Refusing to fix labour laws, in even PM Narendra Modi’s case, means China’s advantage over India is increasing all the time.
Friends, reads an impassioned WhatsApp message in response to the Chinese outrage in Doka La, can we pledge not to buy Chinese crackers next Diwali? While the widely-circulated nature of the message, and its outrage, would suggest many would like to follow its advice, chances are, come Diwali, most would have forgotten.
And with good reason, Chinese products are way too low-cost for Indians to resist, actually to even be able to compete against. That is why, from the pooja Ganeshji to the latest mobile phones, China’s market share is increasing with each passing day. So, we can fulminate all we want, and have workshops on what we need to do to curtail China’s spread in Asia, but we can’t even stop it in our own country. If the price and quality of Chinese goods isn’t compelling enough, in the case of power plant equipment, for instance, generous Chinese credit made many Indian companies opt for Chinese machinery over the past decade.
If it isn’t enough that Chinese mobile phones today account for 51% of India’s smartphone market, PayTM which has a significant Chinese funding is the country’s largest- and fastest-growing payments wallet—once you take into account the fact that China is the world’s third-largest source of FDI and the credit lines its banks are willing to offer, it is next to impossible to curb China’s spread in India.
India, even under the muscular Narendra Modi, can’t fashion a military response to China, but the question is why is it helping it in such a big way? The main reason why China is so ahead of India, it is an old cliché, is because successive Indian governments have willed this. They have consciously kept India back and, for all its vigour, even a Modi government is not addressing the root cause—India’s crippling labour laws. If a government with the mandate Modi has cannot address this, it is difficult to see which government in the future will be able to.
With wage costs half to a third of China’s, many of the inefficiencies Indian firms face due to, say, poor infrastructure can be dealt with, but where India loses out badly is in the quality of its products and that is related to labour laws which compel industry to stay small—to cite the latest Economic Survey, 78% of Indian firms employ less than 50 workers and just 10% employ more than 500; the comparable numbers for China are 15% and 28%. Naturally, then, when a Walmart wants a large order of jeans that need to be uniform and consistent, it will prefer a China—India’s manual processing will ensure the fabric will not be consistent across batches. According to a recent study by Metro Valley, a firm that is working on environmentally sustainable urban development, while India’s labour costs are around half that of China’s, poor labour productivity means China’s cost of production is half India’s.
Now, add to this poor quality (the most important part of any purchase), the costs of poor infrastructure—road transport in India costs $7 per km vs $2.5 in China and it takes 21 days to deliver from JNPT to the US east coast vs 14 days for China—and other DoingBusiness indicators, and it is easy to understand that even as China vacates its low-end manufacturing, it is others that are grabbing the space—Bangladesh and Vietnam in the case of apparel and Vietnam and Indonesia in the case of leather and footwear (see graphics). There isn’t much data about the share of Chinese products in Indian markets except in areas like mobile phones, but in an open-economy framework, if you aren’t export-competitive, you can’t be import-competitive either.
It gets worse. When the government realised it wasn’t creating enough jobs, it came up with special packages like one for the apparel sector which relaxed some labour laws. Among other incentives, firms were to be allowed to hire fixed-term employees and, in another reform, the amount taken away by mandatory EPFO-ESI contributions was to be cut—these lower disposable salary by 45% and make workers prefer the unorganised sector. It is been well over a year, but the new apparel package is still not working and the EPFO/ESI changes remain still-born.
To compound this, when successfully implemented, the new GST rules will force the bulk of India’s small firms to get into the tax net, and rob them of the tax theft that most used to lower prices to be able to counter their inefficiency vis-à-vis the larger firms. If laws are not fixed quickly, SMEs will be badly hit by GST.
PS: If India grew at 10% per year instead of 7% for a decade, even with the same proportion of defence expenditure, India could spend a third more than it does. If nothing else, that should get the government to quickly fix India’s paralysing labour laws.