India is poor. Everyone knows that. But it’s also one of the “emerging economies” and “BRICs,”* the elite group of developing countries that are identified as leading the charge into greater wealth and influence for the non-Western world. It is often paired with China as a possible future world leader and as an alternative development model to the West’s. But India never seems to elicit the same excitement or fear that China does. It has lagged behind its Asian neighbor and rival in many ways — population, economy size, standard of living, how long it’s been developing in a liberal economic environment (25 years vs. China’s 38). It gets much less media and political attention than China. And a comparison on the ground of the 2 countries shows that China has better infrastructure, sanitation, and public services and fewer beggars and malnourished people.
So what’s going on here? Basically, India’s extraordinary growth since Manmohan Singh’s reforms in 1991 has not benefited the majority of its people. Their living standards have improved, sure, but not nearly as much as those in the upper echelons of society, who can benefit from the boom in India’s high-tech and services sectors. Most of India’s people still live out on the farms, where many of the big changes that have roiled Indian society in the past few decades have passed them by (or are only trickling in).
This is the first part in a series on what is keeping India back from Chinese-style growth. Although it’s a complex subject with different points of view and analyses, I will look at what are considered to be the most probable reasons. This post focuses on its labor policies.
Labor is a tricky issue for democracies. They’re obliged to take care of their citizens, which means making sure they have a safe, reasonable work environment. If they come off as insensitive or uncaring, they’ll get punished for it by their voters. That means being generous with labor benefits and workplace protection is usually the safest course of action for them… But on the other hand, for developing countries, it’s important to have “repressive labor policies,” meaning low wages, long hours, and minimal work benefits. It might not be an ideal or fun work environment, but it helps catapult poor, uneducated workers into the middle class. This is also how the countries further east in Asia (China, Taiwan, South Korea, Japan, Malaysia) vaulted into a higher income bracket.
Yet India’s labor policies are some of the most generous in the world. Workers get a maximum of 48 hours of work per week, a day of rest at least every 10 days, a paid holiday every 20 days, and sickness, maternity, and disability benefits. Child labor is banned, and women can’t work at nights or for over 9 hours a day. Workplaces have to be kept clean, with drinking water, decent bathrooms, and safety precautions. Big firms need to have canteens, lunchrooms and daycare.
These might sound great, but they also cost firms a lot of money. With neighboring countries offering less expensive labor policies and more flexibility for companies to set their own, most big international firms choose to set up factories there instead.
Generous benefits and workplace regulations are only part of the picture, though. India has long had a vibrant and turbulent union culture. Any company with 7 or more workers must allow them to unionize. Unions are allowed to go on strike, and do so often, with sometimes violent and chaotic results. Any company employing more than 50 workers has to give them 3 weeks’ notice of any change in working conditions, from shift adjustments and new rules to new technology and inter-departmental shuffles. Companies with over 100 workers effectively can’t lay them off, even if their unit has become unproductive, even if the company has to shut down. The 1947 Industrial Disputes Act lets workers file a dispute claim if they feel they have been unjustly fired or even punished at work. Courts are really biased in favor of labor. A classic example is the case of Uttam Nakate, who was fired in 1983 for falling asleep at the forge where he worked and then won an industrial dispute case and 50% of his back wages. The ruling was finally overturned… 22 years later.
These rules are enforced by a jumble of laws from different eras (the 1926 Trade Unions Act, the 1948 Employees’ State Insurance Act, the 1948 Factories Act, the 1952 Employees’ Provident Fund and Miscellaneous Provisions Act, the 1961 Maternity Benefit Act…). It results in an intimidating stack of paperwork for companies to have to file and keep on record. The cost of compliance involves 5 billion sheets of paper a year (for the whole country). It’s also a headache for employers just to keep track of all the regulations. You can’t even comply with them all without violating others! The article above mentions an employer who was threatened with jail in 1 state because he wasn’t paying his workers by check, while another state threatened him with jail unless he paid in cash.
