Labour Law and Special Economic Zones in India

The Indian labour force consists of about 430 million persons, three-fifths of who are employed in agricultural activity. The rest of the force is spread over industrial and service activity. A descriptive picture of the Indian labour market can be drawn by placing the large, rural labour force at one end of a notional spectrum and locating a small, high productivity ‘formal’ sector labour force (forming only eight per cent of the total) at the other end. In-between is a growing residual ‘urban informal’ or ‘unorganised’ sector, typically associated with the provision of services, but more importantly, associated with low productivity employment—the ubiquitous underemployed or the disguised unemployed of a ‘developing’ economy.

While the formal sector is covered by labour laws, the bulk of the labour force–the agricultural as well as the informal sector workforce, is not. In other words, the many Indian labour laws (covering a wide gamut of labour welfare issues ranging from security of tenure to laws covering work conditions) are relevant only to a formal sector worker who is employed in a legally recognised category of establishment where labour benefits are authorised by law. Also, not only must a worker be employed in establishments that qualify as formal but  must also perform work which can judicially classify the worker as a “workman” under the Industrial Disputes Act, 1947 (IDA). [1]

In contemporary India, the ‘in progress’ rhetoric of structural reform lists the prevailing labour law as a serious ongoing concern. The Economic Survey covering the period 2007-2008, calls for a review of labour laws citing “an imperative need to facilitate the growth of labour-intensive industries, especially by reviewing labour laws and labour market regulations”.  This statement acts to reinforce other recent Economic Surveys, prominently the 2006 Survey which points to the “sharp dichotomy” in the Indian labour market characterised by no regulation of the massive unorganised sector, while the organised sector provides “too much job security”. This rhetoric shows up in a policy brief by the OECD in consultation with the Indian government—citing the facts that any recent generation of employment has been concentrated in small less productive enterprises, while employment in larger firms has not only been falling but that “(t)he number of workers has also fallen in the manufacturing sector where the share of labour income in value-added is low compared to other countries and capital-intensity is relatively high”.

This is seen as a reflection of India’s inability to exploit “its comparative advantage as a labour-abundant economy.”  To increase employment it is suggested that the “(t)he level of employment protection needs to be reformed”. Apart from consolidation of central and state laws, this means removing constraints on regular employment contracts that are imposed on large companies. Constraints which are in contrast to those imposed on smaller firms or cover temporary and fixed-term contracts—“all areas where regular employment is increasing” and where the level of protection “is similar to the OECD average”. The policy brief goes on to suggest that reforms such as the “reduction in the stringency of employment protection” would “remove an important barrier to the expansion of smaller companies and would increase employment, productivity, real wages and the number of social benefit recipients, as well as facilitating the movement of labour out of agriculture to more productive areas.”

While the rhetoric quoted above emphasises the perceived correspondence between labour laws and employment, a good deal of empirical work suggests that the proposition that employment in the formal sector has been constrained by labour legislation is, at best, empirically fragile. This very fragility requires us to view Indian labour law and its possible reform using conceptual frames that are not preoccupied with de jure legislation (such as that which requires ‘large’ firms from seeking permission from the government before firing workers) but rather turn attention towards the actual implementation of the law by looking at judicial and executive practice.

It is becoming apparent that there is a good deal of ‘flexibility’ in the formal labour market, as employers have come to use increasing quantities of contract or casual labour, in addition to evading labour laws assisted to various degrees by ongoing executive and judicial practice.

One specific policy initiative of the Indian state in this regard is to set up Special Economic Zones (SEZ)—in imitation of China—to promote manufacture for exports by designating geographical areas where extensive infrastructural facilities, fiscal support and appropriated land (creating many vexatious issues of compensation and displacement) are provided by the government. A particularly stated additional aim is to create employment opportunities.

