Why India Is Rethinking Its Labor Laws

Surrounded by humming sewing machines and gossiping women, Nazia Begum stitches a gauzy black frill onto a C-cup brassiere in a factory in Muzaffarpur, about three hours south of New Delhi. Her employer, Shekhar Bhagwat, matches the bra to a photograph to check the quality, then watches as the lingerie gets packed and sent off to a Paris boutique.

Although Bhagwat is prospering, he faces a dilemma. The next logical move is to branch out into men's underwear, yet margins are smaller in the men's line and a company requires big economies of scale to succeed. "Men's underwear?" asks Bhagwat. "Why bother with the headache? I'd need thousands of employees."

Ramping up does not appeal to businessmen like Bhagwat. As soon as a company hires more than 100 employees, it is impossible to fire anyone without government permission. Such laws have long deterred foreign investors, hampered manufacturing, and prevented the nation of more than 1 billion people from experiencing an industrial takeoff similar to China's. Now legislators are fighting to push a law through Parliament to let a company expand its workforce without surrendering the power to lay off workers to bureaucrats. The bill faces fierce opposition from labor unions.

India's labor laws have their roots in the British raj and were last fully updated in the Industrial Disputes Act of 1948. They prohibit companies with more than 100 employees from making positions redundant and firing people for any cause other than criminal misconduct. An additional 45 national laws intersect or derive from the 1948 act, and about 200 state laws control the relationships between employees and employers, according to India's Labor Ministry.

Companies must keep 6 attendance logs and 10 separate accounts for overtime wages, and file 5 types of annual returns. There are at least 11 definitions of the word "wage." Other rules regulate the height of urinals in workers' washrooms, how often a building must be lime-washed, and how many sand-filled buckets must be on hand to put out fires.

In a speech to trade unions on Nov. 23, Prime Minister Manmohan Singh wondered if these laws had hampered India's growth. "Is it possible that our best intentions for labor are not actually met by laws that sound progressive on paper but end up hurting the very workers they are meant to protect?" he asked. India could have added 2.8 million jobs to the formal economy in the decade through 2007 had labor laws been less restrictive, the World Bank said in 2007. As few as 30 million Indians work in the formal private sector or government, according to the Central Statistical Organization, the government statistics group. (The rest work in agriculture or the underground economy.) Credit Suisse (CS) economist Robert Prior-Wandesforde calls this number "absurdly low." China has at least 260 million workers in manufacturing, mining, and nonfarming activities, according to International Labor Organization estimates. "It's unusual how successful India has been without any sort of industrial revolution," says Prior-Wandesforde, head of South East Asia and India Economics at Credit Suisse.

India's IT companies, such as Tata Consultancy Services and Infosys, employ as many as 2.7 million. Some labor laws were waived starting in 2001 to encourage growth in the sector, India's second-largest earner of foreign exchange, by placing most of the workforce inside fenced-off zones. The waivers allowed IT companies and call centers to operate 24 hours a day, recruit women to work late at night without building single-gender facilities, and add staff freely without submitting layoff decisions to the authorities.

The success of the Software Technologies Parks of India Act—and of special economic zones in China—has spurred the revival of a 45-year-old plan that creates special enclaves with more infrastructure and fewer labor laws. Other companies hire professionals on three-year contracts and laborers on daily wage contracts, says K.R. Shyam Sundar, an industrial relations expert who has worked with Indian universities. Contracted labor can be fired more easily.

Without reform, there will be fewer opportunities for Indians such as Begum, who is raising two children on the $3.80 she is paid for 10 hours of work a day in the lingerie factory. Her income puts her in the top 20 percent of wage earners, according to the National Commission for Enterprises in the Unorganized Sector. "This job keeps me from begging," she says.

The bottom line: India's labor laws deter businesses from hiring more than 100 workers and are holding back the country's industrial growth.

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