Why Couldn’t India Become A Manufacturing Behemoth? Our Bizarre Socialist Labour Laws Are To Blame 

Over the last couple of days, many states have announced bold factor market reforms such as labour reforms.

Some states have also undertaken substantial agricultural reforms such as Madhya Pradesh.

The common thing amongst these states is the fact that they’re all governed by BJP administrations.

It would be naïve to think that COVID–19 pandemic can be dealt with by just the central government alone.

The economic fallout is going to be significant and comparable to the Great Depression.

This, therefore, means that we need a multi-staged policy response from the government and some of the long-awaited reforms have indeed been pending are land and labour reforms.

These are ideally supposed to be done at the state level, and therefore, by BJP governments finally taking a bold decision, they have revealed a larger strategy for economic revival over subsequent months which relies on higher investments, especially in manufacturing sector.

This also signals a shift from the Nehruvian-Socialism that has failed us for decades and perhaps, COVID–19 has finally started to dismantle the remains of the pre-1991 India growth model.

That being said, it is important to take a minute and acknowledge that every economist has over successive years advocated for a change in our land and labour regulations.

For instance, the Industrial Disputes Act required companies to seek permission before retrenchment of workers if the establishment had more than 300 employees.

This was subsequently lowered to 100 workers.

To not being able to fire people, irrespective of a change in business conditions, naturally meant that businesses would keep their number of employees at less than 100, or create a new firm for the 100th employee and every subsequent employee that was hired henceforth.

These laws and excessive regulations in the formal sector led to companies outsourcing work to informal enterprises which didn’t have to meet such compliances.

Consequently, India created a structure that incentivised informalisation of the economy and at the same time had a structure that encouraged companies to remain small.

This was also the essence of the chapter on dwarf firms in the Economic Survey.

Our structures that discouraged firms from getting large gradually led to a decline in our competitiveness even as other countries built mega-factories and huge global conglomerates.

With a large domestic consumer market like India, there was potential to have some of our key companies emerge as MNCs competing with the best in the world, but the reason why that didn’t happen was because our policies didn’t want companies to become big.

The laws and regulations that have been created were done to protect the dignity of labour.

The question is, were these norms successful in achieving the objective?

The answer is obviously ‘no’.

It is intuitive that informal workers are worse off with little to no job security and we know from our experience that these norms did result in greater informalisation.

Moreover, they prevented investments in India by large companies which would have helped us integrate further with the global value chains.

Consider this: While these norms were meant to protect those who were employed, they prevented investment which prevented the creation of job opportunities.

Therefore, while those in the formal sector may have benefited from these regulations, a large section of the population, especially those in the agricultural sector, continued to be in a state of disguised unemployment.

It shouldn’t be a surprise that India didn’t witness the kind of manufacturing revolution that some of the other emerging economies did.

The fact that some of these reforms have happened in land-locked regions such as UP and MP are also encouraging as our peninsular states had initiated some partial relaxation of these norms in the past and had some success in attracting industries.

Overall, the prospects of labour reforms come with one of the biggest corporate tax cuts in the world.

This, at a time when companies are looking at alternatives to China, is an excellent opportunity for India to seize the moment and several BJP ruled states have already started talking to some of these companies.

The interesting point here will be a politico-economic one.

That is, whether the Congress ruled states, or the other Opposition ruled states also start dismantling the Nehruvian Socialist model? If not, then, it becomes imperative for the BJP ruled states to be as aggressive as possible on some other reforms such as the new electricity Bill and a revised land acquisition amendment to name a few.

Success of these states in their transformation is critical not just for the overall economic recovery post COVID, but also for creating a new India Growth Model which can be replicated across other states.

If successful, then who knows, other developing and low-income countries may study (and try to emulate the same) for decades.

There’s a lot at stake here, and it’s important that we double down on reforms over the coming months.