Given the overall desire of the SEZ endeavour to push for labour-intensive export oriented consumer goods, the entire enterprise is probably best understood as being located at the border between the formal and informal sectors, drawing the labour force from the informal/agricultural sector. At this location, the very act of employment generates a dilemma because the instant a worker is drawn from the informal/agricultural sector and ‘employed’, she becomes eligible for all the benefits provided by law to formal sector workers. If this were indeed to be allowed, it would raise perceived labour costs which would presumably dampen national and international investment. If disallowed explicitly, the political rhetoric associated with the SEZ enterprise would end up being more widely challenged. Given the frontier location of the labour involved, the solution to this dilemma has been to nudge the practice of law in a manner which minimises the coverage of labour law without actually changing the law—a relatively smoothly accomplished step, given the nature of Indian labour law as well as the structure of the enabling law associated with SEZs.

Though the Special Economic Zones Act, 2005 overrides certain other laws (particularly granting fiscal benefits to firms located in a SEZ), the Act maintains that in relation to labour, standard labour laws are to continue to operate in the SEZs. While there is no change in the laws, under this regime the implementation of labour law is shifted from the control of the Labour Commissioner to the Development Commissioner of the SEZ, a figure who is given substantial power over all aspects of governance of the SEZ. Furthermore, the ability of workers to organise strikes is curtailed by undertaking a general policy measure that labels economic activity within a SEZ as a ‘public utility service’, which under Indian law makes strikes in units labelled as such entirely illegal. All these factors taken together result in the fact that while the ‘speak’ says that labour laws are supposed to be operational in a SEZ, they are almost entirely absent in practice.

Many scattered studies covering SEZs all over India report a pattern—union activity is widely discouraged and absent in the zones, workers are not paid minimum wages, work very long hours to complete stringent targets, are subject to being fired without justification or compensation, denied any maternity benefits and suffer from work related illness.

In relation to this some of the most interesting insights can be gathered from an ethnography that documents the narratives of women employed in the Madras Export Promotion Zone gathered painstakingly by Padmini Swaminathan [2]. On the one side there are many vexatious narratives regarding hours of work, hygiene conditions at the work place, sexual harassment and ill-health as a consequence of hazardous work conditions. However, simultaneously, the informants also paint another picture of their lives—they say that since they have undertaken employment in the factory there is better food and clothing, pucca houses have been constructed, bore wells have been dug to ease water problems, gas or kerosene has replaced wood fires. In particular dalit informants speak of the upward social mobility that factory employment has given them.

This admixture of the negative and positive effects of such employment compels Swaminathan to note that “the observation that wage income has enabled families to improve the quality of food consumed has to be juxtaposed against the reports of many respondents that they were unable to eat before leaving for work for want of time and also they often say there was an odour pervading the work areas leading to a loss of appetite and reduced intake of food.” It is precisely this juxtaposition that is particularly challenging—people who in the alternate are worse off in terms of wages and income voluntarily trading a higher wage for unregulated work conditions. If this has been voluntarily chosen, should we stop worrying about bad work conditions? Is there some reasoning or argument which can be invoked that will privilege concerns about work conditions in a free market world? Is the best reform of India’s restrictive labour laws, an atrophy of law, such that there is no law?

While it can be maintained society intervenes by insisting that there should be laws against hazardous work conditions on purely ethical grounds because such concerns will always remain inadequately served by the market (signalling an inevitable trade-off between the economy and fairness) some recent work puts forth more consequential arguments.  If we were to step to extend Kaushik Basu’s argument to labour standards more generally we get the following—while individual workers may voluntarily trade the higher wage that the SEZ employment offers against adverse work conditions and are thus better off than they were before, this generates an externality on labour as a group—thus laws that support labour standards look after the welfare of much larger groups of people than if there are no standards [3]. There are, it turns out, some welfarist arguments that support the reform of labour law rather than encouraging the atrophy of all law.

[1] The prominent judicial term is ‘workman’ defined under 2 (s) of the Industrial Disputes Act 1947.

[2] See Padmini Swaminathan (2005) “The Trauma of ‘Wage Employment’ and the ‘Burden of Work’ for Women in India” in Kalpana Kannabiran (ed.) The Violence of Normal Times: Essays on Women’s Lived Realities, New Delhi, Women Unlimited)

[3] Kaushik Basu (2003) ‘The Economics and Law of Sexual Harassment in the Work Place’ The Journal of Economic Perspectives Vol. 17 No. 3 (Summer) pp. 141-157

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