To achieve its '$5-trn economy' goal, India must stop scoring own goals

The fable of the hare and the tortoise has long been used by many liberal foreign observers of India’s economy. The hope has been that democratic India, with its sluggish reforms process, might eventually catch up with the bold pace of reforms and growth that dictatorial China has set in the past four decades.
 
This story, along with assorted magazine cover images of India as an uncaged tiger or a purposeful elephant, has helped policymakers in New Delhi believe India’s turn will come... well, sometime in the next millennium. China is now a $13-trillion economy and India’s GDP is at $2.8 trillion, but who’s counting?

 
In no industry is the gap between the two countries, exacerbated by the missed opportunities and policy failures of successive governments, as glaring as in apparel. China’s exports, despite much higher factory wage costs, are several multiples of India’s. India’s share of the global apparel export market today is just 3 per cent. This must count as the largest self-inflicted wound in the history of the World Trade Organization, given that India has the most unskilled labour in the world.
 

Happily, in this respect, the Bharatiya Janata Party government has a chance to make amends for past mistakes by streamlining India’s web of inflexible labour laws that handicap apparel and other labour-intensive industries. The timing couldn’t be better. The US-China trade war is opening up opportunities even for late starters such as India. Just a couple of days ago, Apple was reported to be completing a final evaluation of countries as diverse as Vietnam, Mexico and India as it prepares to move large parts of its supply chain away from China. Apple’s as well as Foxconn’s investment in India, however, will only become sizeable if this government actually makes radical changes to India’s labour laws, especially those that require state governments’ permission for firing workers in factories with more than one hundred workers. “Who is the state to decide when you can hire and fire,” says Naresh Gujral, who built a successful garments export company before becoming a Rajya Sabha MP. “The government will not take over the factory.”

 
To its credit, in its first term the Modi government gave employers in apparel and textiles greater latitude to hire workers on short-term contracts, but other than a couple of states such as Rajasthan and Madhya Pradesh, the suffocating restrictions on laying off workers remained untouched. Even the changes in these two then BJP-ruled states were tiny. Raising the threshold for enterprises to lay off workers without government permission from those with 100 workers to those with 300 is minimalist in its ambition. When I was covering the dynamic factories in southern China at the start of this decade as a correspondent for the FT, one of my most memorable moments was finding myself outside the gigantic Shenzhen factory of Foxconn, Apple’s largest manufacturer of iPhones. It was more a township than a factory, with about 250,000 workers.

 
In its second term, this government seems poised to make changes to labour laws but if this past week is any indication, it will be timid and effectively forfeit to Vietnam this huge opportunity offered by the migration of manufacturing from China. On Monday, the government approved a redrafting of the laws on social security and working conditions but postponed revisions to the codes on industrial relations — tellingly those relating to retrenchment.
 
Meanwhile, the gains to flexibility in hiring contract workers introduced by the government in the first term have to be weighed against the aggressive enforcement of provident fund requirements that end up slowing rather than rapidly enlarging the formalised labour force.

 
Nagesh Sharma runs a successful sourcing company that supplies retailers in the US and Europe with apparel from Africa, Jordan and India. He complains that two people in his office are almost exclusively assigned to tackling the whims of bureaucrats who enforce rules on provident funds and whether a company is liable for the contributions of employees of its labour contractors. Still, he praises state governments in Odisha and Jharkhand for subsidising training for apparel workers, often women.
 
When I spoke this week to Harish Ahuja, who heads Shahi Exports, the largest garments maker in the country with 60 factories and 115,000 workers, he seemed more concerned by reports that the government is considering an increase in the national minimum wage than by India’s rigid labour laws, which his company has learned to live with. Most of Shahi’s employees are women. The only contract labour used at his factories is for security guards and housekeeping.

 
But, margins in apparel are razor-thin; an arbitrary national hike in wages would be another blow to an industry. In the past couple of years, India’s apparel exports declined to $15.7 billion, from $17 billion in 2016. Tiny Cambodia, with a population less than Mumbai’s, has seen its apparel exports almost double over the same period to $12.2 billion in 2018. Bangladesh’s stand at $37 billion. The tortoise that is the Indian government still appears to be sleepy and sluggish while our competitors win this all-important race for populous, developing nations.