Labour Regulations and Informalisation in India’s Organised Manufacturing: A Case of Textile and Clothing

Abstract

This paper seeks to understand the dynamics behind a slow pace of employment growth in one of the key industries in India, viz. textile and clothing, in view of labour market rigidities. It begins with delineation of labour regulations and amendments undertaken by the Central and the respective state governments in the organised manufacturing. A derived labour demand equation is estimated to gauge the impact of labour regulations and other factors on employment. The analysis indicates that the organised textile and clothing industry has provided employment to nearly 2.5 million people in 2013–2014. However, the industrial firms have been increasingly hiring contract workers in place of regular workers, whose share in total workers has increased from 8.5 to 15% between 2000–2001 and 2013–2014. The share of contract workers in total workers is relatively higher in Gujarat, Haryana, Madhya Pradesh, Maharashtra, Rajasthan and Uttar Pradesh. This seems to be in a bid to escape the strict provisions of the Industrial Disputes Act, 1947. We find a significant adjustment cost involved relating to hiring and firing of workers, which, in turn, may constrain the job-creating potential of this sector. The regulations under the Act make it difficult for the employer to adjust their labour input, in response to changes in technology. The states with relatively flexible labour regulations have performed better in terms of employment growth than those with rigid regulations though the rate of growth of contract labour has been high in almost all. The empirical analysis based on the random effect model estimated from 2000–2001 to 2013–2014 across 19 states validates that firms find hard to adjust employment to the desired or optimum levels immediately. Increasing wage rate and capital intensity also affect demand for labour in a significant way. While pushing reforms to revitalise output and export growth in this segment, the Textile Policy 2017 should also strive to bring the much needed amendments in labour regulations towards creation of gainful jobs.