The contemporary empirical literature suggests that production processes are fragmented and are being delegated to outsiders. The present study is based on a field survey and attempts to observe the organisational dynamics of production processes and labour relations in the organised sector in two states, Gujarat and West Bengal, where a large part of production activity is engaged in the vertical chain. The paper observes that, while being delegated, production activities are mediated through non-market channels like social, political and other peer group networks. This is also true in the case of labour hiring. Labourers are of three types: directly hired permanent workers, directly hired contract workers and workers supplied by contractors. The share of contract labour is as high as 70-75%, and contract workers are hired by persons who have strong connections with trade unions, political leaders and bureaucrats. Such networks help the firm in reducing asymmetries and ensuring market efficiency but do not necessarily protect the interests of upstream agents. More specifically, the existing rules of contract labour and minimum wage are routinely violated. In bypassing the existing rules, these transactions are quite often detected by the regulatory framework, but bribery effectively circumvents any problems. The process is faster in politically less active states than in politically active states, where such extra-legal transactions often appear before a public forum and consume considerable time and money to resolve. Therefore, the existing form of intermediation, led by favoured political and other peer groups, is a major obstacle to pro-poor growth in India and strong political action is required to tackle it.
The paper was presented at the International Conference on the 'Informal Sector in South Asia: Organisational Dynamics, Institutional Determinants, Interlinkages and Development' held at the Institute of Economic Growth, Delhi, during 27-28th July, 2009.
Discussion Paper Series, Research Programme Consortium for Improving Institutions for Pro-Poor Growth, Manchester, UK, No. 26, 34 pp.