India labor laws

Years ago Indian politicians, believing themselves to be smarter than the free market and serving the best interest of workers, passed laws which made it rather difficult for businesses to fire or lay off employees. So the result was that India enjoys remarkably low unemployment, vigorous growth and exemplary employee-management relations, right?

According to the Wall Street Journal, not exactly:

Coimbatore, a colonial-era textile hub in the southern state of Tamil Nadu, expanded in recent decades into a manufacturing center for machine parts and small motors. Dubbed the Manchester of South India, its streets are lined with shops that sell pumps, coils and bearings.

Pricol was founded here in the 1970s by Vijay Mohan, the son of a textile-factory owner, as a maker of moped speedometers. Now its seven plants around India export 50 products -- from fuel gauges and clocks to cigarette lighters -- to some 40 countries.

As its work force grew, so did its problems.

Pricol, like other Indian manufacturers, is guided by two old labor laws. The country's Industrial Disputes Act of 1947 requires companies to gain government permission before dismissing workers. The Contract Labor Law of 1970, meanwhile, prohibits employers from using temporary workers for long-term jobs. Both aim to encourage companies to protect workers by making them permanent.

Manufacturers have long complained that it can take years to dismiss their permanent employees, leading to bloated work forces and hampering companies' ability to respond quickly to changing business conditions. Executives and industry groups say relaxing the labor laws would allow companies to hire more workers and would attract more manufacturers to India, ultimately underpinning a rise in wages.

"Some of the hardships faced by labor will be lessened if there is greater demand for workers, as would happen in a more flexible market," says Cornell University economics professor Kaushik Basu, who was recently appointed chief economist for India's Ministry of Finance. There are no current efforts to change the laws, officials say.

Some observations:

• Regulations which make it difficult to fire workers will result in less willingness to hire them in the first place.

• The best path to boosting the standard of living for Indian workers is to make the country an attractive destination for investment. The more businesses there are competing for Indian labor the more wages will have to rise.

• Those hurt most by such policies are the unskilled and least educated, as manufacturing is one of the few areas such workers can find decent-paying jobs. It is little coincidence that the sectors of India's economy which have boomed the most are more skilled fields such as back office operations and information technology.

• Indeed, to the extent manufacturers have invested in the country it has been in skill-intensive industries as noted by McKinsey.

• According to wikipedia, India's industrial sector accounts for a mere 17 percent of workers. The lack of manufacturing means that unskilled workers must instead labor in low paying, back-breaking agricultural work, which employs 60 percent of the workforce.