How A Factory Became A Flash Point

Violence at a Honda plant highlights India's outdated labor laws and rattles foreign investors

On July 25, fighting broke out between workers and police near a Honda Motor Co. motorcycle factory outside New Delhi. The riot was the culmination of four months of on-again, off-again job slowdowns and unrest that resulted in a handful of dismissals from the 1,800-worker plant. It made national headlines, with images of workers and police brutally beating each other broadcast across the country.

The violence -- India's first serious labor action in years -- highlights problems stemming from an antiquated labor code. The 58-year-old law requires any company that employs more than 100 people to get government permission before laying off workers. Although the law led to a strong, often militant labor movement, it ultimately sapped India's international competitiveness and spurred the decline of Bombay's once-mighty textile mills. "Bureaucrats and courts know nothing about industry, much less are able to predict a downturn or the consequences of a commercial decision taken by a business," says Bombay labor lawyer Chander Uday Singh, an advocate of changing the law.

Over the years, though, Indian companies learned to adapt and union power declined. They outsourced manufacturing to outfits with fewer than 100 workers that weren't regulated by the law. They bought out older employees with generous voluntary retirement schemes, then shifted to so-called contract labor -- workers hired for less than two years who aren't entitled to benefits and can't unionize. And since the labor law applies only to "factories, plantations, and mines," India's most entrepreneurial companies looked elsewhere -- giving rise to the country's vibrant technology service sector. As a result, the labor movement atrophied. Today, India has a workforce of some 450 million, but fewer than 10 million union members, the government estimates.


The Honda riots, coupled with the growing power of the Communist Party -- which supported the job action and backs the ruling coalition led by the Congress Party -- may be a sign that India's labor problems are on the rise again. Losses from the months of unrest are likely in the tens of millions of dollars, and the Japa-nese ambassador to India said the riots would damage India's reputation as a destination for foreign investment.

Many Indians, meanwhile, fear that despite the success Indian manufacturers have had in skirting the labor law, it still hobbles the country's ability to create employment for the masses. The private sector has added just 1 million permanent factory jobs since 1993, while some 15 million young people join the labor force annually, says Subir Gokarn, chief economist for Crisil Ltd., a credit-rating agency: "90% of India's workforce is not protected by the labor legislation," he says. "It is betraying the very constituency it is supposed to protect."

Some attempts have been made over the years to simplify the law. The National Commission on Labor has recommended amending labor legislation in light of the new globalized world. Lawyer Kavita Khanna wrote a detailed report on the necessity of a flexible labor policy, and even recommended that the Labor Ministry change its name to the Ministry of Employment Generation & Human Welfare to emphasize the importance of job creation. "Unless we reform our labor laws, we cannot have the manufacturing-led growth we need," she says.

The politicians listened, but did nothing. Now, perhaps pressure from those 15 million young people entering the workforce every year will finally spur some real action.

By Manjeet Kripalani in Bombay

    Before it's here, it's on the Bloomberg Terminal.