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Changes in the Indian economy: impact on HR practices & industrial relations.

The author brings forth here the changes that were evident in the macroeconomic conditions of the country in the preceding decade and how they affected organizational actors. It was found that such changes had a profound impact on the human resource management practices of the firms as well as on the industrial relations climate of the country. Work arrangements have evolved drastically in the past ten years and have challenged the existing norms within the firm and also brought the industrial relations climate under strain. The article traces how different human resource practices have changed to adapt to the dynamic exogenous environment.


To understand the changes that take place in organizational policies and practices, it is imperative to focus on the exogenous environment in which the organizations operate. Effective human resource practices are critical to a firm's survival and hence akin to any other firm-level practice is sensitive to the economic environment in which the firm operate (Budhwar, 2003; Sodhi, 1994). An economic analysis allows for a study of organizations, industrial sectors and markets. Organizations indulge in scanning the economic environment to make decisions regarding capacity levels, product differentiation, setting of processes and investment in R&D. Apart from the above it also assists in understanding how firms organise their activities and what changes they bring to their organizational process to remain adaptable as per the contingent exogenous conditions.

With multiple changes happening across sectors such as a radical shift in the utilization of technology to variations in how revenue is earned there has been a marked change in work relationships across organizations (Kalleberg, 2009; Okhuysen et al., 2013). These changes range from exhibiting boundary-less career by employees (Howes & Goodman-Delahunty, 2014) to a prevalence of more flexibility oriented contracts Vis a Vis commitment oriented contracts. Rapid advancement in technology with respect to social networks has enabled stronger peer to peer connectivity and new techniques of work interaction (Adler, Kwon & Heckscher, 2008; Gittell & Douglass, 2012). Such changes have also spawned new methods of employee engagement and also provide new platforms for recruitment and selection. The last ten years have seen one major recessionary economic event and this has impacted all sectors. Organizations faced with an unpredictable demand scenario owing to recessionary tendencies of the market have shown a greater propensity towards hiring contingent labor (Verma & Gomes, 2014). Hiring contractual employees has been seen as a trend in both blue and white collared jobs. Indian labor market has also seen an increase in migrant labor. Changing HR climate in diverse sectors is also bringing to fore issues related to diversity, discrimination and ethical treatment of employees (Buddhapriya, 2013; Bukhari & Sharma, 2014; Sia & Bhardwaj, 2008).

Indian Economic Scenario

The last ten years have, for a majority of the time, seen rule from a single coalition government. India's economic performance in the years 2005 to 2008 was superlative indicated by the high growth rate in GDP ranging from 6.57% to 9.32% (Rangarajan et al., 2008). Sectors such as services and infrastructure thrived due to high uptake in demand. Excess liquidity coupled with easy financing brought a surge in the real estate, automobiles and consumables market. In the services sector, India witnessed one of the fastest growth globally. The annual contribution to GDP by the services sector in 2013-14 was 57% (Bhargava, 2015). Agriculture continues to be a major employer, but its share in GDP has consistently been declining and contributes to around 17% of the annual GDP of the country. The country enjoyed a very high average growth rate to the tune of about 9%, but this period of growth was punctuated by a contraction in demand owing to the global recession that was witnessed in 2008. This moderation in growth became further anaemic with growth rates plunging to 4.4% in 2012 (Mishra, 2014). This was owing to a decrease in the value of the rupee, increase in current account deficit and slow recovery in industrial and infrastructure sectors.

The crisis of 2008 had international origins with roots in the subprime crisis in the USA and escalating oil prices. High unemployment rates in the developed world led to protectionist policies resulting in a contraction in the services sector in India. For example, the growth in information technology industry slumped to less than 10% (Heeks, 2015). This had a large scale impact on the bottom line of Indian technology firms. Similarly, the contraction in demand also led to investors altering their investment profile and shying away from the real estate market. This led to the crash in property prices and a decrease in investment in new projects. The subsidy mind-set of the government also did not help and lacunae in government spending schemes such as MANREGA, which had a cap on investment in asset creation did not give any support to the infrastructure sector. The automobile sector also saw a gross decrease in demand leading to increased inventory and shutting down of plants to control production.

