How PACL ran a Rs 50,000 crore Ponzi scheme


So another Ponzi scheme has been busted.
The Securities and Exchange Board of India(Sebi) in an order issued on August 23, 2014, banned Delhi based PACL, from collecting any more money from investors. Sebi also asked PACL to refund the money to investors over the next three months.
A Ponzi scheme is essentially a fraudulent investment scheme in which money brought in by new investors is used to redeem the payment that is due to existing investors. The instrument in which the money collected is invested appears to be a genuine investment opportunity but at the same time it is obscure enough, to prevent any scrutiny by the investors.
In case of PACL, the money collected was supposedly invested in “ agricultural land”.
As the Sebi order on the company written by Whole Time Member Prashant Saran points out “According to PACL, it mainly deals in the sale and purchase of agricultural land and development of the land…PACL’s business model is not limited to simple trading in barren agricultural land but to provide significant value addition to such low value barren land by developing it into productive agricultural land.”
This land bought by PACL after collecting money from the investors wasn’t handed over to them. As the Sebi order points out “PACL has also submitted that only symbolic possession of plots are handed over to the customers as fragmentation of land/ plot into smaller sizes may not be practical or permissible under the applicable revenue laws.”
The Sebi order goes on to inform that till March 31, 2012, Rs 44,736 crore was invested in PACL schemes. The company further informed Sebi that Rs 4,364.78 crore was collected by it between February 26, 2013 and June 15, 2014. Hence, the total amount collected amounts to a whopping Rs 49,100 crore. “This figure could have been even more if PACL would have provided the details of the funds mobilized during the period of April 01, 2012 to February 25, 2013,” the Sebi order points out.
The order goes on to note that “from the available records, it is also noted that since inception till 2012, PACL has allotted land to about 1.22 crore customers.” PACL also informed Sebi that the company has more than 4.63 crore customers to whom land hasn’t been allotted. Hence, “the total number of the customer of PACL comes to around 5.85 crore.”
To summarize, the company has close to 5.85 crore customers who have invested around Rs 50,000 crore with it. This is the basic back story of PACL, which has been put together brilliantly by Saran in the Sebi order. So what are the holes in this story?
First and foremost if the company has Rs 50,000 crore invested with it, it must have used that money to buy “agricultural land” worth a similar value. But the Sebi order clearly points out that PACL hasn’t done so. “The company has only lands worth Rs 11,706.96 crore [i.e. agricultural lands (Rs 7,322.11 crores) and commercial lands (Rs 4,384.84 crores)] out of which it has not only to satisfy the claim of 4.63 crore customers who have deposited Rs 29,420 crore with it but also to satisfy 1.22 crore customers to whom the land has been allotted but sale deeds have not been executed.”
PACL claims to have more land but hasn’t been able to share those details with Sebi “In view of the above, the proposal does not appear to be serious and reasonable,” writes Saran of Sebi. This throws up several questions? If the company has land worth Rs 11,706.96 crore only, where is the remaining money that it has raised from its customers? Why hasn’t it been invested?
Further, how does it plan to repay the customers at the end of the tenure of their investment? The customers have been promised a certain rate of return. And that return can be paid only when the land which PACL claims to invest in grows in value. But without the company investing money in land, that isn’t going to happen.
Also, at the end of the tenure of his investment, the investor either has the option of taking land or money. Saran of Sebi had asked PACL to provide him a sample of 500 customers. From this sample, 421 customers had taken their money back. The question is how were these customers repaid if the money being raised is not being invested totally?
In fact, in a news report published in The Economic Times in June 2011
PACL director S Bhattacharya had said that “about 80% of customers opt to take the money at the end of the plan term instead of the plot of land they supposedly paid for.” So the remaining 20% must be taking on the land, they had originally invested in, is a fair conclusion that one can draw. But as the Sebi order also points out “Not a single applicant out of the 500 samples selected has registered a sale deed of the land he had proceeded to purchase in the first instance…These facts raise serious doubt the real estate business that PACL claims to carry out.”
In fact, the situation gets even more intriguing when one considers the total number of investors in the scheme. As summarised earlier nearly 5.85 crore investors have invested around Rs 50,000 crore in the scheme. But interestingly Bhattacharya had told The Economic Times in 2011 that the “
the company has no more than 50 lakh customers”. So how did the number go from 50 lakh to 5.85 crore in just over three years? Or like Sahara, PACL does not really know how many customers does it really have?
All these lacunae lead Saran to conclude that “the lack of maintenance of proper records/ data is a clear indication that the activities of PACL are in the nature of ponzi scheme.” Hence, like most Ponzi schemes which run for a while, the company over the years has managed to build in the minds of its customers some sort of a façade of a business model, where they make money by buying and selling agricultural land.
But the available data does not lead to that conclusion. What the company seems to have been doing is to take money from new investors and hand it over to the investors whose investment had been maturing. That was all it did. It did not have a business model. It was an out and out Ponzi scheme.

