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Labour laws, that’s the one killing mfg: Morgan Stanley

The News International Team

Labour regulations in India, known for being complex, rigid and time-consuming, ranks our country 99th in Labour Market Efficiency among 148 countries, a Morgan Stanley report on Labour Market Environment noted. In this category, China’s rank stands at 34, while that of Japan and USA are 23 and 4, respectively. Even the hiring and firing practices adopted by India are poorer than that of China, Bangladesh and Pakistan. India holds a distant 61st position in another yardstick, the employee-employer relationship.

The Morgan Stanley report penned by Chetan Ayah and Upasana Chachra says India’s labour provisions meant to safeguard worker interests are applicable only to 16 percent of total workforce. Instead the regulations within it have been stifling job growth in the manufacturing sector. The manufacturing sector accounts for only 12.9 percent of GDP in India (2013) versus 31.8 percent in China (as of 2011), 23.7 percent in Indonesia, 20.5 percent in the Philippines, and 14.8 percent in Brazil. The tight labour laws have resulted in lack of foreign investment in manufacturing capacity. India’s market share in manufactured exports stands at a miniscule 1.6 percent (aganist China’s 17.5 percent). Its share in global manufacturing employment is only 5.8 percent (versus China’s 34 percent).

What’s worse, India’s urbanization rate lags that of other emerging market countries while agriculture continues to employ 49 percent of the labour force.

The report criticizes the inherent multiplicity of laws within Labour laws which has stifled the growth of labour-intensive industries in India while increasing rigidities in the labour market. The Industrial Disputes Act and  Contract Labour Act are glaring examples that need immediate overhauling. The Industrial Disputes Act is often at the heart of the current rigidity in the labour laws in India. The restrictive provisions relating to layoffs are belived to hamper growth in employment by creating an incentive for firms to remain small, the report noted.

Similarly, the Contract Labour Act is severely crippled by its limitations. It was designed to demotivate employers from using contract labour but what happens is quite the opposite. In those industries where demand trends are cyclical, employing contract labour gives the employer greater flexibility to manage the employee strength. The use of contract labour has also led to cases of labour unrest (such as those in Maruti, Honda, etc.).

Although , On July 30, 2014, the Cabinet has approved a number of amendments to labour laws, The report suggests a comprehensive review and restructuring of labour laws to make them attuned to the present economic realities. “We believe that the central and state governments have recognized the need to initiate labour law reforms in order to boost manufacturing sector jobs,” the report said.


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