Most employers get around the regulations somehow. Indian businessmen are clever, having worked their way around the forbidding “Import-License-Quota Raj” (regime) that restricted international commerce before the 1980s. Usually they rely on contract laborers, who can be hired and fired more easily and aren’t subject to quite as many regulations or paperwork. But another law lets the national or state governments restrict which companies can use contract labor or even ban it altogether in some sectors. They also can’t work for more than 240 days at a time — they’re supposed to be “temporary” workers.
Given all these obstacles and issues, most international firms just don’t want to open branches or factories in India. Even Indian manufacturers tend to outsource their operations overseas before expanding domestically. It’s also led to a hollowing-out of the middle-sized firm sector; lots of companies keep their employee numbers under 7, for obvious reasons. Although there are a few major companies with hundreds of employees, they tend to be in “capital-intensive” sectors (like cars) that rely more on machinery. Clothes & textiles are the sectors that helped China, South Korea, and Japan grow and develop. They’re very labor-intensive. But they also depend heavily on unpredictable demand cycles, meaning that they need to be able to hire & fire workers easily and change their working conditions quickly. That means that in India, most textile firms are very small-scale (under 10 employees, or again, really under 7), and it means that in the textile sector India is about on the same level in terms of exports as Bangladesh — which is less than an eighth India’s size.
Instead, what India gets is a melange of small firms and people working in the “informal sector,” basically making things in their backyards or on their front steps and giving it to someone who comes by to collect every day. It lets companies skirt the onerous labor regulations, but it also keeps the country poor and underdeveloped. 94% of Indian workers are in this sector of the economy. And since informal occupations aren’t taxed, it keeps government revenue really small too.
Factory labor is grinding, boring, repetitive, sometimes dangerous, and usually mindless. It’s not the kind of thing most people aspire to; they just do their work and punch out at the end of the day. But this is how further East Asia developed in the late 1900s, and how the West developed in the 1800s. Many factory workers are willing to put up with dreary conditions if at least their kids can be guaranteed a brighter future. And the fact of the matter is that the orthodox development strategy remains “move a bunch of poor, uneducated farmers into manufacturing and build up a middle class with money to buy stuff with.” It’s unclear what India can do without this step.
Although Indian politicians remain very labor-friendly, there is a growing realization that some sort of flexibility is necessary for the country as a whole to advance. The Bharatiya Janata Party, in particular, has adopted a pro-growth, pro-business platform, and its leader (and India’s current prime minister), Narendra Modi, wants to expand the business- and private sector-friendly strategy exemplified in his home state of Gujarat to the whole country. But labor unions in India have strong ties to political parties, including the BJP, and few politicians are willing to take a big risk like repealing 70-year-old labor laws. Instead, they opt for personally consulting with the unions and talking them out of aggressive strategies that might harm the company, the local economy, and even India’s reputation as a reliable investment destination in general. But as I said before, a lot of businessmen and tycoons just don’t trust India at this point. If their plants are large, labor can eat up 80% of their costs, and the profits they will get per worker just aren’t high enough to rationally justify the operation.
Some hopeful thinkers suggest that India might be “leapfrogging” the manufacturing stage in the development trajectory, heading right for the services stage. But most politicians are anxious to foster more manufacturing opportunities. Modi has been active overseas and wants to court investors to locate more of their operations in India, touting a “Make in India” campaign. But most of these investors want to see labor reform before they make any commitments. The World Bank has also called on India to loosen its labor laws.
The good news for India is that China is increasingly pricing itself out of the super-low-wage-factory-labor category, leading companies to reorient their factories and operations to other poor countries. Usually they opt for places like Bangladesh, Vietnam or Indonesia. But with 840 million potential workers (1/5 of the world’s total!), India offers a tempting and obvious alternative. The bad news is that its own labor policies don’t make it very attractive — for foreigners or domestic entrepreneurs.
The others are Brazil, Russia and China. South Africa is technically included as well but a lot of commentators omit it.