The article originally appeared on on August 26, 2014.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The coalgate mess: SC order shows UPA left our energy sector in a crisis

coal Supreme Court of India today delivered a judgement which is likely to have far reaching consequences on the energy scenario in India. In a judgement the court said “The allocation of coal blocks through Government dispensation route, however laudable the object may be, also is illegal since it is impermissible as per the scheme of the CMN Act (Coal Mines Nationalisation Act, 1973).
This essentially deemed illegal, the 195 coal blocks that had been allocated to public sector and private sector companies since 1993. These coal blocks had geological reserves amounting to 44.8 billion tonnes.
The decision to give away coal blocks free to the private sector was first made in 1993. The idea, as the Economic Survey of 1994-1995 pointed out, was to “encourage private sector investment in the coal sector, the Coal Mines (Nationalisation) Act, 1973, was amended with effect from June 9, 1993, for operation of captive coal mines by companies engaged in the production of iron and steel, power generation and washing of coal in the private sector.”
The idea sounded “laudable” at least on paper but the trouble was that “no objective criteria for evaluation of comparative merits” of companies to which these coal blocks were allocated, was followed. As the Supreme Court judgement put it “The approach had been
ad-hoc and casual. There was no fair and transparent procedure, all resulting in unfair distribution of the national wealth. Common good and public interest have, thus, suffered heavily.”
Most of these coal blocks were allocated between 2004 and 2011 when the Congress led United Progressive Alliance (UPA) was in power. Data from the Provisional Coal Statistics for 2011-2012 points out that 156 of the 195 mines with geological reserves amounting to 41.24 billion tonnes of the total 44.8 billion tonnes, were allocated between 2004 and 2011. Hence, nearly 94% of the reserves were allocated between 2004 and 2011. Interestingly, Manmohan Singh was the minister of coal for a large part of this period between 2006 and 2009. During this period a little over 78% of the total 44.8 billion tonnes of coal reserves were allocated.
While the approach was adhoc, the move could have still benefited the country, if the companies to whom the blocks had been allocated had started producing coal quickly enough. Interestingly, during 2011-2012, these coal blocks produced 36.9 million tonnes. This amounted to around 6.8% of the total production of 539.94 million tonnes during the course of that year.
For the current financial year (i.e. 2014-2015) these mines are expected to produce around 52.93 million tonnes. This will be out of a total produce of around close to 590 million tonnes. The demand for this year is expected to be at 787 million tonnes.
Interestingly only 31 out of the 195 coal blocks currently produce coal. What this tells us is that most of the public sector and the private sector companies to which coal blocks were allocated haven’t started producing coal as yet. A major part of these blocks as mentioned earlier were allocated between 2006 and 2009. Given that its been a while since these blocks were allocated, and hence its surprising to see that only 31 out of the 195 coal blocks are currently producing coal.