Since India's financial institutions did not have a direct exposure to the subprime crisis in the USA, the toxicity of credit default did not impact the banking and financial sector as much. The strong regulatory framework put in place by RBI also assisted in buffering the Indian economy from global recessionary trends to a large extent. RBI extended credit in the Indian economic system and followed an accommodative monetary policy by lowering interest rates. The government also resorted to reducing the excise duties to assist in demand creation. All these factors assisted India to have a cushioned impact of the global crisis but then also recessionary trends starting in 2008 had slowed down the economy. The recovery has not been as strong as expected though green shoots have started appearing in the stock markets indicated by high rallies and also with an increase in property rate and uptake in demand for capital goods. The global recession also heralded a new financial model of expenditure being followed by many global firms with respect to their service's needs. They have started reducing their capital expenditure and have increased their operating expenses with respect to consumption of services. This trend can be clarified by observing an increase in adoption of financial models such as pay per use that are inherently flexible and do not lock up capital. With the economic context for the preceding decade clarified, we now proceed to understand the impact the changes in the exogenous environment has brought on the HRM practices and labor relations in India.

Impact on HRM Practices & Labor Relations

Strategic HRM attempts to understand how managing work and workers can enrich the competitiveness of organizations. Obviously, HRM scholars focus a considerable extent of their energy on work and workers in the context of the workplace and the exogenous environment. Dynamic economic environment is propelling alternative forms of work arrangements such as contingent workers and part time workers in order to impart flexibility to the organizations. On the other hand, from a legal point of view, firms are finding it difficult to ensure compliance with employment and labor laws for workers in such work arrangements. The ups and downs in the Indian economy in the last ten years created a deep impact on the human resource management practices and industrial relations climate of Indian firms. We focus on the individual component of HRM practices to flesh out the changes that were experienced.

Human Resource Planning & Recruitment

In the earlier part of the decade, high economic growth and increase in the spending power of individuals led to a spike across all sectors leading to the creation of new capacities. On the manpower front, it led to hiring and hoarding of employees in anticipation of continued demand. During this period, to shorten recruitment cycle and reach a wider pool of applicants, two major changes in recruitment practices that gathered acceptance was recruiting via the internet and employee referrals. With the strengthening of internet and penetration of internet usage among applicants led to the high utilization of the virtual recruitment route. This though had its downside as it led to some bias in favor of the urban candidates and also led to a deluge of applicants that resulted in an overload of resumes. The period from 2004 to 2008 also saw an increment in the usage of the human resource management information system within firms. Organizations also created internal electronic boards for information exchange and interaction. Implementation of such systems led to streamlining of HR processes and greater transparency in HRM practices. When the environment is dynamic, employees have an expectation for greater transparency (Ackoff, 1999). Such electronic means of information exchange led to an increased structural empowerment of employees. Firms started to utilize electronic information exchange boards in order to advertise open internal positions in the internal labor market with everyone having the same access to information and as a consequence reduced information asymmetry and gave equal opportunity to all employees. Employee referrals also gathered importance as an important recruitment tool. It reduced costs, gave the employees a sense of ownership and a chance to choose their co-workers.

Economic contraction starting from 2008 onwards led to large scale manpower restructuring exercises. Firms across sectors stopped hiring and initiated manpower restructuring strategies. Weak pull from the external labor market led to a reduction in attrition in firms across sectors. Organizations, therefore, resorted to layoffs. Layoffs bring an immediate impact on payroll cost and preserving the profitability of firms (Greenhalgh, Lawrence & Sutton, 1988). Firms across sectors started to offer voluntary retirement schemes. Voluntary retirement services, an alternative method for managing employee surplus is utilized when there is a possibility of labor unrest that may result due to retrenchment (Guha, 1996; Maheshwari & Kulkarni, 2003). The economic contraction of 2008 led to an important change in the human resource practice of managing employment contracts. Employment contracts can be commitment oriented and offer permanent employment or can be temporary in nature offering flexibility in managing human capital. The type of contract can depend on the value-creating potential of an employee (Kulkarni & Ramamoorthy, 2005). Employees that have a higher level of firm-specific tacit knowledge will have a higher value creating potential for the firm, and the firm may not want to lose them even in a surplus situation. Such employees are continued to be retained on commitment oriented contracts. Temporary employment contracts offer a good way to handle numerical flexibility to keep the organization sustainable.

Employee Training & Development

Employee training is the method of advancing the knowledge, skills, and enriching the behavioral attributes. It leads to improvement in the ability of the employee to perform work tasks assigned to him effectively and efficiently (Robert & John, 2004). Since 2003 onwards, the focus of human resource management shifted from plain administrative matters to more strategic roles. Training and development were a critical practice that assisted the firm in realizing its goals of high growth. The training programs were made more operationally aligned. Human resource departments in firms across sectors reinvented the way in which they trained and developed talent. The close association between work experience and leadership development was recognized, and sharing of knowledge across roles and geographies was encouraged. Mentoring also became a critical tool. Leaders from mature markets trained leaders in upcoming markets to avoid a repeat of same mistakes (Power, 2012). Training became high on participation, and the emphasis was on acquiring new skills and learning abilities (Collin & Smith, 2006). Pre-2008 recession had seen a burgeoning growth in demand, and such heightened demand had put pressure on training cycles. Newer methods of imparting training such as computer based training, live video streaming and concurrent training across geographies using video conferencing emerged. The clear impact on the human resource practice of training and development during this period was on operational relevance and speed and method of delivery.

