputes of Industrial Tribunals and enforce their awards is an essential corollary to the obligation that lies on the government to secure conclusive determination of the disputes with a view to redressing the legitimate grievances of the parties thereto, such obligation arising from the imposition of restraints on the right of strike and lockout, which must remain inviolate, except where considerations of public interest override such rights’ (emphasis mine).


Of course, a measure of institutional co-option of the workers was created through the provision of the establishment of a Works Committee for firms employing more than 100 workers. However, without a legal binding provision (unlike the compulsory adjudication or legal enforcement of tribunal awards) the Works Committee remained mostly on paper and the provisions were followed only in the breach. Similarly, while collective bargaining was paid a lip service, the fact that there was no explicit provision for the recognition of a collective bargaining agent in the ID Act or the Trade Union Act remained a central weakness of the emergent industrial relations system. Allied to this was the overwhelming discretionary power of the government for adjudication and conciliation. Unsurprisingly, there grew a tendency towards ‘juridification’ of industrial disputes.

Not only was the ID Act vehemently opposed by the leading trade union federation of the time, the All India Trade Union Congress AITUC, many Congress leaders too were opposed to it. For instance, V.V. Giri as the Union Labour Minister resigned from his post in 1952 when the government refused to enforce a bank award that favoured the workers.


The ID Act partly succeeded along with other measures (industrial truce resolution of December 1947 and 1962 voluntary abjuring of strike and lockout, Code of Discipline of 1958) in brokering industrial peace, at least till the 1960s. In this period a state promoted tripartism alongside the development of ‘political unionism’ (first created through a separate trade union federation, INTUC, patronized by the ruling Congress in 1948) alongside proliferation of labour legislation became the hallmark of industrial relations system. However, this system could not be insulated from the severe crisis of the Indian economy and industrial stagnation and high inflation which corroded wage levels in the decade after 1966. Industrial disputes and strikes escalated, leading to the 1974 All India Railway Strike and its severe repression by the government, followed by the Emergency in 1975 when all industrial actions were massively curbed. It is a matter of some irony and a fact of relevance to the current labour reform debate that it was precisely during the Emergency when the workers’ movement had been muzzled completely, that Chapter VB was added to the ID Act (which introduced the requirement of government permission for retrenching, lay-off and closure of firms employing above 300 workers).

Post the 1980s, the deliberate withdrawal of the state from the economy and the IR system (reflected in the non-interference of the government in the nearly two-year long Bombay textile strike of 1982) and the sharp reduction in trade union power was matched by the initiation of a deliberate strategy of large firms to outsource and ‘informalize’ their production. Once the limited attempt at state initiated ‘formalization’ through the expansion of public sector employment had been abandoned, the ‘ informal sector and informal labour’ became the crucial link in the new phase of capital accumulation. Even as the segmentation of labour market and structural dualism was reinforced by the various ‘thresholds’ (size, income and duration of employment) embedded within the labour law system, what changed in the 1990s and 2000s was the way in which the wall between ‘formal’ and the informal sector was breached and informality and ‘informal labour’ (temporary contract and casual) rushed in to flood the formal sector.


The strategy of capital too changed – from ‘outsourcing’ of production to increasingly ‘insourcing’ the cheap and precarious labour. This expansion of informality into the formal sector was the basis on which the ‘scissors effect’ of (falling wage and rising profit shares) became increasingly operative in the last two decades. This ‘scissors effect’ has its counterpart in the increasing gap between ‘overprotective’ labour laws and a declining level of enforcement or between de jure rigidity and de facto flexibility. The ground for both these phenomena was provided by the continuing weakness of the labour law system in so far as ‘collective’ rights of workers were now explicitly undermined, even as individual worker rights (against unfair dismissal, retrenchment and layoff) appear to have been strengthened.

The brief narrative of the evolution of labour law in India has focused on the state and its changing strategies vis-a-vis labour and capital. Of course, a fuller explanation of the paradox of de facto flexibility and de jure rigidity of labour law requires a deeper structural analysis of changing balance of class forces, as well as the collective responses of labour and capital to state strategy. In recent times an important demand of the trade union movement has been for the abolition of the threshold based division in law and an extension of labour regulation to the informal workers. The series of recent workers struggles where permanent temporary and contract workers have come together to fight for common rights of association and collective bargaining is perhaps a pointer to the future of the evolution of the labour law system.

In so far as the government’s recent attempts at labour law reforms are concerned (only a few of them are in the public domain) the changes in the Apprentice Act and the proposed Small Factories Act are notable for the tunnel vision approach. Focused solely on the ‘ease of doing business’, for instance, the Small Factories Act proposes to do away with application of 14 major labour laws, including ID Act, Factory Act and Minimum Wages Act for factories with less than 40 workers. Apart from giving legal sanction to extending work hours up to 12 hours for these factories (which was in any case a universal practice in recent years ) the modicum of collective bargaining which existed in the ID Act (including the right to strike) has been removed, alongside the system of regular inspection for safety and labour law compliance. The government is in this instance proposing to create a fresh threshold, albeit at higher levels (40 instead of 10) in effect thereby legalizing the practice of ‘informalization’ on a large-scale. It remains to be seen how the political opposition recently emboldened by the massive response to the land law ordinance takes up the issue. But far more important, it is the working class opposition that will be crucial in shaping the future evolution of labour law.