The crisis of the Indian workplace

SIDDHARTH VARADARAJAN

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DOES India need to reform the laws, regulations and administrative arrangements that govern its factories, mines and other non-agricultural workplaces? The answer is yes, but not for the reasons cited by those who are clamouring the loudest for change.

Ever since manufacturing hit a plateau towards the end of Manmohan Singh’s tenure as prime minister, Indian corporates and their lobbying arms like the Confederation of Indian Industry, FICCI and Assocham have tended to blame the industrial slowdown on government-induced rigidities in the market for labour, land and natural resources. In their telling, the Congress party’s misplaced zeal for protecting the rights of workers, farmers, forest dwellers and the environment made it impossible for Indian companies to invest in and expand their enterprises.

In a piece for the April 2014 edition of Seminar, ‘The Cult of Cronyism’, I had argued how the anger and impatience of the corporate sector led India’s richest businessmen to defect virtually en masse to the Narendra Modi camp in the run up to last year’s general election. They generously funded his campaign and helped sell the idea to the Indian voter – and indeed to global capital – that Modi could be counted upon to dismantle these so-called impediments to growth.

One year later, it is touching to see how well placed the faith of the Indian business community really was. Environmental norms which inconvenience companies looking to set up mining or manufacturing projects in forest land or ecologically sensitive regions have been diluted. The Land Acquisition, Resettlement and Rehabilitation Act, 2013 – which had replaced the more draconian and business friendly 1896 law – has also been amended to accommodate the demands of the corporate sector for speedier and cheaper acquisition.

When it comes to labour reform, however, the Modi government has been more cautious. In essence, what the Indian corporate sector wants is the right to lay off workers at will, based on technology, market conditions and profitability without prior approval from the government as mandated by the Industrial Disputes Act (IDA). The ‘policy brief’ issued by the CII soon after Narendra Modi became prime minister contains a typical summary of this demand: ‘[T]here is a need to enable industry to have necessary flexibility in manpower deployment as per their needs. The new Government has proactively addressed some of these issues with the introduction of amendments in the Factories Act regarding working hours, allowing women to work in night shifts with adequate safeguards etc. Most importantly, industry should have the flexibility to downsize without prior permission up to a higher cut off limit (which is only 100 workers as of now) in lieu of higher severance benefit and re-introduction of fixed term employment’1 (emphasis added).

 

Curiously, the same statement put forward a second demand – legalization of contract labour – despite the fact that once the right to hire and fire is granted, the ‘flexibility’ rationale for not hiring more permanent workers ought no longer to apply. ‘Contract Labour has become an integral part of today’s manufacturing and services sectors and all uncertainties about regulation may be removed by renaming the act as the Contract Labour (Regulation) Act instead of the Contract Labour (Abolition and Regulation) Act,’ the CII said. ‘We feel that the use of contract labour would enhance employment as this allows the engagement of a vast number of labour (sic) which would not have been possible otherwise.’

I have flagged this issue at the outset because it provides a clue to the question of what has been driving the employment profile of the average Indian enterprise, especially the growing bias towards hiring workers on a contract or even casual basis. Is it the fear of not having the freedom to down-size when times are hard? Or is it the unwillingness to provide workers a reasonable share of the value added in the form of wages and relevant social security obligations like provident fund, gratuity, bonus, medical insurance (via the ESIC), sick leave and so on?

 

While the central government has so far only focused on soft labour reforms such as the cutting down of red tape for enterprises, the BJP governments in Rajasthan and Madhya Pradesh are testing the political waters with more dramatic sounding changes. Both states have now granted factories employing up to 300 workers the freedom to retrench or shut down without prior state approval. The response of the opposition Congress, as well as of the trade union movement, has been somewhat tepid, mainly because the new rule is unlikely to make much difference on the ground. The dirty secret about the Indian organized sector is this: thanks to the growth of contract labour and declining government and even judicial interest in the enforcement of labour laws, most companies have over the years managed to operate with a fairly flexible workforce.

This is the reason why both data and anecdotal evidence do not support the conventional economic argument that legal rigidities on the firing of workers will affect both the quantum of employment and the growth prospects of industry in a strictly linear fashion. In a 2006 paper, Aditya Bhattacharjea has refuted the claim that states which adopted a more stringent version of the IDA fared relatively poorly on the manufacturing front compared to states that gave companies more latitude to retrench labour.2

Looking beyond the inter-state macroeconomic picture to enterprise-level survey data, Bhattacharjea cites a ‘large-scale study covering 1300 firms [which] looked at labour flexibility and employment in nine industries in ten states over the period 1991-98. [The survey] found that most firms had increased employment during this period, but more than a quarter had decreased it. Although firms employing less than 100 workers increased their employment more than larger firms, possibly indicating a threshold effect of Chapter V-B (of the IDA, allowing smaller firms to freely retrench), the difference was insignificant for manual workers. On the other hand, as compared to these smaller firms, a larger proportion of the bigger firms reported a decrease in employment, and this proportion increased with the size of firm. The inference was that these firms were not being deterred from hiring and firing, despite the IDA provisions remaining undiluted3 (emphasis added). In his 2007 survey of labour issues in India, R. Nagaraj notes how the organized sector ‘shed 1.8 million (6.3%) jobs, mostly in manufacturing (1.2 million jobs or 18%)’ between 1997 and 2004.4 Numbers like these are hardly evidence of the lack of labour flexibility.