Post-2008 recession, the primary focus of firms was to retain the right talent and conserve tacit knowledge from decrease owing to manpower restructuring. The training and development budgets had decreased, and firms also had to keep their employees ready for any future opportunity that may come up when the economy looked up. Many firms resorted to multiple on the job training programs such as job shadowing to keep the resources ready for upcoming future requirements. Such training program assisted in the acquisition of tacit knowledge and keeping employees future ready.

Performance Management & Appraisal

The first changes that occurred in the performance appraisal of employees in the last decade were in the level of transparency. The performance management system was made less opaque, and the employee was not in the dark with respect to the status of the process. This addressed the anxiety related to the appraisal process to a considerable extent. One of the important impacts of the economic changes of the last decade on performance management and appraisal system was the linking of employee's goals with firm's growth objectives. This was found to be critical for sustenance. This moved the performance appraisal from being an administrative exercise to a strategic exercise.

Another impact that was seen in HR practice of performance management was the linking of an employee's pay to his/ her appraisal. The component of salary linked to his/her performance was variable in nature and changed with the appraisal results each year. This was particularly evident in period's post-2008 when markets were tight and positive differentiation was required for retaining the best employees. Such a system rewarded the employees for gains in business and productivity of the firm (Sparrow, Schuler& Jackson, 1994). During the last decade what was measured underwent a drastic change. The performance management system became driven by customer satisfaction and employees were appraised high based on the quality of customer service provided apart from the quality of tasks executed. The focus of such a performance system was on the philosophy of rewarding merit and individual performance. The criteria became more behavior based, development focused and long-term oriented.

The years from 2005 onwards also saw the widespread utilization of the bell curve for appraising employees. Fixing the curve assisted in segregating the employees into the top percentile who had to be retained at all costs and employees in the last percentile who can be compensated less or in a situation of retrenchment laid off. Positive differentiation, therefore, became a strategic exercise during the times of contraction.

Career & Talent Management

Organizations that can maintain the right pool of talent for an extended period are more likely to succeed than other firms (Vance & Vaiman, 2008). Talent management has gained importance since 2008 due to economic contraction resulting from the global financial crisis. During the period of recession, it was critical for organizations to identify and retain key associates within the firm especially when they were downsizing (Whelan, 2011). The concept of talent management has undergone major changes post-recession, and the stress is not on critical resources but critical processes (Mellahi & Collings, 2010). There has been a recognizable shift in the talent planning process. Talent planning since 2005 has also started to utilize human resources information systems (HRIS) extensively.

In the current work arrangements the talent pool is constantly engaged with the customer and any increment in the abilities of the human capital pool results in enhancement of the client-vendor relationship (Srikanth& Puranam, 2011). Another change that is evident in the last ten years in the field of talent management is the global nature of nurturing talent. In the last ten years, multinational firms have expanded in India and global talent management is considered to be an important spoke in a firm's strategy (Cappelli, 2008). During and after recession the control on talent became important for the firm and hence this period saw widespread utilization of human resource information system (HRIS)such as the organization level intranet, platform HR solutions and emails to keep a tab on matrices pertaining to talent management (Farndale & Paauwe. 2007).

The last decade also saw increase in popularity of boundary-less career where employees are more committed to their career rather than the organization and this resulted in short association between employees and employing firms (Tung, 1998; Lazarova & Caligiuri, 2002). This heralded a new investigation into the construct of commitment and had a major impact on employee level HR practices.

Compensation & Benefit

The business cycle has a substantial bearing on the top and bottom line of an organization and directly influences a firm's wage bill (Madhani, 2010). Pre and post-recession periods from 2004 onwards have seen major changes in which compensation has been administered to employees in India. During the growth period from 2004 to 2008, the norm was to pay to market with the job market being an employee's market. HR practices with respect to compensation and rewards took care of administering a large number of perquisites and resorted to the propagation of employee stock option plans. The fixed component was high, and the variable component was also never held back as the firms were doing well.

