Labour Reforms and Growth in Manufacturing Employment in India

There has been limited research on the impact of labour regulations on the growth in manufacturing employment in India based on econometric analysis techniques. The research in this area has been mainly confined to the organized or formal sector of Indian manufacturing, which accounts for only about 20-25 per cent of the total manufacturing employment in India. While several studies have been undertaken on the question of whether labour regulations led to the contractualization of labour or whether these regulations impacted the size structure of manufacturing enterprises, much fewer studies have dealt with the question of whether labour regulations inhibited employment growth and labour reforms have contributed to job creation in Indian manufacturing. In giving empirical content to labour reforms in terms of an index, the focus of the past research has been mainly on the amendments made by different states in India to the Industrial Disputes Act, 1947 (IDA). The enhancement of the threshold applicability limit of the IDA from 100 workers to 300 workers, as several states have done in the past, may impact employment in the formal manufacturing segment. However, it probably had little effect on employment in the informal manufacturing sector, accounting for a dominant part of manufacturing employment. Manufacturing enterprises employing up to nine workers form about 98 per cent of total manufacturing enterprises in India and account for a dominant portion of total manufacturing employment. Employment in such enterprises is unlikely to be impacted much by an enhancement of the threshold applicability limit of the IDA. However, employment in such enterprises may get a boost from an enhancement in the threshold applicability limit under the Factories Act, 1948 from 10 to 20 workers in establishments using power and from 20 to 40 workers in establishments not using power, which has been done by many states in India in the course of the last ten years. In this paper, the state-wise manufacturing employment data, covering both formal and informal segments, are used to investigate econometrically the impact of labour reforms, particularly the enhancements of the threshold applicability limit under the Factories Act and the IDA, on manufacturing employment. The results of the analysis indicate that labour reforms significantly positively impacted manufacturing employment in India and contributed to employment growth