India’s Ailing Manufacturing Sector & Unions

The WSJ has a sobering article on the state of the manufacturing & labor relations in India –

COIMBATORE, India — This ancient city has turned itself in recent years into a manufacturing dynamo emblematic of India’s economic rebirth. But a homicide case playing out in an auto-parts factory here is raising concerns about whether the Indian industrial miracle is hitting a wall of industrial unrest.

We can’t be a capitalist country that has socialist labor lawsPricol Ltd., which makes instrument panels for the likes of Toyota Motor Corp. and General Motors Co., was rocked in late September when workers burst into the office of Roy George, its 46-year-old human-resources boss. Angry over a wage freeze, they carried iron rods, witnesses say, and left Mr. George in a pool of blood. Police arrested 50 union members in connection with his death, their lawyer says. Charges haven’t been filed.

The underlying question raised by this story is the size, shape & importance of the manufacturing sector for India’s long term economic development…

Historically, nearly all first world nations initially went through a period where manufacturing formed the bulk of their employment. In the US, for ex, manufacturing has shrunk from ~40% down to 10% of the employed but, that’s still roughly ~15-20M people today – a figure which has held remarkably constant for the past 40 yrs. China, of course has charted a league of its own and currently employs a whopping 80-100M in manufacturing.

India, by contrast, is hoping to pioneer a development path led by the service sector. The potential problem with this is that while gleaming InfoTech giants like Wipro or Infosys make fantastic national champions and headline grabbers, they ultimately employ a very small percentage of the arguably most elite workers in the country (between 1M directly to 5M indirectly ; for comparison, the US IT industry was roughly 7M people in 2000). Unfortunately, the median individual in the 3rd world is usually far from the education / skill level necessary for thes sorts of jobs. For these folks, a factory job that pays a regular wage is both more attainable and, due to the large spill over effects, creates a broader national economy multiplier. The problem, as the WSJ notes, is that the Indian economy employs a comparatively paltry 1 million individuals in the “Organized Manufacturing Sector” and dropping

Part of the reason for such poor manufacturing sector performance are India’s notorious labor unions –

Battle lines are being drawn in labor actions across India. Factory managers, amid the global economic downturn, want to pare labor costs and remove defiant workers. Unions are attempting to stop them, with slowdowns and strikes that have led at times to bloodshed.

The disputes are fueled by the discontent of workers, many of whom say they haven’t partaken of the past decade’s prosperity. Their passions are being whipped up, companies say, by labor leaders who want to add members to their unions and win votes for left-leaning political parties. Adding to the tensions are the country’s decades-old labor codes, which workers and companies alike say require an overhaul.

“We can’t be a capitalist country that has socialist labor laws,” says Jayant Davar, president of the Automotive Component Manufacturers Association of India.

And the unions in part, draw their strength from License-Raj-style laws which introduce a “political loop” in an otherwise highly operational business decision about staffing levels –

Indian Manufacturing Workers

…The country’s Industrial Disputes Act of 1947 requires companies to gain government permission before dismissing workers… 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.

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p>A separate NYT piece provides further details on this modern day License Raj -

Current laws still say that any company employing more than 100 workers cannot fire people without government permission, and the labor commissioner in the government has to be notified of every single person working on the night shift. In addition, no worker can be made to work beyond 75 hours of overtime a quarter.

Combined with militant politics, and an increasingly interconnected global economy, the results have started spilling over into other countries ; the WSJ piece provides some examples –

  • this year, labor actions have hit manufacturers from Indian automaker Mahindra & Mahindra Ltd. to Finland’s Nokia Corp. and Swiss food giant Nestle SA.
  • Workers at a unit of Korea’s Hyundai Motor Co. staged sit-ins in April and July, demanding recognition of an outside union and reinstatement of suspended workers.
  • In September, workers at a unit of Japan’s Honda Motor Co. tried to prevent a trial of a new assembly line by threatening engineers and executives with shock-absorbers and motorcycle pieces, according to a court documents.
  • Last year, the chief executive of Graziano Trasmissioni India Pvt. Ltd., a manufacturing unit of Swiss high-tech group OC Oerlikon Corp., was beaten to death by workers who had been suspended at a plant outside New Delhi.
  • A strike that started in late September at Indian supplier Rico Auto Industries Ltd. left Ford Motor Co. without transmission parts, forcing it to halt production temporarily at an Ontario plant that makes Edge sport-utility vehicles and at a Chicago plant that builds Taurus sedans….The six-week Rico strike spurred GM to idle an SUV-production facility in Delta Township, Mich., for a week and cut one shift for a second week. GM also cut a shift at a transmission factory in Warren, Mich., said a person familiar with the matter.