This tells us a lot about the ground level implementation challenges in India.
What remains to be seen is the impact this judgement will have. At close to 53 million tonnes in 2014-2015, the captive blocks will produce around 9% of the country’s total coal production. It has to be ensured that this produce is not suddenly taken out of the equation because that can have disastrous consequences for the energy scenario in this country.
The Supreme Court also pointed out that “it is directed that the coal blocks allocated for ultra mega power project (UMPP) would only be used for UMPP.” Data shows the total amount of coal expected to be produced by UMPP in 2014-2015 stands at two million tonnes. Adjusting for this, the amount of coal being produced by coal blocks stands at 50.92 million tonnes (52.92 million tonnes – 2 million tonnes).
If this coal were to be imported, assuming a landing price of Rs 3400 per tonne of coal (if its imported from Indonesia) this would mean an additional expense of Rs 17,300 crore per year. In this scenario, power tariffs will go up further. This will in turn impact inflation and economic growth.
But it is not just about power tariffs. Our ports will have a tough time handling this additional quantity of coal that will have to be imported. Over and above that, the Indian Railways is not exactly geared to be able to transport this coal from the ports to different parts of the country where it is required. The added infrastructure that will be required to handle the additional imports cannot be created overnight. Further, it is likely to drive up international price of coal, which has been falling lately. Also, it needs to be decided as to what happens to those coal blocks were coal is actually being produced. Do they get away just by paying a fine?
By following an arbitrary process of allotment of coal mines the various governments of the past (primarily the Congress led UPA) have left a huge mess which threatens the energy security of India. The Supreme Court judgement points out that “the explanation by the Central Government for not adopting the competitive bidding is that coal is a natural resource used as a raw material in several basic industries like power generation, iron and steel and cement.”
It goes on to add that “The end products of these basic industries are, in turn, used as inputs in almost all manufacturing and infrastructure development industries. Therefore, the price of coal occupies a fundamental place in the growth of the economy and any increase in the input price would have a cascading effect. The auction of coal blocks could not have been possible when the power generation and, consequently, coal mining sectors were first opened up to private participants as the private sector needed to be encouraged at that time to come forward and invest. Allocation of coal blocks through competitive bidding in such a scenario would have been impractical and unrealistic.”
The Central Government referred to in the judgement is the Congress led UPA government. The moral of the story here is that when you don’t allow the free market to operate, when things are not transparent, and when politicians decide on rules and framework as they go, the situation usually ends up in a mess.
The least that can be learnt from the Coalgate experience is that whenever the government decides to allocate natural resources from now on, it should do so in a transparent and rule based manner.

