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Labour-rich, yet Economically Poor?

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By Seppi Sebastian

With the world’s fourth-largest economy and with the strongest potential to be the third largest over the next decades, India is poised to take a leadership role in international business. In fact, with an impressive 7.4 percent economic growth rate recorded in the second quarter of 2015-16, coupled with the Chinese economy slowing down to its lowest in twenty-five years, India is at a unique advantage. Here, India’s manufacturing sector, with the right impetus, can become the powerhouse that drives the world economy. However, India has unfortunately found itself in a paradoxical situation, one that despite lower wages than the global average, India still does not identify as a global manufacturing hub.

However, India has unfortunately found itself  in a paradoxical situation, one that despite lower wages than the global average, India still does not identify as a global manufacturing hub.

On the other hand, since 2001, India has had one of the fastest growing service sectors in the world. With an annual growth rate of 9 percent, this sector has contributed to 57 percent of India’s GDP in 2012-13. The industrial sector meanwhile has only recorded a negligible increase and contributes to a minimal 26 percent of GDP. Economic analysts and industry, in general, consider this disparity to be an outcome of India’s rigid laws, high rates of corruption and excessively complex worker-centric labour regulations, aside from low labour productivity.

Despite the ample availability of human capital, India has not been able to optimise  it for industrial development.

According to the World Economic Forum’s Human Capital Report 2013, out of 122 countries, India was ranked 78th on overall human capital status, 63rd in education and 112th in health and wellness. It is predicted that the size of India’s workforce will increase up to 249 million between now and 2050 while India’s economic rival China’s is set to decline to 166 million during the same period. To understand this quagmire, where China’s aging workforce can be outpaced by India’s relatively youthful workforce, policy makers have to reflect on the past, the current state of affairs and figure out how the Indian government and industry need to build human resources capacity to meet the varied demands of the future.

A Historical Perspective

To begin with, in the pre-independence period, labour rights, trade unions, and freedom of association were all suppressed. As a result, labour activism became part of the civil disobedience and unrest. Post-independence Indian labour law was so closely linked to the Indian independence movement, that the then newly framed Constitution of India in 1950, included fundamental labour rights, such as the right to join and take action in a trade union, the principle of equality at work and the aspiration of creating a living wage with decent working conditions. Despite several decades of economic progress, labour laws enshrined in the constitution have not largely been amended nor reformed over the years, making them archaic to contemporary businesses and ways of working in a technology-centric world.

Indian labourer | Photo Courtesy: Visual Hunt

Indian labourer | Photo Courtesy: Visual Hunt

While laws are one thing, the productivity of labour is also another cause for concern. Studies conducted over the years have shown that India is affected by low productivity (defined as output per employee) of labour compared to other developing nation.

Studies conducted over the years have shown that India is affected by low productivity (defined as output per employee) of labour compared to other developing nation.

Perhaps this mood was reflected when during the early days of offshoring, firms from the developed world (The US and Western Europe) showed greater interest in setting up manufacturing facilities in Thailand, Mexico, China, Vietnam and Philippines rather than in India. It is interesting to note that although these countries (like India) had an equally bad record of bureaucracy and corruption, the labour in these countries was found to be more productive.

Apparently, political ideologies and mindsets are also to be blamed. Studies have indicated that regional mindset has impaired domestic industry and economic growth. For example, in Kerala alone there were nearly 363 “hartals” called by different political parties, between 2005 and 2012, making them days of unproductive labour. Moreover, a political climate dominated by the socialist ideology during the 70’s and 80’s contributed to a mindset which perceived profit making and enterprise a taboo, thereby also laying extra emphasis on worker-centric labour policies. Nevertheless, the current union government is taking an industry-friendly attitude and hopes to transform India into a manufacturing hub over the next years. In fact, as early as 2002, the Second National Commission on Labour suggested the formulation of labour codes similar to those in Russia, Germany, Poland, Hungary and Canada. The existent labour law was recommended to be divided into five broad areas: industrial relations, wages, social security, safety & welfare, and working conditions. Perhaps, the need for labour reforms, although having been discussed over the past decades, now finds a wider acceptance and greater importance.

Regulations that Disincentivise Industrialisation

The Centre for Public Policy Research (CPPR) conducted extensive research and analysis into a plethora of labour-related issues faced by entrepreneurs and industry in India. This study, part of the British High Commission supported a project titled ‘Breaking Business Barriers’ on the ease of doing business in India, found the following critical issues with regard to human resources and its regulation in India. Indian employment and labour matters are under the purview of 45 central government laws and more than 100 state statutes, several of which overlap or, in exceptional cases, contradict.

Indian employment and labour matters are under the purview of 45 central government laws and more than 100 state statutes, several of which overlap or, in exceptional cases, contradict.

