How Should India Reform Its Labour Laws

Topics: Law, Labour market flexibility, Labour law Pages: 8 (8260 words) Published: July 2, 2015

How Should India Reform Its Labour Laws?
Simon Deakin, Antara Haldar

This paper examines the current policy debate around
the reform of labour laws in India, which has been
stimulated in part by the success of the “Gujarat model
of economic development.” Gujarat’s deregulatory
reforms have included changes to the legal regime
governing employment terminations, which could form
a basis for a change in national-level labour laws.
Evidence linking labour law deregulation to growth,
however, is weak, whether the focus is on India or the
experience of other countries. Building labour market
institutions is a long-term process which requires
investment in state capacity for the management of risks
associated with the transition to a formal economy.

The authors are grateful to an anonymous referee for comments on an earlier version of this paper.
Simon Deakin ( and Antara Haldar (ah447@cam. are at the University of Cambridge.


1 Introduction


abour law reform has come on the political agenda in
India, particularly in the wake of the elections in May 2014 of the Narendra Modi-led government at the centre.
India’s labour laws are decades old and are said to suffer from rigidities which are holding back economic development.
Worker-protective labour laws, it is argued, are deterring investment and stalling the growth of formal employment. India’s labour laws are set at an inappropriately high level for a developing economy, which would otherwise be in a position to use low-cost labour as a source of comparative advantage. The

strict regulation of employment terminations (“retrenchments”) in Part V B of the Industrial Disputes Act (IDA) 1947 (as
amended in 1976) has been a particular focus of criticism.
Critics of this law argue that as it targets larger plants and enterprises for regulation, it discourages the growth of firms, and contributes to labour informality.
Viewed in a comparative perspective, India’s recent focus
on labour law reform is not unique: other middle-income
countries have been having similar debates about the form
and content of labour regulation. While these debates sometimes lead to deregulation, there is no worldwide trend towards the weakening of worker-protective labour laws
(Adams and Deakin 2015). Although the discourse of the
World Bank and other international financial institutions
remains focused on the need for flexibility in labour markets, there is an emerging view at the country level that labour
flexibility is not a sufficient condition for economic development, and perhaps not even a necessary one. Instead the focus is increasingly on how to build institutions for managing labour market risks in the transition to a formal economy (Marshall and Fenwick 2015).

In this paper we seek to locate the debate over the future of labour law in India in the context of global trends, as seen through the lens of recent theoretical and empirical contributions to the study of labour regulation, and in relation to India’s own experiments in regulatory reform, in particular the

“Gujarat model.” Section 2 outlines the movement of labour market theory away from equilibrium-based models, with their emphasis on labour law as a distortion of competition, towards an evolutionary understanding of labour market institutions, which takes a more nuanced view of their efficiency effects. Section 3 reviews empirical evidence on the operation of

labour law systems, including India’s. Section 4 looks at the Gujarat model and its combination of labour law deregulation, financial incentives for business and infrastructural investment. Section 5 contains the conclusions.

march 21, 2015

vol l no 12


Economic & Political Weekly


2 Developments in the Theory of Labour Regulation
Beginning in the 1980s and gathering strength during the
years of the “Washington Consensus”, the economic critique of...

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