US embassy cable - 05NEWDELHI5365

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, Labor 
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