An Informalised Labour System

The textile mill closures in Ahmedabad were a direct conse- quence of the liberalisation of industry and the economy at large. The textile policy that came into force in 1985 was accompanied by the removal of restrictions on the organisation of production which had been introduced in the first decades after independence. The new economic policy announced in 1991 represented a more systematic confirmation of this pro-free market course by removing yet more restrictive government regulations. One objective of these far-reaching reforms was to increase the flexibility of the labour market. It is against this background that the loss of more than 100,000 jobs in the textile industry in Ahmedabad in the last quarter of the 20th century must be seen.

The argument for greater flexibility is based on the assumption that security of employment, as a distinctive feature of the labour system in the formal sector of the economy, is counterproductive to the creation of more work. A permanent job also implies a whole range of rights and entitlements, such as a guaranteed wage index-linked to the price of basic necessities, paid holidays and a range of bonuses and contributions for social provisions. As a consequence of these overhead expenditures, labour accounts for a much higher percentage of production costs than just wages. The change from a planned to a liberal market economy marks the end of efforts to build up a social-democratic welfare state along western European lines and to protect labour with a system of strict regulations under the watchful eye of the government. The turning tide also entails curtailing the power of the trade unions in which the vanguard of the labouring classes had united to defend their interests.

The political choice for an unadulterated capitalist development strategy means that employees can be hired and fired according to the needs of the moment. And at a price which – without corrective intervention – is determined by supply and demand. Such a regime is seen as providing the best guarantee of sustained and labour-friendly growth.

In the introduction I noted that transnational financial agencies exerted considerable pressure on the government of India to effect this turnabout in macroeconomic policy. The main argument for imposing this change is that an extension of scale beyond national level can occur only through harmonisation with the principles on which, according to the IMF and the World Bank, the dynamics of the global system depend: free trade and competition as the determining characteristics of economic activity. In its World Development Report 1995, the World Bank claimed that accelerating economic growth required that the dualistic structure of the labour market be abandoned without delay.¹

As stated earlier, a pattern of economic reform along the lines of that introduced for the country as a whole after 1991 had already been pursued in Gujarat from the late 1960s onwards. The state government declined to introduce or apply rules meant to promote the use of either capital or labour in the formal sector of the economy. I have published several studies [Breman 1977, 1985, 1994 and 1996] based on empirical research on the social impact of this policy of informalisation. The dominant practice of avoiding formal regulation by government agencies in Gujarat explains why the industrial magnates in Ahmedabad were able to count on an accommodating response from the authorities when, one after the other, they started shutting down production at their composite textile mills. Their attempts to seek a higher return on the capital they had invested met with little official opposition. In the few cases where complaints were lodged against companies for illegal termination of production, criminal proceedings were usually not instigated owing to legal complications. Was it in fact correct to assume that the closure of unprofitable textile mills would inevitably lead to mass unemployment and impoverishment of those who lost their jobs? Partly, perhaps, at least in the short term. Yet more optimistic prognoses claimed that the policy of informalisation that had been pursued in the state in the previous decades had resulted in not less but more work and not more but less poverty.

The first steps towards dismantling of labour legislation have meanwhile been taken. The power of the trade union movement, which in 1989 had still been able to prevent the adoption of the Industrial Relations Bill (under which only companies with more than 300 employees would need government permission to close down), has been considerably weakened in the face of progressive economic liberalisation. The main point of conflict is abolition of the much-contested employment security. The argument is that the price of preserving this acquired right, which benefits only a very small proportion of the working population, is far too high: namely the inability to attract capital on a large scale or to invest with any prospect of a reasonable return. In this connection, it is worth recalling that one of the main union demands during the failed textile strike in Mumbai, which lasted from the end of 1982 to the middle of 1983, was to decasualise the large number of reserve workers (‘badli’) [Bhowmik 2000: 8-9]

. Workers and their representatives are accused of abusing the protection afforded to them to steadfastly resist all proposals that might lead to greater flexibility. Behind this criticism is the desire to be able to dismiss employees if results are below par or to rationalise business operations to increase productivity, without being confronted with the impossibility of getting rid of superfluous labour. It has been calculated that a substantial part of the workforce in the formal sector could be made redundant without affecting the level of production.

