This Labour Law Reform Can Help Create Low-Skilled Jobs That India Needs



One of the fundamental points that Indian policymakers and politicians haven’t understood since independence is that India needs to encourage manufacturing that employs low skilled and unskilled workers.

The public sector enterprises that were launched after independence concentrated on skilled manufacturing, and in the process did not create much employment. The Make in India programme launched by Narendra Modi, made the same mistake initially.

As Ruchir Sharma writes in The Rise and Fall of Nations—Ten Rules of Change in the Post Crisis World: “After Narendra Modi became prime minister in 2014, he launched a “Make in India” campaign. But there was still a basic problem: His aides, at least initially, were not talking about building simple factories first, in industries like toys or textiles, of the kind that can employ many millions of people and jump-start an industrial middle class. They were talking about advanced factories in industries like solar-powered appliances and military weapons, which require the highly skilled workers not yet found in abundance among India’s vast population of rural underemployed. India was trying to skip over a step in the development process, not for the first time.”

On June 22, 2016, the Modi government made a small but very important change in the labour laws that govern the textile sector in India. As the press release put out by the Ministry of Textiles pointed out: “Looking to the seasonal nature of the industry, fixed term employment shall be introduced for the garment sector. A fixed term workman will be considered at par with permanent workman in terms of working hours, wages, allowanced and other statutory dues.

The fact that the move has come nearly two years after Modi became the prime minister tells us that the Indian establishment still remains enamored by the idea of skilled manufacturing.

Nevertheless, this a very important move. As Amrit Amirapu and Arvind Subramanian write in a research paper titled Manufacturing or Services? An Indian Illustration of a Development Dilemma: “Historically, there have been three modes of escape from under-development: geology, geography, and “jeans” (code for low-skilled manufacturing).”

In fact, the East Asian countries that escaped poverty did so by jumping on to the jeans or the low-skilled manufacturing bandwagon. As Amirapu and Subramanian write: “In the early stages of their success, East Asian countries relied on relatively low-skilled manufacturing, typically textiles and clothing (China, Thailand, Indonesia, Malaysia etc), to motor economic growth. Later on they diversified into more sophisticated manufacturing but “jeans” offered the vehicle for prosperity early on. No country has escaped from underdevelopment using relatively skill-intensive activities as the launching pad for sustained growth as India seems to be attempting.”

There is no reason that India should have been attempting anything else. But such was the marketing spin, first around public sector enterprises and then around information technology, that manufacturing that employs low-skilled workers was sort of looked down upon. But at the end of the day public sector enterprises and information technology needed skilled workers and given that they could create only so many jobs. And this was nowhere near the number of jobs that India needs.

Most estimates now suggest that India needs to create around one million jobs every month, for fresh individuals who are entering the workforce.

The textiles sector has the ability to create many low-skilled jobs and that gives it a tremendous fit with India’s natural competitive advantage i.e. low-skilled labour. In fact, as Arvind Subramanian and Rashmi Verma point out in a recent column in The Indian Express: “Every unit of investment in clothing generates 12 times as many jobs as that in autos and nearly 30 times that in steel.”

But the irony is that when comes to textiles, even Bangladesh is doing better than India. As Mihir S. Sharma writes in Restart—The Last Chance for the Indian Economy: “Before the expansion of trade thanks to new international rules in the twenty-first century, India made $10 billion from textile exports, and Bangladesh $8 billion. Today India makes $12 billion—and Bangladesh $21 billion.”

So what happened here? The textile industry, explains Sharma, needs to turnaround big orders quickly and efficiently. This means that really long assembly lines are needed. As he writes: “100 people can sequentially work to make a pair of trousers in least time. In Bangladesh, the average number of people in a factory is between 300 and 400; in the South Indian textiles hub of Tirupur, it’s around 50.”

India has very few factories that actually employ more than 500 people.[1] Now compare that with China. The largest garment manufacturing factories in China have a workforce of 30,000. In fact, even Bangladesh has garment manufacturing units with 10,000 workers. In India, the numbers rarely go beyond 1,000 workers. In fact, in India, the garment manufacturers prefer to split their workforce into many units, instead of employing a lot of workers at one unit. This basically comes from the fear of not being able to retrench workers.[2]

In fact, Subramanian and Verma make a similar point in their column in The Indian Express where they say that “an estimated 78 per cent of firms in India employ less than 50 workers with 10 per cent employing more than 500 workers.” “In China, the comparable numbers are about 15 and 28, per cent respectively.”

This leads to a situation where the Indian companies operating in the textiles sector do not have the economies of scale required to compete globally. One of the reasons the Indian companies cannot compete globally is because they can’t hire and fire workers according to the demand for their products.

The government has now introduced the concept of the fixed term contract which allows textile companies to hire workers for a fixed period, instead of offering permanent employment. Up until now companies had been hiring contract workers, who in many cases are not paid as much as permanent workers even though the work being done is exactly the same. The fixed term contracts will also allow companies the flexibility to hire according to their demand. And they won’t have to keep workers on the rolls even when they don’t actually need them.

In fact, this is one factor which has led to many textile companies not taking on more business in the past because once they had hired workers, they wouldn’t have been able to let them go.

As the Eleventh Five Year Plan (2007-2012) pointed out in this context: “Chapter V-B of the Industrial Disputes Act 1947 does create a psychological block in entrepreneurs against establishing new enterprises with a large workforce and impede attainment of economies of scale. As a result, firms prefer to set up enterprises with a smaller permanent workforce, and these enterprises are unable to cope with large size orders from retail market chains in garments and footwear for instance.”

Chapter V-B of the Industrial Disputes Act essentially makes it compulsory for a firm with more than 100 workers, to take the permission of the local government before retrenching workers. This complicates the entire scenario. In the recent past, this limit has been increased to 300 workers in the states of Rajasthan and Madhya Pradesh.

In case of garment manufacturing, a lot of demand is basically export demand. This means that the demand tends to pick sometime before Christmas and New Year, and then it falls. In an ideal scenario this would mean hiring workers just a few months before Christmas and then letting them go, after the garments have been made and shipped. The fixed term contracts will allow companies to do just that, by hiring workers through the formal job market, instead of working through contractors, and short-changing the workers.

The fixed term contracts will encourage textile companies to hire more workers. Nevertheless, they will still think going beyond 100 workers (or 300 workers in some cases) because then the Chapter V-B of the Industrial Disputes Act, 1947, is likely to kick-in.

[1] Annual Survey of Industries 2013-2014

[2] A.Hoda and D.K.Rai, Labour Regulations and Growth of Manufacturing and Employment in India: Balancing Protection and Flexibility, Written for the World Bank, ICRIER, 2015

The column originally appeared in Vivek Kaul’s Diary on July 5, 2016

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)