The case for radical labour reforms

On different occasions over the past few weeks, the managements of companies such as Toyota, Mahindra and Mahindraand Bajajhave locked horns with their disgruntled workers. The growing labour problems in India’s auto industry could not have come at a more inopportune time for the sector. Faced with a slump in revenues, and declining profitability, India’s automobile manufacturers are struggling to address the demands of a young, impatient and insecure workforce.

The auto sector was the shining star of Indian industry for most of the past decade, generating more jobs than almost any other industry in the organized manufacturing sector. Now, it has become a byword for industrial conflict. The reasons for the auto industry’s labour pangs lie in the unhealthy growth of contract workers, and in India’s archaic labour laws, which implicitly incentivize such employment.

In the 10 years leading to 2011-12, new jobs in the auto industry grew at an average annual pace of 11%, nearly twice the pace of overall employment growth in organized Indian industry, according to data from the Annual Survey of Industries and the Centre for Monitoring Indian Economy. Most of these jobs went to contract or temporary workers. The share of contract workers in the auto workforce spiked up by 30 percentage points over the same period to 46%. No other industry saw as big a jump in the share of contract workers over the past decade.

The use of contractual employment may have been a convenient tool to escape the rigidities in the labour laws governing regular employment and to curtail the power of labour unions, but that strategy has reached its limits now. In several factories, contract workers are now in a majority and have been able to unionize themselves. Given that their stake in the long-run growth of the company is far lower and they are typically younger than regular workers, they are far more impatient with company managements, and have adopted unconventional methods to push for their demands. As recent events show, these workers are far more prone to wildcat strikes and militant action, which in extreme cases (such as the July 2012 incident at Maruti’s Manesar plant) have led to violence.

What is true of the auto sector is also broadly true of the entire organized manufacturing sector. Originally intended for peripheral work, the contractual system of employment has come to occupy the core of Indian manufacturing today, especially in the industrially dynamic states of Haryana, Gujarat, Andhra Pradesh and Tamil Nadu. The absence of transparent labour market reforms to overhaul an outdated and restrictive labour regime has led to de facto liberalization of labour laws, with state governments reducing monitoring of existing laws, and tinkering them when required to provide flexibility to employers. Thus, despite flouting several provisions of the law governing the use of contract workers, such as avoiding contract work in the core activities of firms, employers have been able to use growing numbers of contract workers.

India’s labour regime represents a curious mix of improbably stringent laws and totally lax implementation, promoting a culture of weak governance that hurts employers, the employed, investment sentiment and economic growth. The labour woes of the auto industry point to the limits of this regime.

The country needs to generate many more quality jobs than it created in the past to meet the aspirations of a growing and impatient workforce. That can only happen with a minimalist labour regime where flexibility to employers is combined with better governance and a more generous exit package or social insurance for employees.

Over the past decade, the government has tried to forge a consensus between employers and trade unions on labour reforms, but such efforts have failed repeatedly. One way to break the deadlock could be to allow states the power to amend central legislation relating to labour, as economist Arvind Panagariya suggested in a recent interview to The Indian Express newspaper. Once progressive states start benefiting from labour reforms, other states could be tempted to follow suit.

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