At the start of March 2001, presenting the budget for the new year, finance minister Yashwant Sinha announced radical changes to the Industrial Disputes Act of 1947. He justified the changes by referring to the rigidity of existing labour laws. His proposal is to allow companies with fewer than 1,000 employees to close without prior permission from the government. The announcement received a warm response from the proponents of private enterprise. Although the proposed deregulation also entails an increase in the compensation paid to redundant workers, the experience in Ahmedabad has shown that it is not too difficult to find ways around this obligation. The trade unions have expressed sharp criticism of these plans to dismantle industrial legislation and are taking action to try and influence the debate on the changes in parliament. It is certainly not a coincidence that the leadership of the organised labour movement has taken a much less resolute stand against another initiative which Sinha announced in the same speech – the repeal of the Contract Labour (Regulation and Abolition) Act of 1970, which abolished contract labour. This Act was introduced to provide a minimum of protection for workers in the informal sector, who are exposed to all manner of exploitation of their labour power by contractors and subcontractors. Yet the impact of the policy of flexibilisation on this extremely vulnerable group of workers – who make up the lion’s share of the working population – is likely to be much greater than that of the amendments to the Industrial Disputes Act on the status of workers in the formal sector. The fact that the government has never taken great pains to ensure effective compliance with the legal restrictions on the use of contract labour is small consolation. With these amendments, it no longer even keeps up the pretence of doing so.

How plausible is the argument that it is necessary to weaken employment security to restrict overprotection of formal sector labour? There is a tendency to attribute this acquired right to the encouraging attitude adopted by the post-colonial state in respect of this vanguard of the emerging industrial society. According to this interpretation, labour welfarism was promoted in the first decades following independence to secure employees’ interests and to limit the power of private enterprise through government control of the economic order. Yet this view can be contradicted by the argument that it was the employers who insisted on job security in the first instance, to ensure that their employees complied with their employment contracts. The Workmen’s Breach of Contract Act of 1859 can be seen as an early expression of this desire to tie employees to a contractual obligation. The initial reluctance of the masses of migrant workers from the rural hinterland to bind themselves to the rhythm of industrial labour gave rise to complaints from employers in later years about the lack of commitment of their workforces. When the expulsion of labour from the agricultural sector and from the villages increased dramatically during the first half of the 20th century, it was the turn of the labourers to realise the benefits of a permanent job. At the same time, employers increasingly experienced job security as a burden. Their earlier complaint about the lack of commitment was turned around and interpreted by them as a problem of overcommitment on the part of their employees [Breman 1999a: 4-17]. Industrialists now responded angrily to the workers’ tendency to treat their jobs as more or less their own property. This even extended to them claiming the right to designate a son or other close family member as the primary candidate to take over their position when they reached the end of their working life.

The World Bank in particular has been a fervent supporter of a policy aimed at ending the dualism in the labour market, not by formalising but by informalising the employer-employee relationship. The argument for abolition of ‘onerous job security regulations’ and other labour laws, such as that establishing a minimum wage, which hamper the free workings of supply and demand has now acquired the status of political correctness, against which few dare to object. In a recent ILO Social Policy lecture, Pranab Bardhan also joined the ranks of those who believe that the tendency in India to consider a permanent job as one’s own property is not only counterproductive in terms of efficiency and effectiveness but also does no justice to the interests of excluded candidates who might be better qualified [Bardhan 2001: 471-72].²

The south Asian regional office of the ILO in Delhi recognises the reasons for abolishing employment security but notes that the refusal of workers to consent to such measures is also understandable. Their determined resistance against erosion of their status as employees is driven by the lack of any system of provisions to alleviate the consequences of involuntary unemployment and to offer them decent labour standards, albeit at a lower level of subsistence. These comments led to a recommendation in a recent ILO report to accompany the reforms aimed at abolishing the dualism in the labour market with the introduction of a social safety net and the establishment of a minimum wage, which would ensure an income above the poverty line [ILO Report 1996; see further Ghose 1999].

