India’s Big Government

by Vivek Kaul

  In fact, when it comes to textiles, even Bangladesh is doing better than India. As Mihir S Sharma writes in Restart: “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.”349

  So what happened here? The textiles industry, explains Sharma, needs to turn around 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 the 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.”350

  India has very few factories that actually employ more than 500 people.351 Once again, 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.352

  So, there is enough evidence going around which tells us very clearly that the average Indian manufacturing firm is very small. In many cases, it employs even less than ten people. Jobs are created when small firms start to grow big and recruit more people. As an OECD (Organisation for Economic Co-operation and Development) research paper points out:353

  SMEs (small- and medium-sized enterprises) account for 60 to 70 per cent of jobs in most OECD countries, with a particularly large share in Italy and Japan, and a relatively smaller share in the United States. Throughout, they also account for a disproportionately large share of new jobs, especially in those countries which have displayed a strong employment record, including the United States and the Netherlands. Some evidence points also to the importance of age, rather than size, in job creation: young firms generate more than their share of employment.

  So what is it that is holding back small Indian businesses from growing bigger? Labour laws is the simple answer. The interesting bit is that the country has so many of them that nobody really knows how many. I might be exaggerating a little here, but I hope, dear reader, that you get the drift.

  When it comes to law making in India, there are three lists: union, state and concurrent. The central government can make laws on areas that come under the union list. State governments can make laws on areas that come under the state list. Both union and state governments can make laws on areas that come under the concurrent list.

  Labour is split between the union and concurrent lists. The regulation of labour comes in the union list. More specifically, industrial disputes, trade unions and the welfare of labour, including conditions of work, provident fund, employers’ liability, workmen’s compensation, and invalidity, old age pension and maternity benefits come in the concurrent list. Hence, the central government and state governments can legislate on labour. Many state-level laws are essentially similar to laws enacted by the central government, but with minor variations.354

  Given that both the central government and the state governments can legislate on labour, this has led to a surfeit of labour laws. The National Manufacturing Policy of 2011 estimates that, on an average, a manufacturing unit needs to comply with nearly 70 laws and regulations. Of course, all these laws are not labour laws. At the same time, these units sometimes need to file as many as 100 returns a year.

  The 2013-2014 annual report of the Ministry of Labour lists 44 Acts in the area of labour which have been passed by the central government. The veteran lobbyist, Amit Mitra, who is now the Finance, Industries and Commerce Minister of the state of West Bengal, estimates that there are another 150 state-level labour laws in India.355

  Another estimate made in a research paper published by the International Labour Organisation put the total number of state-level labour laws at 160. As the research paper points out: “The state laws mostly supplement and sometimes address specific local issues, but are not in conflict with [the] central laws.”356

  This puts the total number of labour laws at around 200.

  The trouble is that there are so many laws out there that it is difficult for a firm to operate without breaking some law or the other. This essentially ensures that even firms which have the chance of growing bigger end up remaining small.

  Furthermore, the surfeit of laws keeps the smarter lot away from entrepreneurship. As the National Manufacturing Policy of 2011 points out: “This kind of compliance burden puts off young entrepreneurs and they are not willing to take up an entrepreneurial role. As a result, a large number of people who could have been self-employed and would [have] contribute[d] to further employment and enhance[d] economic activity end up accepting jobs much below their potential.”

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  A firm comes under the ambit of the Factories Act of 1948 the moment it employs 10 or more workers “on any day of the preceding twelve months” and “in any part of which a manufacturing process is being carried on with the aid of power”. If the manufacturing process is not carried out with the aid of power, then the firm needs to have employed 20 or more workers on any day of the previous 12 months to come under the ambit of the Factories Act.

  Power is essentially defined as “electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal agency”.

  Here are some of the requirements of the Factories Act:357

  a) No adult worker shall work in a factory for more than 48 hours in any week.

  b) The total amount of overtime work done in a quarter (a period of three months) cannot exceed 50 hours. The overtime kicks in if the worker works for more than nine hours on a given day or more than 48 hours in a given week. Section 59 of the Act states: “… [when] a worker works in a factory for more than nine hours in any day or for more than forty-eight hours in any week, he shall, in respect of overtime work, be entitled to wages at the rate of twice his ordinary rate of wages.”

  c) The employment of children under 15 years of age is not allowed.

  d) Women are allowed to work in a factory only between 6 am and 7 pm.

  e) Separate restrooms should be provided for men and women.

  f) A suitable place for keeping clothes which are not worn during working hours needs to be provided. There needs to be a place for the drying of wet clothes as well.

  g) A sitting place needs to be provided for workers who work in a standing position, so that they can take a break whenever the work permits.

  h) In every factory, a first-aid box needs to be kept. One first-aid box needs to be maintained for every 150 workers. Furthermore, a separate person who holds a certificate in first aid which is recognised by the state government needs to be in charge of the first-aid box and needs to be readily available during the working hours of the factory.

  i) The factory needs to be kept clean as well as whitewashed or colour-washed. The whitewashing or colour-washing must be carried out at least once in every period of fourteen months.