Post-recession, the firms resorted to controlling costs so as to be ready when the economic conditions improve and the time comes to turn the dime. The compensation structure became closely linked to comparative appraisals. Salary ranges were broadened, and job levels collapsed in order to control the wage bill. The variable component got tightly linked to the firm's quarterly performance and was retained from monthly component till the quarterly results were out. If the firm did not do well, the employee did not get the held amount. The impact on mandatory benefits fairly remained negligible as the law mandated them. The firms though worked around the legal statute by avoiding permanent staff and hence did not have to pay pension and health care benefits.

Industrial Relations Climate

Differences and disputes are inherent to the relationship between employer and employees. In India the labor relations are governed by three basic laws: a) The Industrial Disputes Act (1947), b) Contract Labor (Regulation & Abolition) Act, 1970, and c) the Factories Act (1948). Such laws have been enabled to protect the illiterate, marginalized worker from hire and fire policies of the management. In the last ten years there has been drastic change in the economic scenario and employers are clamoring to bring in changes in these legal statutes so as to enable them flexibility in managing manpower resources. Still even when the changes have not been done the employers are able to circumvent these regulations by hiring contractual employees and also engaging in unethical behavior with the employees. The stress on India's industrial relations scenario can be gauged from three violent incidents that have taken place in the last ten years. These incidents have resulted in the loss of life that took place in the three corners of the country indicating a worsening situation at the national level. The reasons have been the alleged illegal practice of labor market flexibility that was being practiced in these firms. Flexibilities in the form of contractualization has come out to be a major irritant in the IR scenario of India in the last decade. The fact that there is a large scale pay disparity and the unwillingness of employers to take employees on their permanent rolls due to strictness of various IR acts has shown glaring lacunae in the IR framework of India. The current framework also lacks a comprehensive dispute resolution mechanism with the current method being multistage and time consuming. An alternate, faster, fair and just dispute mechanism is the need of the hour.

Another, important feature that deserves attention is the inability of the IR framework to address the informal sector and migrant labor. Lack of collective support for migrant labor and those who are involved in unorganized work has been observed the world over but in India even though around 93% of workforce is engaged in unorganized work (Sen, 2012), they have always remained outside the purview of labor laws and have lack of social security, no fixed minimum wages and are subjected to abject working conditions with working hours ranging from 12 to 14 hours (NCEUS, 2009: 6.64). The Government of India has enacted a law under the "Inter-state Migrant Workmen (Regulation of Employment and Conditions of Service) Act 1979". This law has remained on paper and the record of penalization under the same is dismal. Similarly "The Unorganized Sector Workers' Social Security Bill" was enacted in 2008. However, the Act does not have any binding compulsion on the government, except registration and issuance of identity cards for members of unorganized workforce (Sen, 2012). Though the act has social security in the title the government has no plan to fund the social security of workers in the unorganized sector (Ghosh, 2009). In India employee collectives have ignored the informal sector owing to the huge costs in enrolling such employees and also an expectation that they harbor that slowly the informal sector will get absorbed in the formal sector (ShyamSundar, 2010).Though the mainstream unions have upped their effort in the last decade to incorporate informal workers (ShyamSundar, 2010), the vacuum created for such a long time has yielded to creation of non-unionized organization such as Self-employed women's association (SEWA). SEWA has been registered as a trade union but is a trade union, pressure group rolled into a cooperative.

The Way Ahead

The new government at the Centre has embarked on an ambitious effort to give a boost to the manufacturing sector by launching the "Make in India" campaign. This campaign is getting dovetailed with all major capital intensive acquisitions that the government is making. The case in point is the acquisition of big-ticket capital intensive defence assets. In order for firms to start manufacturing in India on a big scale and to make India the first choice for setting up plants, the managements of various firms have started to ask the government to liberalize some stringent labor laws. This is a very sensitive issue as any dilution will render labor to exploitation, but no change will lead to non-participation by organizations.

Table 1 brings forth the changes that can be done to alter the current labor relations scenario and enable both investments as well as protect workers' rights.

The government has already started plucking some low hanging fruits. It has started to streamline the process of government-industry interaction by allotting labor identification numbers to around 6 lakh firms through the newly launched "ShramSuvidha Portal". A new random inspection scheme has been brought into force to reduce the general grouse of industries against inspection by labor inspectors. Anew computerized system has been brought into place for unit selection, and it will be imperative for the labor inspector to upload his/her report in the system within 72 hours of the inspection.

