Informal Labour at the Root of Corporate Corruption

By Dipankar Gupta

If bribe giving is legalized will that ground the bribe taker for good? This suggestion was made recently by Kaushik Basu, the Prime Minister’s Economic Advisor. Sadly, such low cost, budget one-liners invariably fail to fly. Eager to clean up the corporate sector, Narayana Murthy, of Infosys, initially endorsed this suggestion, but later found faults with it. The bribe giver could rat on the bribe taker, but it would not be worth the halo. Word would go around and that person would be singled out forever in the real world of give and take.

Under current conditions, but for a handful of companies in IT, telecom and financial services, it is hard for business to play clean and be above board.When 93% of the work force is unorganized and informal, it would be foolish for the investor not to tap into this gold mine. Not only is cheap labour pouring out of every vein, but there is no pressure either to maintain proper records. We are now in a zone where facts are concealed, less than proper wages are paid, not to mention the slurring over of provident fund, medical benefits and bonuses. If this means bribing the labour inspector, it is a minor expense.

This explains why the dependence of the formal sector on the informal/unorganized workers has grown over time in India. In 1999-2000 it was 37.8%, but it went upto 46.6% in 2004-5, and is still climbing. When labour is ready to be hired for a song, it is tempting for business houses to rely on the informal sector. Besides, as everybody else is doing just that, it would be ruinous to play fair. The unseen hand of the market would give all such clean efforts a tight wallop behind the ears. That would straighten out any law abiding entrepreneur.

In practice, it is difficult to separate the unorganized from the informal labour force, especially in India. This is probably why the National Commission for Enterprises in the Unorganized Sector underplayed both size and skill in defining the unorganized workers. Instead, it considered all those who were not covered by formal arrangements regarding employment conditions and social security benefits to belong to this category. The International Labour Conference of 2002 also held a similar position. Whether labour is organized or unorganized, formal or informal, depends ultimately on worker-management relations.

This has some unexpected consequences. If you think your swanky car is a product of the organized sector, think again. Reports suggest that even in Maruti Company, 85% of the work force is made up of contract labour. Things have come to such a pass that garment manufacturing units too resort to outsourcing. Shirts made in the main factory have their buttons sewn on somewhere else. Suppliers of crude throw carpets and mats destined for children’s nurseries in the west, have a long supply chain too. Relying on cheap, informal labour has become such a habit!

It is not surprising then that number of units employing less than 10 workers has increased by about 110% over the last 25 years or so. Though many of them are household industries, they often produce for large corporate enterprises. As these lowly paid artisan-labourers help others to make huge profits down the line, there is little demand for skilled workers. Not only does this make our corporate sector corruption prone, but also inhibits it from being world class. This is why the vocationally trained labour force is a stagnant 5%, in India, but a staggering 95% in South Korea.

But why should any of that be worrisome? After all, on the back of informal labour, our textile export went up by roughly 100% between the years 1995-2003. As the link between globalization and the humble cottage industry is doing well, the established entrepreneurs who profit from this chain see no reason to rock the boat. Even if one were to entertain good intentions, it is hard to argue against easy money.

Corporate spokespeople may, however, explain this situation somewhat differently. In fairness, they are not always unconvincing. They would argue that the reason for their over-reliance on the informal sector is because government laws are so unreasonable. In their rendition, the Industrial Disputes Act makes it impossible to fire recalcitrant and non performing workers once the unit employs more than a hundred people.

This is not entirely accurate but, unfortunately, that is how the law pans out in practice. True, both factory owners and workers cannot declare a strike or lockout without notice, but that is not unique to our country. In America too, the Worker Adjustment and Restraining Notification (WARN) Act requires a 60 day period before layoffs and closures can be effected. Yes, there are stipulated laws regarding minimum wages and overtime in India, but so is the case in America as well. The Fair Labour Standards Act in the United States regulates both labour emoluments and maximum hours of work per week.

Therefore, for Indian corporates to demand that they should be able to freely hire and fire workers, or that wages should be determined by the market, is unfair. What, however, rings true is that it takes forever for an industrial strike to be settled in India. According to our law, during the pendency period, when the dispute is supposedly being sorted out, nobody can be dismissed. Yet, as there is no stipulated time limit within which decisions on such matters must be reached, the issue may hang fire interminably.

Business houses have found a way out of this. They try and make sure, to the extent they can, to employ less than 100 workers. This way they can get under the radar and not have to go through the legal rigmarole to fire a worker. That part is understood and it is silly of the Industrial Disputes Act not to take this matter under consideration. Even so, the fear of strikes is largely imaginary. In 1990 there were 1825 strikes nation-wide, but by 2006 the number had dwindled down to 192. Why then should entrepreneurs fear strikes today?

