The Effects of Employment Protection Legislation on Indian Manufacturing

Abstract

This paper extends an earlier critique (Bhattacharjea 2006) of the empirical literature on labour regulation and industrial performance in India, but focuses more narrowly on the impact of legal restrictions on layoffs, retrenchment and plant closures. After summarizing the earlier paper, it describes in detail the variability of employment protection regimes across Indian states attributable to court judgments, a key factor which other authors have ignored. The earlier literature has also ignored the possibility that firms may adapt to restrictions on labour flexibility via fragmentation and outsourcing of production. Some conclusions of the earlier studies are also undermined by lacunae in the official industrial statistics. The paper concludes by summarizing the results of an empirical exercise based on an alternative methodology.