Why Indian Firms Don’t Scale: Labor Edition

Abstract: This paper argues that India’s complex web of labor laws, with their low employee thresholds and micromanagement of the workplace, disincentivizes firms to scale and hire more workers. These regulations prohibitively increase firms’ unit labor costs too soon, typically starting at just 10 workers, which leads to a predominance of small, informal firms, hampering India’s economic growth and job creation potential. We recommend repealing most of India’s labor laws, which are obsolete, streamlining the labor regulations that only set standards, revamping the inspection system, and applying criminal penalties in very few circumstances. While these changes may entail various political economy challenges, a second-best solution is to increase employee thresholds for existing labor regulations to 1,000 workers (10,000 for industrial disputes and closures). These reforms can create a more conducive environment for large-scale firms, enhancing competitiveness and contributing to formal, stable employment opportunities in India’s manufacturing sector.

Read and download the full paper here.