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Needless to say, if I were an MNC thinking about investing in India manufacturing capacity…this would certainly make me think twice.

27 thoughts on “India’s Ailing Manufacturing Sector & Unions

  1. Labor unions have no place in a democracy. I live in San Francisco, and the hotel-workers union is on strike right now.

    I dont see India becoming a manufacturing powerhouse anytime soon. Our “sab chalta hai” attitude doesn’t bode well with the hard work and six-sigma perfectionism needed in manufacturing for profit.

  2. Combined with militant politics, and an increasingly interconnected global economy, the results have started spilling over into other countries ; the WSJ piece provides some examples

    I have trouble reading anything from the oped pages of WSJ. I would like a piece on how they championed the current recession with lower taxes and less regulation, but getting back to the current article I think labor in India , because of the corruption inherent in Indian politics have excess power. I hope the perpetrators are punished. Also, I hope the labor laws are relaxed and made more capital friendly.

    This is a typical oped article from WSJ. They start with a case where one cannot but agree with the writer but then try and make a general statement about the entire labor/regulatory market. Comparing Indian labor laws to any advanced country’s laws cannot be taken seriously. A better balance is not only required in India but also in the United States.

  3. India, by contrast, is hoping to pioneer a development path led by the service sector. The potential problem with this is that while gleaming InfoTech giants like Wipro or Infosys make fantastic national champions and headline grabbers, they ultimately employ a very small percentage of the arguably most elite workers in the country (between 1M directly to 5M indirectly ; for comparison, the US IT industry was roughly 7M people in 2000). Unfortunately, the median individual in the 3rd world is usually far from the education / skill level necessary for thes sorts of jobs. For these folks, a factory job that pays a regular wage is both more attainable and, due to the large spill over effects, creates a broader national economy multiplier. The problem, as the WSJ notes, is that the Indian economy employs a comparatively paltry 1 million individuals in the “Organized Manufacturing Sector” and dropping –

    But i thought liberalisation had fixed India’s economic problems. You mean that massively overspending on indigenous MNCs without developing globally competitive manufacturing idnustries and moving up the technology ladder is not going to lead to industrialisation?

    :D

  4. Compare:

    Union membership has declined by 12% in India during 1987 to 2001. (Source: various issues of Indian Labour Statistics, Labour Bureau, Shimla.)

    to your chart. Please articulate a cause and effect and back it up with evidence about on-the ground realities in India (using labour laws to look at labour conditions is like looking at tax rates to determine how much people actually pay in taxes).

  5. I was wondering how long it would be before this story got picked up by this site’s resident free-marketeer.

    if I were an MNC thinking about investing in India manufacturing capacity…this would certainly make me think twice.

    YAWN… yeah, just like how the threat of massive internal political instability is deterring foreign investment in China?

  6. India is a manufacturing powerhouse in its own rights already. We are a competitor to Pricol and make world class products sold in over 60 countries to US and Japanese OEMs, as does Pricol. In the instrumentation realm, the top 3 producers are US, Germany and India. The IT centric american-indian sometimes tends to have a tunnel-vision of business, based on their interactions in life and business on a daily basis. Having long been part of the supply chain to Japanese and European manufacturers, Indian quality levels are far superior to chinese competitors in the heavy duty industrial business. China gets a lot of press based on the volume of consumer goods manufactured there, but we see an even split when it comes to industrial products.

  7. Compare: Union membership has declined by 12% in India during 1987 to 2001. (Source: various issues of Indian Labour Statistics, Labour Bureau, Shimla.) to your chart. Please articulate a cause and effect

    That’s easy. India, like the US, is experiencing its fastest employment growth in its least unionized sectors. One might even go further and attribute DIRECT causality rather than merely indirect correlation –> it’s BECAUSE they are non-union / less-regulated sectors that they are the fastest growing in India.

  8. Compare: Union membership has declined by 12% in India during 1987 to 2001. (Source: various issues of Indian Labour Statistics, Labour Bureau, Shimla.) to your chart. Please articulate a cause and effect and back it up with evidence about on-the ground realities in India (using labour laws to look at labour conditions is like looking at tax rates to determine how much people actually pay in taxes).

    Three words: Unorganized manufacturing sector. If unions and leftists make it tough for manufacturers to do business in a fair and efficient manner, then most manufacturing will move to the unorganized sector, that is manufacturing that is still willing to do business in India, with no labor protection at all.

