INDIAN LABOR LAW REFORMS NOT LIKELY SOON; IMPROVED

C O N F I D E N T I A L SECTION 01 OF 03 NEW DELHI 005365

SIPDIS

E.O. 12958: DECL: 06/27/2015
TAGS: ELAB PGOV ECON IN
SUBJECT: INDIAN LABOR LAW REFORMS NOT LIKELY SOON; IMPROVED
SOCIAL SECURITY IS A PREREQUISITE

REF: A. NEW DELHI 4861


B. NEW DELHI 3909

Classified By: Charge Bob Blake for Reasons 1.4 (B, D)


1. (C) Summary: The Indian business community is frustrated
by what it views as "inflexible" labor laws that constrain
business operations and lead companies to use costly
loopholes. American companies also favor labor law reforms,
but are not as concerned as their Indian counterparts. Labor
unions and the Left Front (LF) generally oppose labor reform
under discussion in the government, as they anticipate that
it will threaten their members' job security. Recently, the
UPA government has made minor amendments to some Indian labor
laws, but LF opposition has prevented the UPA from making the
deeper reforms desired by the business community and foreign
investors. The continued power of the LF and its allies, and
their firm determination to resist labor reform, makes change
difficult. As long as India has no effective worker
displacement or unemployment compensation system, workers and
their unions will remain focused on job security at any cost.
End Summary.

Need for Reform?
--------------


2. (C) Most Indian economic and business leaders believe
that reforming the country's "inflexible" labor laws is
essential to achieve higher economic growth. For example, a
March IMF report cited these laws as an impediment to India's
achieving 6-6.5 percent annual growth, while a recent London
School of Economics study of 16 Indian states over a 40-year
period found that states with more pro-worker legislation
experienced less poverty reduction than states that had made
pro-business amendments to labor laws. Dr. Venkat Ratnam of
the International Management Institute told Laboff that
India's restrictive labor laws also clash with community and
consumer rights.


3. (C) Indian labor unions and the communist parties are
almost united in their opposition to reforms of India's labor
laws. The lack of a "safety net" (India has no unemployment
compensation) for laid-off workers is a major concern. G
Devarajan, Secretary, Central Committee of the All India
Forward Bloc, optimistically told Laboff recently that the
government should spend a minimum of three percent of GDP
(about $17 billion) to provide comprehensive social security
for all workers, including access to medical facilities and
care, compensation for injury or death, and provision of
education for children, especially in rural areas. Devarajan
and representatives of the labor unions also demanded that
the GOI extend this social safety net beyond urban industrial
workers, to those in the agricultural and informal sectors,
who make up approximately 93 percent of India's estimated 480
million workers and contribute greatly to the nation's
economic output. Currently, India's labor laws apply only to
the 7 percent of workers in the formal sector.

Reforms Under Consideration
--------------


4. (U) The Industrial Disputes Act (1947) regulates
reductions in force (RIF) and plant closures. It requires
large firms (more than 100 employees) to receive approval
from the state or federal labor ministry 90 days before
laying off employees. Likewise, no plant employing more than
100 workers can shut down without obtaining approval 90 days
before the closure date. The business community believes
this law unduly constrains its operations, making firms
hesitant to hire in times of expansion for fear that in a
downturn they will not be able to lay off redundant workers.
Labor unions and the LF oppose proposed reforms of the
Industrial Disputes Act that would loosen or drop these
strictures -- even though they claim that that the labor
ministries already grant permission for RIFs and plant
closures in most cases. They believe the reforms will
eventually lead to "easy hire and fire" policies that will
undermine job security.


5. (C) The pro-reform camp also seeks to amend laws
prohibiting firms from employing contract laborers for
extended periods of time without the promise of eventual
permanent employment. Textile companies that compete with
China are seeking an extension of the workweek to 60
hours/week from the current 48 hours/week. Reform proponents
argue that labor restrictions deter many foreign companies
from investing in India. Labor unions and LF believe that if
the GOI loosens labor restrictions, it will enable firms to
deny worker benefits by replacing unionized workers with
"temporary" contract workers. They also believe that
contract laborers performing work of a similar nature to
permanent employees should have the same benefits as
permanent employees. (Currently, contract laborers receive
no benefits.) Labor and the Left are not concerned about the
loss of potential FDI due to labor restrictions, since they
are inherently suspicious of FDI.

Recent GOI Actions
--------------

6. (U) The UPA government's dependence on LF support has
made it even more difficult to reform labor laws. For
example, the GOI recently dropped proposals included in the
original version of the Special Economic Zone bill calling
for labor law flexibility within the zones after the LF
objected (Ref B). However, some small reforms have been
made. In March, Parliament amended the Factories Act (which
regulates workers' health and safety) to allow women to work
at night. In May, the GOI reduced the amount of paper
records employers were required to keep. The GOI has also
prepared draft legislation to permit companies with less than
300 workers to retrench or lay off workers without government
approval (although the legislation would also increase
compensation to laid off workers by nearly 400 percent.)
Some states are also changing their labor laws. The Gujarat
government has issued an Executive Order automatically giving
permission for a plant closure if the state labor ministry
fails to grant permission within a set time frame.

