Most of India's labour laws were crafted with scant respect for 'market response.' If X seemed bad, the presumption was that you had to simply enact a law banning X. But the fact that each law leads entrepreneurs and labourers to respond strategically, often in complicated ways, was paid no heed. In a poor country no one with any sensitivity wants workers to lose their jobs.
So what does one do?
The instinct is to make it difficult for firms to layoff workers. That is exactly what India's Industrial Disputes Act, 1947, did, especially through some later amendments, for firms in the formal sector and employing more than 100 workers. But in today's globalised world, with volatile and shifting demand, firms have responded to this by keeping their labour forces as small as possible. It is little wonder that in a country as large as India less than 10 million workers are employed in the formal private sector.
Some commentators have argued that India's labour laws could not have had much of a consequence since most of them apply to only the formal sector. What they fail to realise is that one reason the formal sector has remained miniscule is because of these laws (and also the culture that the laws have spawned).
India is a relational market, and these contracts are based on trust. The trust comes from repeated interactions between individuals or shared "community" (for some fundamental ways in which to think about trust, social networks, institutions, and repeated interactions, see the book Foundations of Social Capital).
Which is why a lot of the employers here prefer working with someone from their own community, or village (even if they themselves have migrated from that village for a generation), someone they know, or someone who has proven their skills and commitment with a rival employer (poaching). The challenge of retaining and trusting employees is the issue that I discussed in my post yesterday.