  The Factories Act generates a lot of paperwork as well. The manager of every factory needs to maintain a register of all the workers. This is to be available at all times during working hours and needs to have the following details: (a) the name of each adult worker in the factory; (b) the nature of his work; (c) the group, if any, in which he is included; (d) where his group works on shift, the relay to which he is allotted. Also, no worker is allowed to work in a factory unless his name has been entered in the register.

  A register also needs to be maintained for all the cleaning, floor washing and whitewashing or colour-washing that is carried out. The factory must also maintain a register for leaves granted to workers and for any accidents that might have happened.

  In fact, the Factories Act is not the only labour law which mandates the compulsory
maintenance of registers. Other laws mandate the same. This increases the burden of small and medium enterprises. It has also led to the inspector raj, which seems to have replaced the licence raj as the number one problem of Indian businesses.

  In fact, Gurcharan Das, in his book India Grows at Night, recounts the story of an entrepreneur friend named Navin Parikh, who runs a factory near Ajmer which makes sophisticated parts and equipment for suppliers to the world’s defence industries. This is how Das recounts Navin’s experience: “‘Not a week goes by,’ Navin said, ‘without an inspector from some department or the other coming for his hafta vasooli (weekly bribe). Labour, excise, fire, police, octroi, sales tax, boilers and more – we have to keep all of them happy. Otherwise, they make life hell. More than 10 per cent of my costs are in ‘managing the system.’”358

  Navin has to deal with, on an average, seventeen inspectors (of course all of them are not labour inspectors or factory inspectors) who have the power to close down his business on some pretext or another.359

  In fact, in December 2014, there was a positive development on this front. Firms with less than 40 workers no longer needed to maintain a register or furnish returns under 16 Scheduled Acts.360

  Also, when it comes to the Factories Act, the economies of scale really don’t kick in. As the number of workers working in the factory goes up, so do the requirements that need to be fulfilled. If the number of workers is more than 250, a canteen and cold water during the summer season need to be provided. In every factory with more than 150 workers, a suitable lunchroom as well as restrooms need to be provided.

  Furthermore, in every factory with more than 250 workers, it is required that the sanitary pans of latrines and urinals be thoroughly washed and cleaned at least once in every seven days with suitable detergents or disinfectants, or with both. (Yes, the Act goes into this level of detail.)

  If the factory has more than 500 workers, an ambulance room with the right equipment and medical and nursing staff needs to be provided for. If the factory has more than 30 female employees, a crèche needs to be provided for.

  In fact, Section 20 of the Factories Act has even got details about spittoons. Here are the four clauses of the Section:

  (1) In every factory, there shall be provided a sufficient number of spittoons in convenient places, and they shall be maintained in a clean and hygienic condition.

  (2) The State Government may make rules prescribing the type and numbers of spittoons to be provided and their location in any factory and provide for such further matters relating to their maintenance in a clean and hygienic condition.

  (3) No person shall spit within the premises of a factory except in the spittoons provided for the purpose, and a notice containing this provision and the penalty for its violation shall be prominently displayed at suitable places on the premises.

  (4) Whoever spits in contravention of sub-section (3) shall be punishable with a fine not exceeding five rupees.

  Yes, you read that right! The Factories Act even specifies that a worker who spits in the factory and does not spit into the spittoon should be fined Rs. 5.

  It is precisely requirements like these that give inspectors the ammunition to hassle manufacturing entrepreneurs. As Trilok Singh Papola writes in a research paper titled ‘The Role of Labour Regulation and Reforms in India: Country Case-study on Labour Market Segmentation’: “Some details of processes and methods… leave room for harassment and extraction of monetary or other favours by unscrupulous inspectors.”361

  The spittoon part apart, many of the requirements listed above seem to be necessary. But, at the same time, one needs to understand that perfect is the enemy of good. Interestingly, the now much-maligned PC Mahalanobis thought along similar lines.

  The economist TN Srinivasan quotes Mahalanobis as saying:362

  … in certain respects, welfare measures tend to be implemented in India ahead of economic growth, for example, in labour laws, which are probably the most highly protective of labour interests, in the narrowest sense, in the whole world. There is practically no link between output and remuneration; hiring and firing are highly restricted. It is extremely difficult to maintain an economic level of productivity, or improve productivity. At [the] early stages of development in all countries, there has been a real conflict between welfare measure[s] and economic growth. Japan is an outstanding example; the concept of minimum wages was introduced only about 10 or 12 years ago, when [the] per capita income had reached the level of $250 or $300 per year; and minimum wages were fixed more or less at actual average levels. In India, with a per capita income of only about $70, the present form of protection of organised labour, which constitutes, including their families, about five or six per cent of the whole population, would operate as an obstacle to growth and would also increase inequalities. It is a serious problem not only in India but in other under-developed countries.

