[[{“value”:”Surveying the literature on the impact of labor regulation, we find that India’s firm-level labor regulations punish businesses in two ways. First, the regulations are too onerous, preventing firms from remaining competitive. While some sectors and large-scale industries might be able to comply with this regulatory overload, most regulations are imposed on firms with as
The post Why Indian firms don’t scale appeared first on Marginal REVOLUTION.”}]]
Surveying the literature on the impact of labor regulation, we find that India’s firm-level labor regulations punish businesses in two ways. First, the regulations are too onerous, preventing firms from remaining competitive. While some sectors and large-scale industries might be able to comply with this regulatory overload, most regulations are imposed on firms with as few as 10 employees, disincentivizing firm growth and large-scale employment. Second, labor-related regulations tend to micromanage factory operations through uncertain enforcement by a labor inspection system, further discouraging firms from expanding. India’s labor laws do too much, too soon in a firm’s life cycle.
We argue that to scale manufacturing across industries and foster job creation, India needs to revise its stringent labor regulations. This paper begins by describing the predominance of small-scale firms, indicating the extent of informality in India’s manufacturing sector, which is well established in the literature. It then shows that India’s labor law tries to do too much; instead of merely setting standards, the statutes micromanage workplaces, colors, fonts, uniforms, and more by requiring permissions for a host of workplace activities such as changing the tasks of a worker. It argues that the laws apply too soon in firms’ life cycle—namely, at low employee thresholds (typically as low as 10 workers). Both these aspects increase labor and compliance costs and discourage firms from scaling. Next, the paper offers recommendations for reforms to stop disincentivizing firms from scaling—including streamlining labor laws, raising employee thresholds, optimizing inspections, and avoiding excessive reliance on criminal penalties to ensure compliance.
Here is much more by Shruti Rajagopalan and Kadambari Shah.
The post Why Indian firms don’t scale appeared first on Marginal REVOLUTION.
Economics, Law, Uncategorized
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