The article originally appeared on and on August 25,2014 
(Vivek Kaul is the author of the
Easy Money trilogy. He tweets @kaul_vivek)

Borrow less, don’t blame RBI: Time Jaitley stops doing a Chidu on us

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010Vivek Kaul

A favourite pastime of former finance minister P Chidambaram other than telling us that the Indian economic growth was about to bounce back, was to ask the Reserve Bank of India (RBI) to cut interest rates.
The new finance minister Arun Jaitley has carried on from where Chidambaram left.
On August 10, Jaitley had nudged the RBI to cut interest rates after taking various factors into account.

The thing with most politicians is that either they do not understand how a market operates or they pretend otherwise. Jaitley and Chidambaram, I assume would fall into the latter category. Allow me to explain.
The latest RBI annual report points out that “
the household financial saving rate remained low during 2013-14, increasing only marginally to 7.2 per cent of GDP in 2013-14 from 7.1 per cent of GDP in 2012-13 and 7.0 per cent of GDP in 2011-12…the household financial saving rate [has] dipped sharply from 12 per cent in 2009-10.”
Household financial savings is essentially the money invested by individuals in
fixed deposits, small savings scheme, mutual funds, shares, insurance etc. The household financial savings were at 12% of the GDP in 2009-10. Since then, they have fallen dramatically to 7.2% in 2013-14. A major reason for the fall has been the high inflation that has prevailed since 2008.
This has had two impacts. One is that expenses of people have consistently gone up, leading to lower savings. Further, of the money that was saved a higher proportion was directed towards physical savings like gold and real estate. This was done because the rate of return available on financial savings was much lower than the rate of return on gold as well as real estate. The average savings in physical assets between 2005-06 and 2007-08 stood at 11.4% of the GDP. This shot up to 14.8% in 2012-13(the data for 2013-14 is not available).
What has not helped is the fact that over the last few years the fiscal deficit of the government shot up dramatically, as its expenditure shot up at a much faster rate, in comparison its income. Fiscal deficit of the government is the difference between what it earns and what it spends. This increase in fiscal deficit was financed through increased borrowing.
In fact, buried in the
second chapter of the Economic Survey of 2013-2014 is a very interesting data point. In 2012-2013, the household financial savings amounted to 7.1% of the GDP. The government borrowing stood at 7% of the GDP. A similar comparison for 2013-2014 is not available yet. Nevertheless, it would be safe to assume that it won’t be materially different from the 2012-2013 comparison.
The conclusion that one can draw from this is that entire household financial savings were used up to fund the fiscal deficit. This is also reflected in the
following table from the Economic Survey.
average cost of borrowing
As the government borrowed more and more, eating up into the household financial savings, the cost of its borrowing also went up. In 2009-10, the average cost of borrowing stood at 7.5%. By 2013-2014, this number had shot up to 8.3%.
Lending to the government is the safest form of lending. Hence, the rate of interest that the government pays on its borrowing becomes the benchmark for all other kind of loans. Also, with greater borrowing, it left a lower amount of money available for others outside the government to borrow. As the
Economic Survey pointed out “In recent years, with a decline in the savings rate and an enlarged fiscal deficit, the external capital from outside the firm, available to the private sector has declined.”
So, with the government paying a higher rate of interest on its debt, and not enough money going around for others (which included banks) to borrow, it isn’t surprising that you and I had higher EMIs to pay.
To cut a long story short, if interest rates need to come down, the government needs to borrow less. If the government has to borrow less, it needs to spend less or try and increase its income. If this happens, there will be more money going around for everyone else to borrow, and will lead to a fall in interest rates.
Unless these things happen, any call by the finance minister asking the RBI to cut interest rates needs to be taken with a pinch of salt. The RBI may decide to humour the finance minister and go ahead and cut the repo rate (the rate at which it lends to banks). Nevertheless, any material fall in interest rates will happen only once the government is able to make serious efforts towards curtailing the fiscal deficit.
And the next time you hear Jaitley asking the RBI to cut interest rates, remember, he is trying to do a Chidambaram on us.

