Easing of Labour Regulations and Employment Growth in Organized Manufacturing : An Analysis of the Employment Effect of Labour Reforms in the Indian State of Rajasthan

Since 2014, several Indian states have taken steps towards easing labour regulations, the prominent one among them being the raising of the threshold of applicability of Chapter V-B of the Industrial Disputes Act (IDA) from 100 to 300 workers, lifting thereby the requirement of government approval for retrenchment of regular workers in medium-size industrial firms. Such a change in the threshold of applicability of Chapter V-B of the Industrial Disputes Act (IDA) was made by the Indian state of Rajasthan in 2014 along with other similar changes in labour laws, bringing about substantial labour reforms. Based on the empirical analysis undertaken, two recent studies (Goswami and Paul, 2021, and Chaudhary and Sharma, 2022) have concluded that the labour reforms in Rajasthan in 2014 did not increase employment in the state’s manufacturing sector. These studies have also found that the labour reforms in Rajasthan led to a fall in the ratio of directly employed workers to contract (or temporary) workers. These findings are at variance with a view often expressed that labour regulations have adversely affected the performance of Indian manufacturing and gains would occur, including enhanced job creation, from an easing of labour regulations. The object of this paper is to investigate the impact of labour reforms on industrial employment in India. An econometric analysis of the effect of the easing of labour regulations in Rajasthan in 2014 on industrial employment in the state is done using state-wise panel data as well as plant-level panel data. Based on the analysis, some empirical evidence is presented in the paper which suggests that the easing of labour regulations in Rajasthan in 2014 did contribute positively to employment growth. Also, the results suggest that the labour reforms in Rajasthan did not lead to the substitution of regular workers with contract workers