Business Finds Costly Loopholes
--------------


7. (C) MK Garg, Labor Advisor to the Associated Chambers of
Commerce and Industry, told us recently that the business
community has stopped publicly advocating labor law reforms
because of the lack of progress. Instead, business has used
methods such as hiring short-term contract laborers, locking
out workers to circumvent labor laws, and using "voluntary
retirement schemes" (VRS),in which workers who agree to
leave their jobs by a certain date receive additional
severance pay. In the short term, these methods are costly,
but they save time for the companies, he stated. In the long
term, as productivity and wages rise, these methods will
become much less cost-effective, according to Dr. Venkat
Ratnam of the International Management Institute. Labor and
the Left are fighting back, calling for an end to VRS, which
they call "forced" or "compulsory" retirement.

Labor Insists on Job Security Before Reforms
--------------


8. (C) Dr. MK Pandhe, President of the CPI(M)-affiliated
labor federation (CITU) and a member of the party's
Politburo, told us recently that the CPI(M) would oppose all
changes to laws governing retrenchment and layoffs until a
proper safety net was in place. G Devarajan of the All-India
Forward Bloc told us that if the government provided improved
medical care, worker compensation, and education for
children, then economic growth would follow. Dr. Ratnam of
IMI also believes that a viable unemployment compensation
system is a pre-requisite to large-scale reforms.


9. (U) Indian labor unions worry that workers who lose their
jobs due to reforms will be unqualified for most new jobs
that are created, which are emerging more in the new economy
rather than the old, where unions are prevalent. Unions
would also like additional labor legislation to extend
protection to workers in the agricultural and informal
sectors of the economy, who make up 93 percent of the labor
force. Devarajan explained that labor "reform" has already
severely restricted the right to strike and organize unions,
and that the proposed "flexible" labor laws will further
impinge upon these rights. (Note: India has not ratified ILO
Conventions on the Freedom of Association and Protection of
the Right to Organize (No. 87) and on the Right to Organize
and Collective Bargaining No. 98 End Note.)

The Next Generation of Labor
--------------


10. (C) Despite the traditional opposition to labor law
reform among most union leaders, some of the younger
generation, typically found in high industrial growth centers
like Mumbai, Pune, Hyderabad, and Chennai, are thinking of
the potential benefits of economic restructuring and labor
reforms. Arvind Shrouti, of the Janata Dal-affiliated Hind
Mazdoor Sabha (HMS) trade union, said that HMS will research
the need for, and benefits of, labor law reform before
rejecting it outright. He believes growing industries can
provide opportunities to expand union membership. His HMS
colleague, Arun Jumar, has called for a campaign to unionize
multinational corporations in India instead of opposing their
entry. However, it will be a huge challenge for these
younger leaders to change the minds of their elders, who
control their organizations.

US Companies' Stance
--------------


11. (C) A recent letter from the US-India Business Council
to Allan Hubbard of the National Economic Council outlined
"key impediments" to the increased development of the
US-India economic relationship. The USIBC highlighted the
need for India's "anachronistic" labor laws to be brought in
line with international standards in order to attract FDI
into the manufacturing sector. However, Arun Sehgal,
Director-HR for Gillette and member of the American Chamber
of Commerce, recently told Pol FSN that most of the demands
for labor law reforms are coming from Indian companies, not
American ones. While the AmCham has raised the issue of the
proposed reforms of laws affecting corporations in their
discussions with the FinMin, it has not systematically taken
up labor laws as a core issue affecting American businesses.
Sehgal added that most American companies are able to cope
with the laws concerning company closures and retrenchment by
using contract laborers and VRS. According to Sehgal, US
companies are more concerned with outdated, obscure laws
relating to bookkeeping and upkeep of factories (such as type
of paint used and provision of spittoons),and that some of
these laws are already being amended.

Comment: Reform at a Snail's Pace
--------------


12. (C) LF opposition to proposed labor reforms is part of
its ideologically driven agenda. The Left has strongly
opposed UPA divestment of public sector companies, increases
in petrol prices, and a potential opening to FDI, and has
withdrawn from the UPA Coordination Committee in protest (Ref
A). Determined to maintain a "secular" government in New
Delhi, even if it pursues objectionable "neo-liberal"
economic policies, the LF is well aware that if it drops the
UPA, the "communalist" BJP will return to power, and the Left
will lose its influence over the course of economic
liberalization. Despite this, the Communists are determined
to oppose the UPA's economic program and prevent the GOI from
implementing deep labor law reforms in the near term,
although the Left may allow passage of small scale reforms,
such as relaxing the requirements for paperwork and factory
maintenance standards.
BLAKE