The article originally appeared on on August 23, 2014

Act now: Arun Jaitley needs to use his lucky streak to push through reforms


Fostering Public Leadership - World Economic Forum - India Economic Summit 2010

Napoleon Bonaparte once said “I know he’s a good general, but is he lucky?”
Luck is an essential part of politics and lucky governments tend to do better than plain and simple skilful governments. As ex cricketer turned writer Ed Smith writes in
Luck—A Fresh Look At Fortune “Academic research supports the idea that voters often can’t tell the difference between lucky governments and skilful ones.” In fact, research carried out by Australian economist Andrew Leigh suggests that “it is more important to be a lucky government than an effective government”. Leigh studied nearly 268 elections between 1978 and 1999.
As Smith writes regarding this study “A government’s average rate of re-election is 57 per cent…Even superb economic management, outpacing world growth by 1 percentage point, only raises the Prime Minister or President’s likelihood of re-election from 57 per cent to 60 per cent. An economically competent government gets an electoral boost of 3 per cent; a lucky one gets a leg up of 7 per cent [i.e.]… the government’s re-election rate jumps to a 64 per cent likelihood.”
Hence, if a government has “luck” going for it, it is important that it does not throw it away and takes some decisions that help it over the long term.
Narendra Modi took over as the Prime Minister of India on May 26, 2014. Things were looking difficult on the economic front and a poor monsoon was being predicted.
The fiscal deficit of the Indian government as on May 31, 2014, stood at Rs 2,40,837 crore. This meant that during the first two months of the financial year (April 2014 to March 2015), the fiscal deficit had already reached 45.6% of the annual target. By June 30, 2014, the fiscal deficit for the first three months of the financial year had reached 56.1% of the annual target. Fiscal deficit is the difference between what a government earns and what it spends.
Typically the income of the government is back loaded, given that its earnings are the highest during the last three months of the financial year. But a large part of the expenditure of the government is more or less spread out through the financial year. Given this, the fiscal deficit typically tends to be high during the first few months of the year.
Nevertheless, even after taking this factor into account, a fiscal deficit of 56.1% of the annual target during the first three months of the year was a very high number. During the last financial year the number had stood at 48.4%. This was largely a reflection of the fiscal mess that the Congress led UPA government had left the country in.
Over and above this, the initial monsoon numbers were not very encouraging. The India Meteorological Department(IMD) in a press release dated July 11, 2014, pointed out that the“rainfall activity was deficient/scanty over the country as a whole” for the period between July 3 and July 9, 2014. This deficiency of rainfall was at 41% of the long period average.” This delay in rainfall had led to a 51% annual decline in the sowing of kharif crops.
These two factors which could have undermined the performance of the new Modi government greatly, have changed for the good in the recent past.
One of the major reasons for a high fiscal deficit has been the fact that oil marketing companies have been incurring huge “under-recoveries” on the sale of diesel, cooking gas and kerosene. The government in turn has had to compensate the OMCs for these “under-recoveries”. This pushed up the government expenditure and hence, the fiscal deficit.
The good news is that oil prices have been falling.
The international crude oil price of Indian Basket of oil as computed by Petroleum Planning and Analysis Cell (PPAC) fell to US$ 99.94 per barrel on 19.08.2014. Two months earlier on June 19, the price of the Indian basket of oil had touched $111.94 per barrel.
This fall in oil prices has ensured that
the under-recoveries of the OMCs for the financial year 2014-15 are projected to be Rs 91,665 crore while the figure was Rs 1,39,869 crore in the 2013-14. If this trend continues the government is likely to incur a lower expenditure for compensating the OMCs for their under-recoveries. And this will also have an impact on the fiscal deficit.
The government has also been lucky on the monsoon front. As the IMD said in a release dated August 15, 2014, “For the country as a whole, cumulative rainfall during this year’s monsoon has so far upto 13 August been 18% below the Long Period Average (LPA).” This is way lower than the deficiency in early July. A bad monsoon could have created several economic challenges for the government. Thankfully, the scenario did not turn out to be as bad it was initially expected to be. Hence, it is safe to conclude that the Modi government has indeed been very lucky on the economic front during its first 90 days.
Given this, the government should use this lucky streak to push in some reform on the pricing of petroleum products. With oil prices falling, this would be a good time to decontrol diesel prices. Over and above this , this would be a good time to limit subsidies on kerosene and cooking gas as well.
As has been suggested here earlier, this might be a good time to start raising cooking gas prices by Rs 10 per cylinder every month, in order to eliminate the subsidy on it, over a period of time.
What might further work for the Modi government is the fact that oil prices might continue to fall in the years to come. As Crisil Research points out in a report titled
Falling crude, LNG, coal prices huge positive for India dated August 2014 “Over the next five years, we expect global oil demand to increase by 4-4.5 m
illion barrels per day (mbpd).
However, crude oil supply is expected to increase by 8-10 mbpd. This, we believe, will bring down prices from current levels.”
This should help the government control its fiscal deficit. If the government is able to lower its fiscal deficit, it will have to borrow less and that will eventually lead to lower interest rates. If the government borrows less, there will be more money to lend to others. At lower interest rates consumers are more likely to borrow and spend. This will have a positive impact on economic growth.
The Modi government has luck going for it right now, but this may or may not last. Hence, it is important that it makes the best of it, and pushes in some decisions which will work well for the economy in the long run.

