ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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The Effects of Employment Protection Legislation on Indian Manufacturing

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 summarising the earlier paper, the variability of employment protection regimes across Indian states attributable to court judgments, a key factor which other authors have ignored, is described. 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 summarising the results of an empirical exercise based on an alternative methodology.

I would like to thank the Rule of Law Program at Stanford University for nancial support; Avinash Sharma, Pranav Sachdeva and Sandeep Vishnu for excellent research assistance; participants at workshop presentations at Stanford and at the Centre for Policy Research (New Delhi) for comments; and Matt Armsby, Abhijit Banerji, Debashish Bhattacherjee, Erik Jensen, Kamala Sankaran and K Sundaram for insightful observations on earlier drafts. None of them is responsible for any errors that remain.

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