While basic microeconomic theory tells us that official regulations such as those envisaged by the IDA or the Factories Act would tend to reduce the optimum size and status of an enterprise’s workforce, the crisis of the Indian workplace is not the product of statute. Rather, it is the outcome of the political economy of ‘actually existing capitalism’ in India – a sub-optimal equilibrium that reflects the presence of a vast reserve of surplus labour that profit-oriented modern manufacturing with its reliance on capital-intensive technology is unable to harness, the interest of rent-seeking politicians and officials, and the balance of power between capital and labour.

 

There are eight distinct but interconnected aspects of the crisis I am speaking of. First is the absence of any real social security protection for the peasants, workers and petit-bourgeoisie. NREGA was intended to throw the rural poor a lifeline but its implementation has been erratic at the best of times. Permanent workers in the formal sector (and government employees) enjoy a modicum of protection because of PF but they constitute barely 20% of India’s non-agricultural work force. The elderly have no old-age pension.

This lack of social security brings us to the second aspect of the work-place crisis. In the face of what Amartya Sen calls an ‘endowment loss’ that is triggered by some act of God or man – land, a homestead, some income generating asset, good health – the average Indian must end up working no matter how low the wage and how terrible the conditions. If he doesn’t, he and his family will not survive. That is why India has an unemployment rate of less than 5% that is low by capitalist standards; but this also means the vast majority of the employed have poor quality jobs. When it comes to young workers, of course, the unemployment rate is close to 10%.

Despite the rapid growth of national income witnessed in the first decade of this century, jobs of any quality have not grown at a commensurate rate, not by a long shot. This is the third aspect of India’s workplace crisis – the declining employment elasticity of output. According to an Economic Times analysis, ‘Companies are preferring to employ more capital instead of labour while producing goods, lending credence to the belief that India’s growth in the post-liberalization era has failed to create more jobs. The country’s worker-to-fixed-capital ratio in the registered manufacturing sector has declined from 10.9 in 1990-91 to 3.2 in 2009-10… Growth in employment, too, has slowed from 2.61% in 1993-94 to 1.02% in 2009-10, according to the five-yearly NSSO survey.’5

 

Fourth is the declining quality of jobs in the formal sector with the category of contract work growing much faster than permanent employment. ‘There has been increasing informalization of the workforce,’ the India Labour and Employment Report 2014 notes. ‘The transfer of workers from agriculture to non-agriculture has been slow, with some acceleration in recent years, but most of the employment generated has been informal and insecure. To illustrate, the percentage share of contract workers in the organized manufacturing sector has increased from 13% in 1995, to 34% in 2011. The growth of regular, protected jobs is also slow.’6 In a recent paper rich with ethnographic accounts about the hiring practices of many large factories around the National Capital Region, Orlanda Ruthven has poignantly captured the difficulty of placing young trainees and the extent to which ‘the ‘permanent worker’ is no longer an acceptable or viable category’, even at multinationals.7

The fifth element of the crisis of the Indian workplace is the declining role of collective bargaining and trade unions, especially political unionism. The percentage of organized sector workers who are unionized had fallen from 45% in the late 1970s to 30% a decade later.8 The situation has further worsened since. Notwithstanding the neo-liberal argument of trade unions using labour market rigidities to further the interest of their relatively privileged members, the fact is that union membership is falling in the organized sector.9 In many companies, attempts by workers to form independent trade unions have been put down with an iron hand.

 

Sixth, thanks to the this weakening of working class organizations at the workplace, the share of profits in gross value added and gross output in the private corporate sector has been steadily rising even as the share of wages has fallen. The deterioration in India’s Gini Coefficient and Palma Index (which measures the ratio of the income share of the richest 10% of the population to the income share of the bottom 40%) is largely propelled by the higher and higher returns to capital.

