Non‐compliance with India's Factories Act: Magnitude and patterns

• Published date: 01 September 2015
• DOI: http://doi.org/10.1111/j.1564-913X.2015.00027.x
• Date: 01 September 2015

International Labour Review, Vol. 154 (2015), No. 3

Copyright © World Bank 2015

Journal compilation © International Labour Organization 2015

Non-compliance with India’s Factories Act:

Magnitude and patterns

Urmila CHATTERJEE* and Ravi KANBUR**

Abstract. While non-compliance with legislation and regulations is said to be rife

in developing countries, there is limited systematic evidence of the magnitude of

non-compliance. The authors quantify non-compliance with India’s Factories Act

in 2010 and nd that the number of non-compliant rms is nearly twice that of

compliant rms, and much larger than the number of rms “adjusting out” of the

legislation. Thus, non-compliance with the Factories Act is a key feature of India’s

“missing middle”. The main trends and patterns of non-compliance are explored,

and a number of key issues highlighted for further analytical and policy research.

T

he regulatory burden on enterprise is a central topic in policy and popular

discourse. Indeed, it is often argued that rms are “overburdened” with

regulations, the corresponding costs of which hinder rms’ productivity and

growth. According to this line of argument, heavy deregulation should occur.

However, regulations are presumably introduced for a purpose; economic the-

ory suggests a number of contexts in which regulation can be benecial to the

economy and society as a whole. According to this reasoning, deregulation

should be approached with caution.

India is no exception to the global debate on regulation. The argument

that business registration, labour legislation and a multitude of other regula-

tions are stiing enterprise and holding back rms’ efciency and growth – and

economic progress – is commonplace. A central piece of legislation is India’s

1948 Factories Act,1 which requires manufacturing rms of a certain size to

* The World Bank, email: uchatterjee@worldbank.org. ** Cornell University, email:

sk145@cornell.edu.

The views expressed here are those of the authors and not of any institution they may be

associated with. The authors wish to thank seminar participants at the Centre for Development

Studies (CDS) – Trivandrum, the Reserve Bank of India, and the World Bank (New Delhi), for

their comments and feedback.

Responsibility for opinions expressed in signed articles rests solely with their authors, and

publication does not constitute an endorsement by the ILO.

1 Act No. 63 of 1948, as amended by the Factories (Amendment) Act, 1987 (Act 20 of 1987).

The text is available at: https://www.ilo.org/dyn/natlex/docs/WEBTEXT/32063/6 4873/E87IND01.

htm [accessed 20 August 2015].

International Labour Review394

register and subsequently comply with other regulations. The Factories Act is

often suggested as one of the reasons for India’s “missing middle”,2 since only

rms with ten workers or more – 20 workers or more for rms not using elec-

tricity – are required to register under the Act. This legislation is believed to

hold back the expansion of successful small rms, inducing them to stay “be-

neath the radar” of the legislation. However, for supporters of the Act, the

legislation provides important protection for workers, not least in the area of

occupational safety and health.

It is striking how little account is taken of non-compliance in these two

major strands of argument. However, without an account of non-compliance,

the discourse on regulation is incomplete. How much non-compliance is there?

Who complies and who does not? How have the magnitude and patterns of

non-compliance changed over time? Without answers to these questions, the

regulation debate takes place in a purely theoretical setting, which may not

match reality on the ground.

The evidence for non-compliance at the rm level, in India and globally,

is mainly anecdotal; there is limited systematic evidence of the extent, nature

and causes of non-compliance. One reason is that it is obviously difcult to

ascertain non-compliance – in other words illegality – through a direct survey

instrument. However, there are some instances where non-compliance can be

identied through indirect means. For example, in the case of minimum wage

regulation, labour force surveys or household surveys routinely collect infor-

mation on wages of the interviewed workers, as well as information on the

nature of their employment. By matching the location/sector/occupation of

each worker with the corresponding ofcial minimum wage, it can be ascer-

tained whether or not minimum wage violation is taking place, without ever

approaching the rm in which the individual works.3 However, these worker-

based approaches do not have the detailed rm-level information required for

further rm-based analysis of non-compliance.

One indirect method in India for determining non-compliance with the

Factories Act is via the ve-yearly surveys conducted by the National Sample

Survey Ofce (NSSO) on rms that are not registered, which ask inter alia

about the rm’s number of workers and electricity usage – the two criteria

on which the registration requirement under the Act is based. Using this data

source, therefore, non-compliance can be quantied. The NSSO surveys have,

of course, been used in the past for a number of purposes, but not in any sys-

tematic way to explore the magnitude and patterns of non-compliance.4 This

article provides recent estimates for the magnitude of non-compliance and

explores some of its patterns. The extent of non-compliance was found to be

2 The idea of the “missing middle” in development economics is that there are a large num-

ber of small rms, some large rms, but very few medium-sized rms.

3 For an application of this method to South Africa see Bhorat, Kanbur and Mayet (2012),

and for an application to Chile see Kanbur, Ronconi and Wedenoja (2013).

4 For example, Bedi and Banerjee (2007) and Nagaraj (20 02).