  9. i am no economist and i also agree that these protectionist laws around labor slows down growth. but my take is so what? do we want modest but more sustainable growth that is less disruptive to people’s lives OR boom and bust growth that exists in the u.s? when the free market runs its course, govt is left to do the cleanup throwing away billions of dollars in peoples money. u.s companies create employment at a faster pace, but they do lay off plenty, so the planning is limited to short terms interests and quarterly goals. on the other hand, since laying off employees is hard, indian companies do not go crazy hiring people when the times are good, there is more long term planning needed, which obviously hampers the pace of growth, but has some merits to it. I think it may also be one reason that the indian employess didn’t lose any jobs in the recent downturn compared to the american counterparts (this is my anecdotal evidence, i haven’t looked up stats).

    India, like the US, is experiencing its fastest employment growth in its least unionized sectors.

    unions are more powerful in low skilled jobs than the high skilled jobs, which is the case universally and the job growth in india has been in services/IT area mostly, so your cause/effect equation is not entirely accurate. i am glad to be proven wrong though.

  10. Part of the reason for such poor manufacturing sector performance are India’s notorious labor unions

    Labor Unions are the least contributing factor to manufacturing in India. Majority of the union leaders are focused on getting fat paychecks and kickbacks. Local politicians, corruption, etc make it impossible for any big company to allow unionized labor. Pay, benefits and job security is all the workers want. Not unions. As JS said, manufacturing companies don’t have the time and money to deal with unionized labor. If unionized, companies will pay more for daily wage workers and minimize strength of unionized workers. They send trucks to near by towns and villages to transport daily workers. The management doesn’t want unions; workers don’t like unions.

    A decade ago, Coimbatore was minting money with big precision manufacturing companies like Pricol, Laxmi, Textool, etc. They met every manufacturing standards set: ISO-9000, ISO-XXXX, six sigma production, whatever. With the fall in textile and exports in last 5 years, thousand were laid off. Many companies were shutdown including Textool. Few surviving ones are under tremendous pressure to make the same quality products for less money. Meanwhile, living expenses are on the raise. Did you notice? It is stupid for Pricol to freeze the pay during Diwali time rather than giving some incentives.

    Any management making such stupid, insensitive decisions is met with violence. Talks between unions and companies don’t go too far. Successful Indian manufacturing companies meet their quality standards by keeping union labor and politics to a minimum. It is important we understand these factors. Coimbatore still ranks at the top in precision tool manufacturing and exports to Europe, US. Blaming unions and politics won’t help manufacturers and investors. If you look closely, India has many success stories in manufacturing industry via partnerships and investments (Maruti Udyog, Mahindra Ford – Mercedez Benz MoU). Please don’t jump to conclusions or predictions like this:

    Needless to say, if I were an MNC thinking about investing in India manufacturing capacity…this would certainly make me think twice.
  11. Maybe

    It is certainly true that the labor unions are a factor preventing India from adopting a Chinese style development model. They’re probably not the only such factor. Of course, if India adopted a Chinese development model it would compete directly with China and that is not easy.

    That said, it is not clear that exporting high value services and having the people in the computer industry buying domestically made products couldn’t work as a development strategy. This hasn’t been done before, but that is because most industrialized countries industrialized before the service sector was capable of producing high value added exportable goods.

    As I recall, India’s limited industrial base is mostly in Bengal, the Communist dominated area? If so, there is an obvious question about why Gujarat and the other BJP dominated areas have not industrialized further. My guess is that even where the BJP is running things, the number of capitalists (as opposed to the number of rich non-capitalists) is actually fairly small and their resources are modest. It is unlikely that even the BJP is willing to support foreign capitalists against their own people as much as the Chinese government does. Now the Chinese government has its own agenda, and I think the US multinationals are deluding themselves when they trust the Chinese, but that’s another story. Right now, India would have to undercut China on labor costs to interest US multinationals as a manufacturing base, and this is pretty hard to do for a democracy. So India’s software based development strategy may be its only real option.

    It is also worth noting that it doesn’t take long for an industrializing country to start suffering from a shortage of demand. Look at the history of the US in the late 1800′s and the 1930′s. Arguably, unions played an important role in the 1930′s in forcing the rich to give up enough of their wealth so that other people could start buying again, and of course WWII led to huge government deficits, which after the war amounted to a big economic stimlus.

    In short, it looks to be pretty likely that unions aren’t the only things impeding the development of India, and they may not even be a particularly important factor. They probably aren’t helping either, as the US unions did in the 1930′s, because in many ways India is probably not as “developed” as the US was in 1929.

    Ray,

  12. mostly in Bengal, the Communist dominated area? If so, there is an obvious question about why Gujarat and the other BJP dominated areas have not industrialized further.

    Thats not accurate. Gujarat is the most industrialized state in India which has long running BJP govt. Haryana and Punjab are other two states with heavy concentration of engineering manufacturing industries. These states have been mostly rules by BJP aligned regional parties. Maharashtra and Tamilnadu are other states with manufacturing industry. Tamilnadu is run by a regional part aligned with the Congress. Maharashtra run by Congress govt. The worst performing states wrt business in India are West Bengal and Kerala. Both ruled by communists.