The shifting correlation of forces between capital and labour has led to the seventh aspect of the labour crisis: poor enforcement of laws like the Factories Act and IDA that were designed to help workers. The percentage of factories not registered under the Factories Act increased from 1980 to 1990 from 53% to 58%10 and will likely have risen further after liberalization because of the growing indifference of ruling parties, state governments and even the courts to the problems of workers. Mechanisms for workplace arbitration are largely dysfunctional. Legal remedies for unfair dismissal can take years on end. On the flip side, of course, officials are not averse to turning the complexity of regulations covering labour into an opportunity for graft and corruption. Either way, however, the worker loses.

The eighth aspect of India’s workplace crisis is the regressive attitude of management to labour. That Indian elites can be rigidly hierarchical is well known, but the imposition of Fordist Brahmanism on young workers can sometimes have disastrous consequences, as recent events at the Maruti factory in Manesar, Haryana, have shown.11

 

How can this crisis be addressed? Not by an amendment to this or that law, surely, and certainly not by one-sided changes. Throughout the capitalist world, employers have the right to reduce the size of their workforce if they so desire. Indian employers are so far and in formal terms an exception, but over the years, most have found ways to circumvent the IDA’s rules and do exactly what they please. To the extent that hiring contract workers involves transaction costs – greater expenditure on training, surveillance and security and lower productivity – which are not normally associated with permanent workers, a relaxation of the IDA to make it easier to fire employees might lead to an increase in permanent employment.

On the other hand, capital intensity is reducing the skill requirements for many manufacturing jobs, thus lowering the transaction costs of relying on contractors to populate an assembly line. On top of that if employers are further looking to avoid making the social security payments that come with hiring permanent workers, then the introduction of a ‘hire and fire’ policy might end up worsening the job situation even further.

 

What the Indian corporate sector needs to realize is that a new social contract for the workplace is the only way to end India’s job crisis. If Indian firms want the same flexibility that their counterparts in advanced capitalist countries enjoy, then they must also be prepared to embrace international best practices as far as providing social protection, a generous severance package for retrenched workers based on length of service and past earnings, and a conducive, open and enabling working environment are concerned. Reversing the imbalance between the share of wages and profits in gross output is also essential. In addition, workers must have the right to set up an independent trade union, to engage in collective bargaining and to go on strike should negotiations be deadlocked.

So far, at least, there is no evidence that the Indian corporate sector, or the Modi government, is interested in labour reforms that balance out the rights and obligations of each side. But without such a package, the dreams of ‘Make in India’ and of generating millions of new jobs will likely remain unrealized.

 

* I am grateful to my colleagues at the Centre for Public Affairs and Critical Theory, Shiv Nadar University – where I was a Senior Fellow in 2014-2015 – and the outside experts who interacted with us for many hours of stimulating discussion on the issue of labour reforms.

Footnotes:

1. CII Policy Watch, Focus: Labour Law Reforms, September 2014. https://www. mycii.in/KmResourceApplication/42580.PolicyWatchLabourLawReforms.pdf

2. Aditya Bhattacharjea, ‘Labour Market Regulation and Industrial Performance in India – A Critical Review of the Empirical Evidence.’ Delhi School of Economics Working Paper, 2006.http://www.cdedse.org/pdf/work141.pdf

3. Ibid., citing L. Deshpande, A. Sharma, A. Karan, and S. Sarkar, Liberalisation and Labour: Labour Flexibility in Indian Manufacturing. Institute for Human Development, New Delhi.

4. R. Nagaraj, ‘Labour Market in India: Current Concerns and Policy Responses’. Paper presented at OECD seminar on Labour Markets in Brazil, China and India, 28 March 2007. http://www.oecd.org/employment/emp/38355655.pdf

5. Smriti Seth, ‘Flip Side of Economic Growth: Cos Prefer More Capital Over Labour, Create Less Jobs’, Economic Times, 4 February 2012. http://articles.economictimes. indiatimes.com/2012-02-04/news/31024793_1_labour-intensive-labour-productivity-manufacturing-sector

6. India Labour and Employment Report 2014. Institute for Human Development, New Delhi, 2014.

7. Orlanda Ruthven, ‘Getting Dividend From Demography: Skills Policy and Labour Management in Contemporary Indian Industry.’ Unpublished paper presented to SOAS seminar, London, January 2015.

8. R. Nagaraj, ‘Trade and Labour Market Linkages in India: Evidence and Issues.’ East-West Center Working Paper, 2002.https://scholarspace.manoa.hawaii.edu/bitstream/handle/10125/3732/ECONwp050.pdf? sequence=1

9. Pong-SulAhn, The Growth and Decline of Political Unionism in India. ILO, 2010.

10. R. Nagaraj, op cit., supra 8.

11. See Aman Sethi, ‘Gone in 50 Seconds: How the Speeding Up of its Assembly Line at Manesar Brought Maruti to a Screeching Halt’, The Hindu, 6 November 2011.

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