Woes – Indian Apparel Industry – Labor Laws

The Indian apparel industry has been stagnated at a chronic level of US $ 17,000 Million since last 8 years. Analysis of data for three countries Bangladesh, Vietnam and India, obtained from WTO website https://www.wto.org/ for period - post quota regime - 1st January 2005 on wards is as under:

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Smaller neighboring countries have done much better than India. Bangladesh’s apparel exports overtook India in 2010 and Vietnam’s in 2012.

Theoretically, India is well placed to capture the international export market as it has the following strengths:

1. Huge demographic dividend.

2. Cheap labor cost when compared to China.

3. Availability of financial capital to build large garment factories.

4. Availability of technical & managerial talent.

5. Excellent product innovation & development capabilities.

6. Excellent backup of competitively priced raw materials from Fiber to Fabric within the country.

However, India’s garment exports have not grown for quite some time.

What has happened?

The Indian Garment factories lack economies of scale. They are small and the whole industry is fragmented. Following are the structural problems in the industry:

1. A big Chinese or Bangladesh factory employs over 5000 workers or more under a single roof, whereas a typical large Indian factory employs 500 to 800 workers including contract workers.

2. Due to inflexible labor laws not allowing automatic route to layoff / retrench or close the factory, entrepreneurs prefer to remain small in size. It may be noted that in case a factory employs more than 300 workers on its muster roll, it requires government permission to layoff / retrench or close its factory.

3. Any apparel manufacturer wanting to expand, prefers to open multiple factories at multiple locations in order to by-pass the restrictive labor laws. This makes the manufacturing model clumsy / difficult to manage thereby increasing the cost of production in absence of economies of scale.

4. A small factory size not only adversely impacts the productivity, but also restricts the resources and capital availability to invest in newer technologies / automation. It becomes difficult to financially justify the investment in automation.

5. Most of the garment factories employ more contract workers and less permanent workers. Since the contract workers are not permanent, their formal training is rarely done. This leads to the quality of garments being inferior requiring more re-work.

6. The big Composite / Fabric Mills, who have the financial muscle to set up large automated garment units, dither to forward integrate into Garment Manufacturing due to restrictive labor laws. Few existing fabric mills have set up dedicated garment units, but they are small in size as per international standards.

Other adverse major fallout for the country:

1. India loses on domestic value addition by exporting more raw materials and intermediate products like fiber, yarn and fabric instead of fully value added products like garment.

2. The composite fabric mills prefer to export their yarns and fabrics due to large order sizes from overseas factories and the added government export incentives like duty drawbacks, MEIS, etc.

3. The garment factories of the neighboring countries buy these intermediate products from Indian mills at a cheaper price, as Duty DBK and export incentives are factored in. Ironically, this further makes garment costing costlier & less competitive for the Indian factories.

4. No entrepreneur dares to set up a big world class factory under a single roof knowing very well that, once having set up a large unit, there is no automatic compliance-based exit route available to Layoff / Retrench its workers or close the unit. The government permission is required, which rarely comes. Failure to comply with provisions of the law is punishable with imprisonment.

5. It is ironical, that the very labor laws which were supposed protect the labor rights have pushed them into informal employment. More than 90% of the workers employed in the country are employed through informal means which deprives them of social security benefits.

Conclusion:

1. The labor laws on layoff / retrenchment and closure should be reverted back to the provisions prior to 1976. The law - ID Act 1947, then was compliance based and not permission based.

2. Interestingly, the above restriction requiring the grant of a government permission did not exist before the year 1976. During the period of ‘Emergency’ in 1976, the ID act 1947 was amended to insert a new Chapter VB, which brought in host of permission-based restrictions for large factories employing over 300 workers.

3. Though several amendments / new laws were made during the above said period, however many of them were repealed in the subsequent years. Unfortunately, none of the subsequent governments had the political will to re-visit the labor laws pertaining to the industrial disputes. The new “Industrial Relations Code 2020” also fails to address this inflexibility. It is simply a ‘Cut, Copy & Paste’ of the chapter VB of the Industrial Disputes Act 1947.

4. India cannot grow as a manufacturing hub especially for industries like apparels, which are highly labor intensive in nature, unless the labor laws are made flexible to allow ‘Hire & Fire’ on the lines similar to the services sector.