  The Factories Act has essentially ensured that the number of people employed by average Indian manufacturing firms continues to be small. It explains why the firms operating in garment manufacturing, which have the potential to employ a lot of workers, continue to employ fewer than eight employees.

  If manufacturing firms are to grow bigger, it is necessary that changes be made to the Factories Act. Currently, firms using power and employing 10 or more workers come under the ambit of the Act. This number needs to go up, to perhaps 50, or maybe even 100, in order to ensure that firms grow bigger.

  Also, some other changes need to be made as well. Take the case of overtime wages. Currently, Section 59 of the Act states that overtime wages need to be paid at twice the normal rate. This is totally out of line with the way things are internationally across countries. The International Labour Organisation (ILO) stipulates a minimum overtime of 125 per cent of the normal rate. Countries like China, Germany and the United Kingdom do not have a minimum statutory overtime rate. In Japan and France, the overtime rate is at 125 per cent of the normal rate. In Brazil, South Korea and the United States, the overtime rate is at 150 per cent of the normal rate.363 What this clearly tells us is that the overtime rate in India, as per the Factories Act of 1948, is clearly an outlier and needs to be brought down.

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  Another draconian law which ensures that small firms continue to remain small is the Industrial Disputes Act of 1947. The Act applies to industrial establishments with 50 or more workers. The Act, when it was first introduced, did not prevent firms from retrenching workers or shutting down unprofitable businesses as long as they had notified the workers and the trade unions of these changes in advance.364

  Interestingly, the provisions related to the payment of compensation to workers who are laid off or retrenched were introduced in 1953. It is important to explain here the difference between a lay-off and a retrenchment. A firm lays off a worker when the demand for the product that the firm manufactures is slack. The intention is to re-hire the worker when the demand picks up once again. Retrenchment is what in this day and age is referred to as firing a worker. In 1964, the payment of compensation was fixed at 15 days of average pay for every year of service that had been put in.365

  The Act was amended under pressure from the trade unions first in 1976 and then in 1982. In 1976, a Chapter V B was introduced into the Act. The 1976 amendment essentially required that, if a firm employed 300 or more workers, then, in order to lay off or retrench workers or shut down, it needed the prior permission of the government. In 1982, the threshold, if the firm wanted to shut down, was reduced to 100 workers.366 A firm having more than 100 workers needed the prior permission of the government to shut down.

  In 1984, the threshold was reduced to 100 workers if the firm wanted to either shut down or even if it wanted to lay off or retrench workers. The period of notice was increased to 90 days from the earlier 60 days.367

  In fact, what this did was that it led to situations wherein even if a firm employing more than 100 workers had to retrench a single worker, it needed the permis
sion of the local labour commissioner.368 Interestingly, even when the services of a single worker have to be terminated, the dispute settlement procedures apply. This involves a three-stage process (consultation, conciliation and adjudication, or arbitration). Workers tend to prefer adjudication, given the delays inherent in the Indian legal system. The average time taken to complete this process is ten years.369

  After this change was introduced in the 1980s, applications for lay-offs or retrenchments made to the government seldom succeeded. The firms coming under the purview of the Industrial Disputes Act obviously knew that. Hence, they did not make too many such applications anyway. As the Indian Labour Year Book for 1992 points out: “Retrenchment and Lay-off: During the period January-August, 1992, four proposals, two each for retrenchment and lay-off were received for consideration by the Ministry of Labour. One proposal seeking permission for retrenchment was rejected, whereas the other remained under [the] consideration of the Government. One proposal for lay-off was withdrawn, while the other was found to be not maintainable.”370

  How have things looked in more recent times? In 2009, 68 units were allowed to close down. In 2010, the number fell to 41.xiv The total number of units carrying out lay-offs declined from 49 to 45. The total number of units that were allowed to retrench workers fell from 29 to 13.371

  In 2012, 46 units were allowed to close down, 19 units were allowed to retrench workers and 8 units to lay off workers.372 While the numbers have shown an improvement between 1992 and 2012, they are still a joke. In a country as big as India is, only 46 units were allowed to shut down in 2012.

  Of course, firms got around this in various ways. They declared a lock-out on certain grounds. Or, at other times, they announced the closing down of the firm for reasons beyond their control.373 Interestingly, India alone mandates that firms need government permission in order to lay off, retrench or shut down if a firm happens to employ a hundred or more workers.374

  If entrepreneurs are not allowed to close down unviable enterprises, the capital which could have been used for something else remains stuck. Furthermore, the lack of an exit option remains a major roadblock to encouraging people to take on entrepreneurship. This also ensures that firms continue to remain small in size. Entrepreneurs limit their ambition and choose to not grow beyond a certain size.