Impact of Labour Unions and Economic Reforms on the Number of Registered Factories in India

The ongoing economic reform of India has completely bypassed the labour policies, despite implementing dramatic changes in trade, industries and capital market. Notwithstanding this limitation, the registered manufacturing sector has witnessed a steady rise in the number of factories as well as expansion in aggregate output, which suggest an underlying trend of firm entry. Our purpose is to see how different components of reform, viz. trade, labour and industrial policies, affected this industrial expansion. We find that greater unionisation and increased wage-share of the organised workers (which might have resulted from the absence of labour reform) have restricted the growth of the number of factories. This effect is particularly strong in industries which are dominated by large factories. On the other hand, industrial policy reform has had a favourable effect and promoted competition. But trade liberalisation has shown a negative impact on the number of factories. This suggests that trade reform has led more bankruptcy of inefficient domestic firms than it created new exporting firms. Our results are robust to several specification changes.