Moreover, nothing stops the employer of a unit with less than 100 employees from providing social security benefits and wage guarantees to its workers. Labour becomes unorganized, or informal, not because it is unskilled, or because factories are small, but because of the manner in which they have been employed. Regardless of size, why should employers not register their employees on the company’s muster and make them members of a “formal” labour force. This would limit the contractor’s role and make the delivery of wages and security benefits transparent.

The arguments then for encouraging the existence of unorganized labour are not really convincing. Entrepreneurs of even gigantic companies have learnt to live and function with segregated units with less than 100 employees in each. They may all be housed under one roof, or dispersed across the country, but the trick is to keep them small. This is not the best scenario, but neither does it prevent management from making sure that those 99 who work for them do so under proper, “formal” labour conditions.

If the corporate sector routinely lapses into corrupt practices, blame it on the easy pickings strewn in its path. Once you go down the road on informal labour, other practices soon follow as natural accompaniments. Records are concealed, payments docked for no good reason, and a little bribe on the side helps grease the wheel. As our low-wage products make us internationally competitive, there is little reason to change the rules. The law enforcers and entrepreneurs are not just on the same page, but often on the same balance sheet too.

When it comes to the corporate sector, small may not always be beautiful, but it need not be informal either.

This article appeared in Mail Today on July 27, 2011 and is reproduced here with permission of the author.


  • Haris
    Posted at 07:49h, 07 August Reply

    The informal labour story is much the same in Pakistan. It is interesting to connect it with corporate corruption. The economics make sense. There is need for a tiny linking argument, which is needed, in fact, in all economics of corruption stories. This is that many transactions are regarded as legitimated even if they are illegal. Legitimisation might be due to social norms, and/or signals from state authorities and powerful interest groups. Non-compliance with labour laws is widely accepted as being legitimate.

    • Anjum Altaf
      Posted at 16:53h, 07 August

      Haris: My perception is the same. The informal labor situation is the same in Pakistan. The laws are there I suppose because countries are signatories to ILO conventions but it is openly accepted that they exist to be evaded. At best, they are a source for side payments; at worst a handle to harass those under a cloud. Also, competition ensures that no one firm can deviate from the bad equilibrium. The only route is a better regulatory regime from the top. In that context, it would be interesting to explore how the transition has occurred in different places. How did South Korea get to 95% vocationally trained labor? That might suggest some policy options. What is the situation like in China? There is a lot of corruption there but its seems unrelated to evasion of labor laws. Labor is over-exploited but evading labor laws is not what seems to drive the big scams. The Chinese don’t seem to be handcuffed by ILO conventions that they do not want to or feel they cannot subscribe to. At least that’s my impression.

  • Anjum Altaf
    Posted at 07:49h, 25 January Reply

    Professor Barbara Harris-White on the impact of demonetization on the informal economy in India:

    • Vikram
      Posted at 19:03h, 25 January

      This interview is high on speculation and rhetoric, but I saw no firm predictions. Is the interviewee willing to stick her neck out and make clear predictions, for example, what is the scale of permanent job losses she expects to see ?

      There is also a contradiction in that she says that informality of the polity and economy is central to state harassment of private citizens (which makes sense) but then seems to valorize the same informality.

      It also makes no sense that the BJP govt would try to win elections with a strategy that involves people losing their jobs and disrupting the rural economy.

      And last but not the least, India’s economy is not ‘thriving’ because of informal businesses, but because of service exports and foreign investments that fund our energy and expertise imports.

    • Anjum Altaf
      Posted at 07:50h, 26 January

      Vikram: Professor Harris-White starts out by acknowledging that her reactions are speculative and not first hand:

      “So my experience isn’t first-hand, and my answers are conditioned by what I’ve gleaned from over a quarter million words in the Indian press, in English editorials and op-eds by some three score economists, practically none of whom saw this coming.”

      However, the speculations of someone who is a professor emeritus of development studies at Oxford with over 50 years of experience with the informal economy of the country and an output of five books on the subject should be of interest to all those interested in the Indian economy.

      Is there anyone at this point who can make firm predictions of the job losses from demonetization? If not, does it mean that no opinion should be expressed of the likely impact of the policy?

      Did those who planned the measure do any analysis of the likely job losses or gains? If so, have they presented it? If not, does it mean they did not care what the impact might turn out to be?

    • Vikram
      Posted at 06:39h, 29 January

      “speculations of someone who is a professor emeritus of development studies at Oxford”

      The track record of these professors is quite poor when talking about making Indians richer. Think about it this way, in the last 70 years, the greatest reduction in Indian poverty has come due to IMF imposed economic reforms ?

      Did any of these economists recommend these before the crisis ? Did they support these recommendations when they were made ?