To streamline provident fund for employees, around 4.17 crore employees are to be given a universal account number to bring in provident fund portability. The government has also understood the importance of skill development and has agreed to fund around 50% of the stipend paid to apprentices during the first two years of the training period. The unorganized sector accounts for around 90% of effective labor force in the India. The government has also made a beginning to bring some semblance to recognize their contribution to institutionalize this sector. A start has been made by revamping the "Rashtriya Swasthya Bima Yojana". The smart cards that have been issued to the unorganized workers are now going to be loaded with two more social security schemes.

A beginning has been made and the nation has a huge opportunity in front of it to come on the map of developed industrialized nations in the world. It is imperative that to make the environment conducive for growth, proper scanning of the current employment relations environment is done and appropriate interventions be made quickly.


The last ten years have been dynamic on the economic front. Apart from the economic factors, the technology is also changing rapidly and organizations that were once big names in the industry have disappeared. Human resource management practices and industrial relations have to be vibrant enough to tackle these changes. With the current economic scenario it seems the growth is around the corner. Government initiatives such as "Make in India" will add impetus to the manufacturing and services sector in the country. In order to tap into the upcoming opportunities, HRM practices will have to be ready to face radical changes. If we look at the technology sector the component of linear revenue to the top line of such firms is extremely high. With time as the spending pattern of the customer changes, the focus on nonlinear revenue that is driven by pay per use and license fees will increase. This will lead to rationalization of the employee structure even though the economic environment will be that of growth. This is a classic case of such firms falling in the success trap where they have accumulated manpower based on the revenue generation. Any attempt to rationalize the employee base by laying off will not be justifiable and hence will incur strictures from the government, public and the courts. This was evident in the recent case of involuntary attrition by a large Indian technology multinational. This will be a real challenge for the human resource management leadership and practices that are prevalent in such firms.

On similar lines, in order to make the "Make in India" campaign successful, firms will want the IR acts to be amended so as to bring in the required flexibility that is not available right now. This is a critical juncture as any dilution will lead to a potential of exploitation of the workers whereas non-flexibility will lead to lost opportunity. This is truly the time when all stakeholders have to get together and come up with viable options that protects the labor as well as makes the country investor friendly.


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Shrihari S Sohani is from Personnel & Industrial Relations Area, Indian Institute of Management Ahmedabad 380015. E-mail:
Table 1 Current Industrial Relations Challenges & Prospective Solutions

Employee          Description of the issue      Prospective solution
relations issue

Simplification    With around 47 central      Integration and
and               laws and around ISO state   simplification of the
consolidation     laws, India labor statues   laws is required for easy
of Labor laws.    are one the most            understanding by the
                  difficult to navigate.      employee, union
                                              representative and

Contrived         This is required to         Formation of commissions
bargaining        simplify dispute            to facilitate Industrial
and dispute       resolution and making       Relations.
resolution        bargaining process stream
process.          lined.

Lock of           There is a need to          Establishment of a
knowledge         reorient the adjudicators   country level institute
about dispute     and other important         for training of labor
resolution in     stakeholders in the         commissions, judges and
stakeholders.     dispute resolution          union leaders.

Lockout notice    Lack of notice on strikes   Bringing of provisions in
                  in the case of non-public   the IDA in this effect.
                  utility service

Chapter V-B of    This is the most            An effective moderation
IDA               controversial as it has     in law has to be brought
                  put stringent               in to reflect the changes
                  requirements on             in the macroeconomic
                  retrenchment and layoffs    environment of the
                  and also on closing down    country so as to preserve
                  undertakings.               the nation's

Making            Current fines and           Benchmarking exercise
punishments and   punishments are not         needs to be undertaken
fines             benchmarked to              for making the fines and
commensurate to   contemporary inflation      punishment contingent to
the violations.   rates leading to            current inflation rates
                  encouragement of gross

Employee                       Impact on workers
relations issue

Simplification    Easier for workers to have an understanding
and               of their rights
of Labor laws.

Contrived         Stream lined process will protect workers
bargaining        from unnecessary wage loss and quick
and dispute       resolution to their problems

Lock of           Well informed and trained union leaders
knowledge         will be able to represent workers better
about dispute
resolution in

Lockout notice    Lockout notice will protect workers from
                  surprise wage loss and also create more
                  opportunities for them due to increased
                  investment by firms

Chapter V-B of    Moderation in law in line with current
IDA               conditions will create more work related
                  options for the workers due to increased

Making            A strong deterrent will protect the
punishments and   workers
commensurate to
the violations.
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Author:Sohani, Shrihari S.
Publication:Indian Journal of Industrial Relations
Geographic Code:9INDI
Date:Jul 1, 2015
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