Given the slow pace of employment growth over the last two years and India ceding to Bangladesh and Vietnam the space vacated by China in the apparel market – the two are related given the employment-intensity of the sector – the government has done well to come out with a comprehensive package to revive the sector’s competitiveness. This includes greater use of lower-interest-bearing loans for modernizing of the sector and increasing the rates of duty drawback given to exporters.  The latter looks like a subsidy but, as chief economic advisor Arvind Subramanian points out in his article co-authored with textiles secretary Rashmi Verma (see adjoining column THIS HAS TO BE REMOVED FOR THE WEB COPY), it will be WTO-compatible since state taxes embedded in exports can be as high as 5% of the total value. At a time when India’s competitors like Vietnam and Bangladesh enjoy duty-free – or will, once various trade pacts come into force – access to key markets like the US and the EU while Indian exporters face a 9-10% duty, this needs to be completely eliminated. Section 80JJAA has also been amended to ensure the textile sector that has seasonal employment can also get tax benefits. If all goes according to plan, the government will give out sops worth Rs 18,000 crore, but direct and indirect employment will rise by 1 crore and exports $30 billion over three years.

According to the government, in another three years, the package will help India beat Bangladesh and Vietnam – that may be a stretch since there are several other disadvantages Indian exporters face including infrastructure weaknesses. Even after today’s changes on labour, textile firms will be reluctant to expand beyond 100 permanent workers – presumably Chapter VB applies only to them – since closing down is difficult beyond that. Which is why, as Subramanian-Verma point out, 78% of Indian apparel firms employ less than 50 workers and just 10% have more than 500 workers – the comparable numbers in China are 15% and 28% – which is what leads to poorer quality and productivity in India.

What is potentially more significant are the changes made in the employment policy – while this has been done only for textiles, if the move delivers expected results, it may well be replicated across other sectors. While the government already bears nearly 70% of the employers’ contribution to the EPFO for new employees, it will now bear all of it for the first three years – since this means workers can get an additional 12% in their take-home salaries, it is a big plus for moving to the formal sector. EPFO contributions are also to be made voluntary for those earning under Rs 15,000 a month – once again, this makes a big difference to chitthiwali and haathwali (CTC and take-home) salary, and is an incentive to move away from contract jobs. The biggest boost is the concept of fixed-term employment, introduced for the first time, which allows firms to meet seasonal requirements through the formal job market instead of, as now, hiring workers through contractors who generally indulge in all manner of malpractice. Though the tough Chapter VB type of changes will probably be left to the states – Rajasthan and Madhya Pradesh have okayed this for units employing up to 300 persons and Gujarat allows it for units in NIMZs – India could well be on the cusp of some sensible labour reform.