The article originally appeared on on August 22, 2014 
(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Labour reforms: What Modi’s ‘Make in India’ call can learn from the Bolsheviks

narendra_modiVivek Kaul

I was just joking to a friend during the course of a discussion in early August that soon we will start talking about the Rajasthan model of development. And that seems to have happened sooner than I had estimated.
Business Standard in an editorial titled The Rajasthan Model today (August 19,2014) writes that Vasundra Raje, the chief minister of Rajasthan “is single-handedly creating a “Rajasthan model” of development.” This model, the paper goes on to write, differs from other models like the “Bihar model” and the “Gujarat model” in putting “liberal economic reform at the centre of the development strategy”.
Labour reforms are a key part of what seems to be emerging as the “Rajasthan model”. It is well worth mentioning here that the size of the organised work force in India is only around 15.8% of the total workforce (Source:
What’s Holding Back India’s Labour Market Environment? Part 1, Morgan Stanley, August 12, 2014). And this work force which is highly unionised and tends to punch over its weight, has held back the growth of the Indian manufacturing sector.
Before we go any further let’s go back a little in history. Nicholas II, the last Tsar of Russia abdicated(i.e. relinquished) his throne in early 1917, after a massive revolt broke out. As Alan Beattie writes in
False Economy—A Surprising Economic History of the World “Undermined by Russia’s dismal military failure on the Eastern Front of the First World War, the Tsar abdicated in February 1917 after a massive rolling revolt grew in Petrograd [known as St Petersburg till 1914, changed to Leningrad in 1924 and back to St Petersburg in 1991]…Starting with industrial workers, the rebellion then progressed to thousands of mutinying soldiers. This was a popular uprising but not a communist uprising.”
In fact, the communists were caught napping around the time of the popular uprising. “The ‘Bolshevik’ political grouping led by Vladimir Lenin and Leon Trotsky, which would eight months later take control of the country and become the Communist Party of the Soviet Union, was taken by surprise. Many of its key members were not even in Russia at the time, giving rise to the faintly comic spectacle of a bunch of revolutionaries hurrying home to catch up with a revolution,” writes Beattie.
Over and above that the Bolsheviks did not have support of people across the length and breadth of Russia. The Socialist Revolutionaries had that support. Nevertheless the Bolsheviks still managed to seize power. What worked in favour of the Bolsheviks was their “increasing control over Petrograd’s ‘soviet’, or workers’ organization, through the months that followed.”
As Beattie writes “They [i.e. the Bolsheviks] watched their rivals punch themselves out and exhaust local popular support by trying to run a provisional government after the February revolution. Amid mounting discontent with the [First World] war, which was still continuing, the Bolsheviks’ October revolution was a special forces assassination of a tottering government, not a pitched battle against the commanding heights of a functioning state.”
In fact, more people were accidentally killed when director Sergei Eisenstein was making a movie on the October revolution than were killed “during the event itself”. The Bolsheviks managed to punch way above their weight because their support was concentrated around Petrograd where the seat of power was, in comparison, the support of the Socialist Revolutionaries was spread across Russia’s vast interior. And given this, as Beattie writes “The Bolsheviks found it amazingly easy simply to dismiss the Constituent Assembly which was supposed to take power and in which the Socialist Revolutionaries had a clear majority, and take control themselves.”
The Indian labour market is similarly placed. The organised labour tends to punch above its weight like the Bolsheviks, primarily because labour laws are rigged in its favour. It is also unionised and the unions ensure that any prospect of labour reform which is beneficial to the overall labour force and not to organised labour, is vociferously opposed.