      “output of five books on the subject”

      This ‘output’ is a consequence of Britain being a wealthier country than India, with more surplus to splurge, and the great differential between the pound and the rupee.

      I would recommend Tim Worstall writings on this matter.

    • Anjum Altaf
      Posted at 11:13h, 29 January

      Vikram: Let us go with your argument (although it is very contestable) that the greatest reduction in Indian poverty is due to IMF imposed economic reforms. If so, did the IMF pull their recommendations out of the air or did some economists make them based on theory and analysis? If the latter, then the track record of at least some economists is quite good. And they must have supported the reforms.

      At the same time, India is still a desperately poor country (just look at numbers reflecting malnutrition). So those economists who argued that the IMF program was not enough were also right. India is still a pre-industrial economy with the largest proportion of the labor force in the informal sector leading a precarious life.

      Regarding output. Till 1700 India was a much richer country than Britain. Was the output of books in India much greater than in Britain?

    • Anjum Altaf
      Posted at 06:24h, 29 January

      Vikram: Concrete documentation of job losses has started coming in. Of course, there is no reliable estimate of aggregate losses which would require a major national survey.

  • Vikram
    Posted at 16:42h, 29 January Reply

    “If so, did the IMF pull their recommendations out of the air or did some economists make them based on theory and analysis? If the latter, then the track record of at least some economists is quite good.”

    Yes, but what are those economists (Jagdish Bhagwati for example) saying about demonetisation ?

    “India is still a pre-industrial economy with the largest proportion of the labor force in the informal sector”

    Yes, we both agree on this. But we differ on the reasons. India’s failure to industrialize is rooted in the mal-incentives offered to its agrarian elite by the colonial regime.

    “Till 1700 India was a much richer country than Britain. Was the output of books in India much greater than in Britain?”

    It most certainly was.

    “Sanskrit “has the largest body of literature in the world and has seen continuous production of literature in all fields of human endeavour”. Its geographical influence is seen in India, South Asia, South east Asia, Tibet, China, Korea and Japan. What is truly remarkable, Dr. Scharf said, is that “about five to 30 million extant manuscripts – that is 100 times those in Greek and Latin combined – have been written in Sanskrit.””

    And this is just in Sanskrit. If you add the work in Tamil, Kannada, Oriya and Persio-Arabic, then the difference is even larger.

  • Anjum Altaf
    Posted at 05:51h, 31 January Reply
  • SouthAsian
    Posted at 06:18h, 30 June Reply

    A simple appraisal of demonetization by Kaushik Basu now that a lot more data is available:

  • Vikram
    Posted at 18:17h, 07 August Reply
  • Vikram
    Posted at 02:56h, 19 April Reply

    Here’s your favourite newspaper on demonetisation’s impact on tax buoyancy:

    • SouthAsian
      Posted at 00:07h, 23 April

      Vikram: Was this one of the principal objectives of demonetisation?

    • Vikram
      Posted at 00:23h, 23 April

      Rooting out illegal wealth (black money) was definitely one of the principal aims of demonetisation.

    • SouthAsian
      Posted at 03:45h, 23 April

      Vikram: So how much black money was rooted out?

    • Vikram
      Posted at 04:31h, 24 April

      Tax buouyancy of 1.3 and 1.7 is unprecedented as far as India is concerned. IIUC, it implies that cumulatively around 2.5 times more tax was collected in India over the last two years than one would expect under normal circumstances.

      Thats a lot of money that would have otherwise become black.

    • SouthAsian
      Posted at 14:51h, 24 April

      Vikram: Can you provide some credible evidence on how much black money was actually rooted out by the demonetization? There are numerous analyses on this aspect.

    • Vikram
      Posted at 19:21h, 24 April

      I think unprecedented tax buoyancy is evidence enough. There will be no need to ‘root out’ black money if people pay their taxes and keep their money in financial institutions to begin with.

    • SouthAsian
      Posted at 01:47h, 25 April

      Vikram: No, it isn’t. The declared aim of demonetisation was to root out the black money that existed in the economy before demonetisation. The question is how much of that black money was rooted out by demonetisation? Please quote the evidence.

  • Vikram
    Posted at 04:32h, 24 April Reply

    And here is a report on demonetisation’s impact on Financial Inclusion:

    See Figure 1 on page 4 for a summary.

    • SouthAsian
      Posted at 14:53h, 24 April

      Vikram: Was this one of the principal objectives of demonetization?

    • Vikram
      Posted at 18:41h, 24 April

      Not just demonetisation, this has been a goal of the current government since it came to power in 2014. Demonetisation was one in a broader sequence of steps to increase financial inclusion.

      A lot of money was ‘black’ simply because it was never deposited in a bank.

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