The motivation for introducing a national minimum wage is to provide all those who take part in the labour process with socio-economic security. In practice, such guarantees have existed in many branches of industry in the informal sector for years. It is, however, not clear exactly how high this minimum should be. It is most certainly below the standard of a fair wage, which does exist in the formal sector and is adjusted on the basis of collective bargaining. In determining the total wage of this protected labour, a whole range of bonuses are taken into account which have acquired the status of rights over the passage of time, such as a dearness allowance and an annual bonus. The norm applied for a poverty line wage is based on an eight-hour working day, 26 working days a month; the rate is calculated on the basis of an amount reasonably required to enable the worker and two dependent household members to fulfil their basic needs. The author who surveyed these government interventions adds that “the statutory minimum wage rates notified in many states for unorganised industries have almost always been below the poverty line wage, i e, the wage which should enable a worker and his family of non-earning dependents to cross the poverty line” [Bhagat 1997: 724].

The concept of a minimum wage was introduced to reduce the vulnerability of labour. But it is applied with a great deal of caution. There is no precise answer to the question of what basic needs actually entail, in both a qualitative and a quantitative sense. Opinions vary widely on exactly what should be considered the minimum standard of living for a worker at the bottom end of the economy. As we shall see later, the actual calculated amount not only comes close to the poverty line, it even falls below it. The problem is not only that periodical reviews of the amount tend to lag behind the rising prices of daily necessities, but also that there is almost no effective supervision on the part of the government to ensure that employers comply with their obligation to pay the minimum wage.

The existence of legislation guaranteeing a minimum wage for workers in the informal sector since 1948 has been unable to prevent an enormous fall in the income of textile workers who lost their jobs in the mills. As I have already explained in an earlier chapter, the social safety net introduced to support the sacked workers turned out to be a complete failure for most of them. The National Renewal Fund, set up in 1992 by the Board of Industrial and Financial Reconstruction (BIFR), may have led to a number of the closed mills being transferred to the public sector, but very little came of the rationalisation of operations that was intended as the next step. The workers employed by the National Textile Corporation or the Gujarat State Textile Corporation were often paid without having to work. It was in fact a transitional scheme that usually led to voluntary redundancies. The termination of their employment contract was offset by the pledge that all their accumulated rights (such as the provident fund and other payments) would be honoured and they would receive the statutory redundancy pay. The majority of the sacked mill workers were, however, unable to benefit from this relatively favourable redundancy scheme because, for reasons they failed to understand, their mills closed before being recognised as a ‘sick industry

The lion’s share of the money allocated to the NRF was used to finance voluntary redundancies. The higher-ranking personnel of the closed mills benefited disproportionately from this scheme. In contrast to the golden handshakes received by the managers and other staff members, the workforce at the bottom of the mill hierarchy were fobbed off with the lowest of compensation payments.

Redundancy payments accounted for such a large percentage of the funds available that very little or nothing was left over to finance the two other components of the social safety net – the generation of replacement jobs and the retraining of the sacked workers. The plan to set up small-scale cooperatives on the sites of the closed mills using the revenue from the sale of the material assets of the bankrupt mills as seed capital was never given serious thought. Progressive liberalisation excluded the possibility of any form of government support for such initiatives. The experience of former workers with the short-term retraining courses – almost always discouraging – has already been discussed. The limited duration and low quality of the courses, the lack of money or credit to buy the necessary tools and equipment to perform the skills learned and of support of any kind in finding a new job were the main reasons why so few of the former mill workers started or completed this training. The extremely low budget allocated to the programme showed that, although the pledge to provide retraining gave the impression of being well-thought-out and well-intentioned, it was in fact neither [Srinivasan 1999: 1873-76].

One aspect to which I would like to draw special attention is that the policy of rehabilitating workers made redundant as the consequence of closures in the formal sector of the economy was based on the firm belief that they inevitably had to seek alternative employment in the informal sector. The focus in the retraining programmes was on self-employment, on the assumption that as micro-entrepreneurs they would stand the best chance of returning to the labour process.

My criticism of attempts to compensate for the negative effects of the process of informalisation finds support in various reports on this issue [Hirway 1995: 185-200, Hirway, Mahadevia 2000: 50-51]. That the developments in Gujarat are by no means exceptional can be seen from studies relating to the results of the NRF throughout the country [ILO Report 1996: 95-105, Sharma and Mamgain 2001: 270-271]. The meagre success of the NRF is attributed not only to the fact that the activities carried out fell well short of meeting the needs of the sacked workers, but also to the lack of experience of the agencies involved. In my view, this interpretation underestimates the systematic absence of the political will to help the victims of the informalisation process both during and after the closures, in a way that could have increased their resilience in surviving this dramatic downturn in their fortunes.