If genuine labour reform has to happen, it is this ability of the organised labour force to punch above its weight, that needs to be controlled. Let’s take the case of the Industrial Disputes Act 1947. According to this Act any factory employing more than 100 workers needs the permission of the state government, if it decides to lay off a worker. The permission to lay off employees if the situation demands so is difficult to get.
This has led to a situation where firms continue to remain small even when they have an opportunity to grow. It also explains why a country like Bangaldesh manages to export more apparel than India.
Economist Arvind Panagariya in an open letter to Rahul Gandhi in November 2013 wrote that “India exported less apparel than much smaller Bangaldesh and less than one-tenth that by China.” Most Indian apparel firms start small and continue to remain small.
This leads to a situation where they cannot benefit from the economies of scale and hence, cannot compete in the export market. In their book 
India’s Tryst with Destiny, Jagdish Bhagwati and Panagariya point out that 92.4% of the workers in this sector work with small firms which have forty-nine or less workers. Now compare this to China where large and medium firms make up around 87.7% of the emplo
yment in the apparel sector.
Given this, the smallness of the Indian apparel sector, the economies of scale never come into play.
As Panagariya wrote in the Business Standard recently “It is astonishing that Indian laws view a factory of 100 workers as a large, corporate firm. In the United States, any firm with fewer than 250 workers is classified as “small”, while a firm with 250 to 500 workers is classified as “medium”. Even the World Bank, a development institution, defines a firm with 50 to 300 workers as being of medium size, and not large.” This ensures that a firm that starts small, continues to remain small. And this ultimately has an impact on job creation. As Chetan Ahya and Upasana Chachra of Morgan Stanley point out in a research note titled What’s Holding Back India’s Labour Market Environment? Part 1 “All of these ultimately lead to lower job growth. Indeed, the manufacturing sector accounts for only 12.9% of GDP in India (2013) vs. 31.8% in China (as of 2011), 23.7% in Indonesia, 20.5% in the Philippines, and 14.8% in Brazil.”
History tells us that the creation of a strong and robust manufacturing sector is very important for robust economic growth. But in India’s case the system as it stands is rigged in favour of the incumbent large firms and organised labour.
The Industrial Disputes Act also requires the firm to take consent from the workers before modifying an existing job description. “This creates additional rigidities in the use of labour in response to changing market conditions,” write Ahya and Chachra.
Another tricky point is the fact that only 10% of the workforce is required to start a trade union. As the Trade Unions (Amendment) Act, 2001 points out “No trade union of workmen shall be registered unless at least 10% or 100, whichever is less, subject to a minimum of 7 workmen engaged or employed in the establishment or industry.”
This leads to a situation where there is “scope for multiple trade unions in a single factory”. As Ahya and Chachra point out in a note titled
What’s Holding Back India’s Labour Market Environment? Part II dated August 18, 2014, “A company with 700 workers can have 70 trade unions. In most other countries, the requirements for minimum membership for trade unions to be recognized are higher than those in India, reducing the scope for multiplicity of unions.”
In Pakistan at least 20% of the workmen are required for the trade union to be registered. In Bangaldesh the number stands at 30%. Sri Lanka requires a minimum of seven employees for a trade union, but collective bargaining is only allowed if the trade union represents a minimum of 40% of the total employees.
Then there are multiplicity of laws to cope up with. This is primarily because labour law is a concurrent subject and both the central and state governments can legislate on it. As Ahya and Chachra point out “This has resulted in multiplicity of laws, at times with overlapping jurisdictions. Currently there are 44 central laws and about 160 state laws on the subject (ILO, 2013).” It is not rocket science to conclude that it is very difficult for any entrepreneur to follow all these laws.
As Reuters columnist Andy Mukherjee wrote in a recent column “As a textile businessman recently tweeted, if small and mid-sized companies in India followed all existing rules, “your underwear will cost what your jeans cost today”.”
The Rajasthan government has begun chipping away at these laws. One of the changes proposed is that a firm needs to approach the state government when laying off workers only if it employes three hundred or more workers. These are state level changes being made to central government regulation, and hence, they need the assent of the president.
But Rajasthan is just a small part of the overall puzzle. Labour market reforms are needed at the central government level especially if Narendra Modi’s recent “Make in India” call needs to be taken seriously.
Currently, China accounts for 17.5% of the total global manufacturing exports. India in comparison stands only at 1.6%. Labour markets reforms at the central government level are needed if that number has to go up.

The article originally appeared on on August 20, 2014
(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)