  13. the rich never give of their own free will…it must be taken.

    Sure, where can sign up for my free Ferrari, comrade?. It is sickening that some people here are actually saying these things, that I as a top income earner have to forced to cough over my hard earned money to some ungrateful deadbeat. Whoops, nothing better can be expected from this commie website

  14. The problem, as the WSJ notes, is that the Indian economy employs a comparatively paltry 1 million individuals in the “Organized Manufacturing Sector” and dropping -

    Wow. That really says it all. China has upto 100 million and the US even after a steep decline in manufacturing has upto 20 million (with a fraction of India’s population). Things look very bleak for India.

  15. look, it only indicates that we need to make the labor laws and unions even more powerful. That way they would have a stake in the system and only steal the ferraris of rich people, and their unicorns also, and make India’s manufacturing sector strong. Look at Sweden: do they not have more powerful unions than India?

  16. That’s easy. India, like the US, is experiencing its fastest employment growth in its least unionized sectors. One might even go further and attribute DIRECT causality rather than merely indirect correlation –> it’s BECAUSE they are non-union / less-regulated sectors that they are the fastest growing in India.

    Economics (and indeed all attempts to describe the world) is all about telling stories and trying to figure out which ones fit the evidence best, given that in any given scenario, people with different preconceptions will have different stories. Hence, that’s why ignoring the rest of my sentence is to the detriment of your argument if you’re trying to convince. What I said was:

    Please articulate a cause and effect and back it up with evidence about on-the ground realities in India (using labour laws to look at labour conditions is like looking at tax rates to determine how much people actually pay in taxes).

    For example, a hotelier in India told me that the labour unions serve a useful function for him because instead of having industrial disputes with workers, the labour union takes care of it for them. Just one example – and anecdotal at that – but it at least makes a nod to looking at the real world of India. Similarly, an economist has told me that India’s pharmaceutical industry has suffered because of the elimination of their reverse engineering capabilities by virtue of intellectual property laws.

    Isn’t it possible, just possible, that manufacturing hasn’t grown because the state does not have an adequate industrial policy, because having industrial policy – as an idea – have gone out of vogue? Or because the Indian government has focused so extensively on the SPZ model that it has lost sight of the need to develop a broadbased manufacturing industry and require foreign investors to provide backwards linkages where they do invest? Just sayin – there are a lot of stories one could come up with in the absence of any reliable and relatively consensus based evidence.

    To some extent people with different paradigms will always speak past each other, but the only way that it can even be said to be social analysis rather than ideological combat is if they bother to root their analyses on the basis of real world evidence, analyse the accuracy of that evidence, root out biases where possible, and accept at the e4nd of that that it will still be flawed.

  17. It is certainly true that the labor unions are a factor preventing India from adopting a Chinese style development model.

    I’m curious how many people who support such a thing would support the almost inevitable and rapid mass slaughter that this would entail (on all sides). That’s not to say that there isn’t constant violence in India already, but comparing bandhs and police abuse and the frequent but periodic flaring up of larger bouts of state violence to, say, Partition level violence, is a different matter. Moreover, from a development standpoint, it poses important questions for basic political and social stability that the Indian state needs to preserve a semblance of social consent.

    but hey – if people want gujarat and punjab to secede and have a massive social civil war in which many people we know woudl probably get killed – by all means, go for it ;)

  18. Dr. A wrote:

    the almost inevitable and rapid mass slaughter that this would entail

    Dr. A, Would you care to elaborate on this? How exactly would a weakening of labor unions result in “inevitable and rapid mass slaughter”? And what does this have to do with Punjabi secession?

  19. Dr. A, Would you care to elaborate on this?

    I was referring to the development model, not labour unionization. Chinese style (strong state) development model policies –> exacerbation of social and political divisions because of a lack of state capacity to manage the level of conflict that would create –> centrifugal forces (e.g. relatively wealthy states attempt to escape a downward spiraling situation).

    Just one hypothetical scenario – not really worth much more than any other hypothetical, but the point being that India’s political orgqanisation is highly heterogeneous and fragmented and remaking that in a heavyhanded way is like to either fail or have an extremely heavy cost in human lives. Development models and industrial polciy regimes have to ‘fit’ and/or remake political economies – they don’t exist in the abstract.

  20. Of course, all this criticism of trade unions forgets the fact that union organisation is needed to defend the rights of workers against bosses. Without it, there will be more maltreatment and bullying of staff.

    People who want a more “Chinese” economic model actually mean they want workers who have less rights and for businessmen to get richer while neglecting/exploiting their workers.