Maruti Suzuki is the posterchild of India?s manufacturing capability, a world-class company that invested early and created a new ecosystem in India. Today, this posterchild is facing the hard reality of India?s labour market. The lack of reforms over the last 20 years, inadequate support from the government and a rigid system have led to an adverse reaction from industry, which has embraced a new system of labour management. The company?s plant at Manesar, near Gurgaon, has seen continuous labour strife over the last year due to the large-scale casualisation of labour. India?s lack of labour flexibility and the hangover of labour militancy in the 1980s has led to industry not creating large-scale permanent employment but resorting to the use of contract labour.
Today, all over India, both in industry and services, contract labour has become the solution to meet industry?s needs. Further, a rise in the aspirations of India?s lower middle class and galloping wage inflation due to a systemic inability to enhance the supply of skilled labour has increased costs considerably. Permanent employment is no longer looked at as the means to meet the needs of a growing economy by industry. In the manufacturing sector, the 1990s saw increased competition, an open market for goods and labour and a need for more automation and cost competitiveness. It also saw, worldwide, the phenomenon of outsourcing, increased specialisation of labour, and destruction of many jobs by technological innovation. Automation and the use of robotics accelerated productivity and what was earlier done by people was now increasingly eliminated. The bulging middle in the labour pyramid almost disappeared, creating the need for people only at the bottom and top of the pyramid. Manufacturing became a matter of design, innovation, marketing and outsourcing of the actual work.
In India, the white collar component of manufacturing remained to some extent, while the blue collar diminished or was replaced by casualisation of labour. The rise of contract labour, as a response to this, meant that a large number of employees could no longer expect annual increases in compensation and benefits, security of tenure and promotions, but only increased insecurity.
Contract labour creates flexibility and lowers costs. But it destroys the ability of labour to go up the value chain through increased compensation and to build sustainable careers. Earlier, industry in many parts of India allowed ordinary Indians to improve their economic condition, educate their children, have a secure future and see growth in their compensation and careers. It allowed the economic means for a new generation who were better educated and could more fully participate in India?s growth. But it also enhanced costs, made enterprises less competitive and destroyed enterprises, which stayed static and could not change. A classic case was India?s textile industry. Large-scale unionisation and permanent labour conditions, coupled with increased inflation, led to higher and higher compensation, lower productivity, inability to fully compete and ultimately the destruction of the entire industry.
India?s manufacturing industry also saw the same trend and an insensitive government that caved in to militant labour. Industry suffered deep pain as they restructured. The labour laws also did not help as the ability of industry to restructure and lay off labour to meet competitive conditions was constrained.
Industry?s response was the use of large-scale contract labour that gave them flexibility as well as lower costs, and increased competitiveness and growth. But the wheel seems to be coming full circle, with contract labour becoming increasing disillusioned with the lack of growth in compensation, lack of job security and a feeling of helplessness at the rise of inflation. This seems to be the reason for the current sustained labour unrest in Manesar that now threatens to spread to more centres as conditions are the same there.
This vacuum in policy response needs to be filled before it becomes more widespread and hurts India’s manufacturing. China has recently seen an increase in labour costs, an appreciation of the currency and this has given India an opportunity to compete better globally, provided it redefines the labour market. The solution could be a change in India?s labour laws to give the necessary flexibility to employers to lay off labour in case of need, but political considerations continue to hold sway and well nigh make this almost impossible. The alternative could be a change in the contract employment laws by allowing contract labour, but with a condition that the payment to labour is at least 25% above the minimum wages, payment of full statutory benefits through the contractor and the creation of an unemployment benefit scheme. This scheme could entail contributions from the principal employer into a fund that will pay labourers a monthly compensation for at least a year in case they lose their jobs and do not get jobs in the interim. The innovative use of pension contributions through the principal employer will also create a social security web to take care of retirement. In addition, a much better health insurance scheme, in lieu of the ESI scheme, which is currently not working and imposing heavy costs, may be the solution.
But one thing is clear, the lack of a policy response to the new situation is no solution. India needs a policy response before the situation gets out of hand. The next 20 years are India’s to make and can see large-scale employment generation if we get our act right. But fairness and equity requires a better response from employers, too.
TV Mohandas Pai is director, Manipal Universal Learning, and Nishith K Mohanty is chief human resource officer, Manipal Group