Among them, special mention should be made of the Industrial Disputes Act (IDA 1947) which regulates worker retrenchment and closures of manufacturing firms. Although provisioned by law, in reality, such permissions are rarely granted and entrepreneurs face substantial penalties or even prison sentences when workers are terminated illegally. Several studies including a 2008 World Bank study have indicated that India is one of the most rigid labour markets. This rigidity has disincentivised industry from hiring people and expanding production. This rigidity is in turn directly related to antiquated Indian labour laws, many of which are controversial. A case in point being the Industrial Disputes Act (1947) which stipulates that a firm with 100 employees or more cannot close down without government permission. In reality, despite the fact that regulations are intended to improve the welfare of workers, the laws themselves have the opposite effect of curtailing organisational growth by forcing them to circumvent labour laws and remain small.

In reality, despite the fact that regulations are intended to improve the welfare of workers, the laws themselves have the opposite effect of curtailing organisational growth by forcing them to circumvent labour laws and remain small.

Moreover, the organisational need to comply with statutory labour law, multiple inspections and other complexities become costly and tedious, particularly for smaller firms. Under the Factories Act, firms with 10 or more workers and that which use electric power are required to keep records and file regular reports on such matters as overtime work, wages, attendance, sick leave and worker fines. In order to reduce compliance costs, organisations tend to break down their operations into several small separate units, and in the process sideline consolidation and organisational growth.

In order to ensure the kind of labour flexibility that promotes systematization and the collateral benefits that ensue, India should bring down the number of labour laws while simplifying and making them suitable to current industry demands. India’s own experience in this regard shows that states with greater flexibility in working conditions and lower compliance costs tend to have greater worker mobility, higher productivity and employment in the formal manufacturing sector.

Changes in Momentum and Direction

The current union government is proactively deliberating with labour groups and other stakeholders on the Industrial Relations Bill. Meanwhile, state governments such as Maharashtra, Madhya Pradesh and Gujarat have been promoting the proposed amendments. As Labour laws fall in the Concurrent List provided under the Constitution of India, State Governments also have a certain prerogative involving Indian industrial laws. Gujarat has been proactive and has already passed certain amendments in its Legislative Assembly.

The newly proposed Central Industrial Relations Bill may include but are not limited to the following:

  • An amended law which stipulates that factories employing less than 300 workers can be shut down without prior government approval
  • Trade Unions can be formed only if 10 percent of the employees or 100 workers whichever being the least, support the move. Under current law, seven employees can form Unions.
  • Subject to the provision of security by the employer, restrictions on night shifts by women will be removed to facilitate their greater integration into the workforce.
  • Redundant workers to be paid an average salary of 45 days, instead of the 15 days at present.
  • Electronic record keeping replacing existing documentary records and registers with employers.
  • In support of Micro, Small and Medium enterprises, units employing less than 40 staff will be exempted from 14 labour laws. The definition of a factory will be revised, with an increase in the minimum number of employees from 20 to 40 for units operating without power and from 10 to 20 for units operating with power.
  • The increase in overtime limit from the current 50 hours to 100 hours in a quarter.
  • Emphasis on worker health and safety by the provision of personal protective equipment and obligating employers to take precautions against toxins.
  • Eligibility criteria for annual leave entitlement with wages to be reduced from 240 days to 90 days.
  • Employers to provide cafeteria facilities when employing more than 200 workers against the present stipulation of 250 workers. Factories employing 75 or more workers to provide restrooms and lunchrooms against the current norm of 150 workers.
Human Capital

Human Capital Index Ranking 2015 | Photo Courtesy: Pragati

The Way Forward

Laws alone don’t result in a productive workforce; governments, organisations and people themselves need to bring about a change in mindsets.

Further empowering women to enter the workplace and providing additional support to the physically challenged are wanton steps in the direction. In the interim, other Indian states can follow the example set by the Karnataka State Government, and exemptions can be provided, after careful study, along the lines of those given to IT industries from the Standing Order Industrial Employment Act of 1946, which otherwise undermines the flexibility by the employer to determine terms of employment, hours, timing, leave grant, and the implementation of productivity measures. Women can, as a result, be better empowered to work in industrialized settings during night shifts. Meanwhile, people with disabilities are currently provided up to 3 per cent reservation in government and government funded jobs, this figure could go up whilst also ensuring that workplaces are disabled friendly. Overcoming the absence of social security among those in the informal sector would also pave the way for a satisfied, engaged and high performing workforce.

What needs special mention in this discussion  is the ‘demographic dividend’, the 20-25 year advantage that India has, compared to other countries that have an aging workforce. However, despite this advantage, and to utilize available potential, India needs to invest heavily in training its talent. India’s supply of highly skilled professionals is vastly outnumbered by industry demand.

India’s supply of highly skilled professionals is vastly outnumbered by industry demand.

As a result, the government needs to invest in training and capacity building infrastructure, while manufacturing companies need to develop in-house training and skilling programmes as a priority.

In conclusion, the guiding principle for India’s labour reformers should not merely be ring fencing jobs but safeguarding workers through social assistance, re-employment support, (such as those provided in several western nations), skill building and supporting employers to implement continuous employee learning and development programmes.


Seppi Sebastian is an HR Management Consultant for the Centre for Public Policy Research.

This article was originally published on Centre for Public Policy Research

Featured Image Source: Clem Onojeghuo via Unsplash

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