Mobilizing Restraint: Democracy and Industrial Conflict in Post-Reform South Asia

5. Labor Institutions, FACB Rights, and Economic Performance in India

CHAPTER 5 Labor Institutions, FACB Rights, and Economic Performance in India India needs to reform its absurdly restrictive labour laws, which hold back the expansion of manufacturing particularly. —Economist magazine, “India Overheats” A national consensus has been emerging that India’s archaic labour laws are hampering industry’s ability to face international competition aggressively and successfully, particularly in the wake of rapid globalization and the liberalization of the Indian economy. —Confederation of Indian Industries, Labour Reforms in Southern Region States It is apparent that much of the reasoning behind labor regulation was wrong-headed and led to outcomes that were antithetical to their original objectives. —Timothy Besley and Robin Burgess, “Can Labor Regulation Hinder Economic Performance? Evidence from India” In addition to the political impetus for restraining worker protest, chapter 3 discussed the benefits of associational rights for managing industrial unrest.Specifically,we saw that democracies typically enact more regulation to protect freedom of association and collective bargaining (FACB) rights and promote the institutionalized resolution of worker grievances. FACB rights are crucial to the effectiveness of institutions 114 CHAPTER 5 such as labor courts and tribunals, arbitration proceedings, conciliation proceedings, and legally binding collective bargaining agreements. And such institutions are effective in reducing exploitation and providing industrial relations stability where workers can assert their rights. Conversely where workers lack rights such institutions merely become a mechanism for state cooptation and control of organized labor. In such situations economic performance will suffer as employers engage sweated labor and resolve disputes in arbitrary and ad hoc ways. Like most democracies, India has passed a lot of laws to protect worker rights and facilitate institutionalized grievance resolution. As the epigraphs at the opening of this chapter illustrate, India’s labor laws have drawn the widespread ire of economists, the business community, and political elites in recent years for their perceived strictness. India’s Industrial Disputes Act (IDA) has been at the center of this controversy. However the IDA is primarily designed to channel worker grievances through the state’s industrial relations machinery—voluntary conciliation proceedings , voluntary and compulsory arbitration, labor courts and tribunals , and bipartite collective bargaining. If the theory developed in chapter 3 is correct, then the IDA should have a positive impact on economic performance rather than the deleterious effects that economic and political elites suggest it does. What explains this divergence between the growing consensus in the policy community and the arguments about the benefits of protective labor regulation made in this book? This chapter serves as a corrective to previous studies by showing how core elements of the IDA do indeed promote economic growth. Previous studies have come to the wrong conclusion regarding the IDA because, quite simply, they mischaracterize the act, which results in the use of erroneous codings in their statistical models. Specifically, econometric studies have focused overwhelmingly on the impact of state-level employment protection provisions under chapter V-B of the act. Coding these provisions as “prolabor” and most other amendments to the act as “proemployer” has led to the conclusion that laws that protect worker rights impede investment and productivity. The problem with this approach is twofold. First, one state—West Bengal—accounts for more than half of state-level employment protection amendments to the central act. While West Bengal’s employment protection regulation has indeed been stringent,its economy has suffered for a variety of other reasons. Some of the reasons for slow growth, such LABOR, FACB RIGHTS, AND ECONOMIC PERFORMANCE IN INDIA 115 as past worker militancy and an adverse relationship with the central government, have nothing at all to do with labor laws. Second, and more important, it is incorrect to characterize amendments to other sections of the IDA (i.e., those outside of chapter V-B) as either “proworker” or “proemployer.” Rather, other portions of the act are designed to facilitate state intervention in industrial relations. There is no way to predict a priori whether the state will intervene in a prolabor or proemployer fashion; and if the state is intervening appropriately it should do so as a neutral arbiter. Instead of viewing labor law as inherently proworker or proemployer, social scientists should analyze specific provisions based on their intended purpose. The IDA defines three areas of law with implications for economic performance: employment protection law (EPL); the law relating to state intervention in industrial disputes (IDL); and the law pertaining to the ability of state and national...