The Eclipse of a ‘Labour Aristocracy’

My study of the situation in which the sacked mill workers find themselves has to be understood in the light of the dynamics of employment and income for the working population of Ahmedabad as a whole. With the exception of a small minority – mostly those who held higher skilled and better-paid technical or administrative jobs – the dismissed factory workers sought alternative employment in a wide variety of occupations in the informal sector. Of this massive number, in my guesstimate approximately 85,000, around one-tenth left the city to try and build up a new life elsewhere, often in the towns or villages from which they or their parents originally came. The downward mobility of the greater part of this army of unemployed workers led to a further expansion of the pool of reserve labour already existing in the lower echelons of the city economy. This was entirely in accordance with Lubell’s description of the informal sector as a sponge which absorbs the unemployed for whom there is no place in the formal sector. Lubell believed that this incorporation of otherwise unemployed labour would have a beneficial effect, also for reducing income disparities between the two sectors [Lubell 1991: 11].

Before the mill closures in the city started to gather momentum a quarter of a century ago, these factory hands who enjoyed secure employment accounted for two-thirds to three-quarters of the formal sector workforce. The retrenchment of what was once an industrial vanguard has resulted in a dramatic fall in the relative size and importance of this protected and organised segment. As the total size of the working population of Ahmedabad has grown – less the consequence of natural expansion and immigration than of extension of the municipal boundaries – the proportion of work performed in the informal sector has also increased. In the early 1970s, the informal sector was estimated to account for around a half of all work in the urban economy [Papola 1986: 26-29]. By the end of the century, this had grown to between three-quarters and four-fifths. It is an estimate that depends on how informal sector work is defined. In my study, this is understood as wage labour or work on one’s own account which generates income but which is not regulated by an explicit employment contract (written or oral) stipulating mutual rights and obligations if only approximately, enjoys no protection, cannot insist on fair labour standards, and – in the majority of cases – is not registered (or only partially) in the official records. This definition embraces not only the huge army of those who work in the street or in their own homes, but also the industrial workers employed in small-scale enterprises like diamond ateliers, powerloom workshops and other manufacturing establishments with low capital intensity and widely fluctuating production capacity. Informal sector earners work where, when and as long as employers or (sub)contractors require of them and are not in a position to demand the legal minimum wage or other provisions, even if such have been agreed within the industrial branch in which they work. Lastly, and partly resulting from the above, they are not registered anywhere. The fact that they are barely visible or completely invisible to observers from the ‘formal’ world explains why occupational and employment statistics must be seen as relative rather than as exact or even reasonably accurate data.

My definition of informal work is based on the nature of the employment relationship rather than that of the economic activity itself. Companies themselves may be subject to industrial legislation or comply with other criteria relating to the formal sector. But the nature of the agreement with their employees is informal, in the sense that the latter are not employed on a permanent, or even a regular, basis and as such do not appear in the company books. They work on the basis of a mostly oral contract agreed for an unspecified period of time with a jobber or (sub)contractor, who reserves the right to terminate it at any time. The only obligation with respect to the workers is to pay them a piece rate. This comes with no entitlements to social security or other similar provisions. Many of the textile barons in Ahmedabad already ignored the labour legislation, compliance with which would have increased their costs, long before they closed the composite mills. They replaced the permanent employees in certain stages of the production process with much cheaper casual workers, hired by internal or external brokers for as long as they were needed. This is a form of disguised informalisation of work in the formal sector. When workers employed in this way are included in the calculation, the proportion of those working under informal sector conditions rises to above 90 per cent of the economically active population in Ahmedabad [Unni 2000: 60].³

Publications that highlight the virtues of economic informality deny that the move from the formal to the informal sector automatically means a deterioration in living standards. This is particularly true of arguments based on the belief that working on one’s own account and at one’s own risk is the only assured way to achieve development. Such considerations invariably sing the praises of micro-enterprise. Lubell summarises his overview of the literature as follows:

...ILO and other informal sector surveys showed that many informal sector participants who had worked in the formal sector before going into the informal sector shifted to the informal sector not because they were redundant to the formal sector but because they chose to be self-employed, using skills acquired in the formal sector to establish themselves as independent producers or traders; they were small-scale entrepreneurs who chose self-employment because they could capitalise on skills (and savings) acquired in the formal sector [Lubell 1991: 112].