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On This Day - 25 OCTOBER 2011
This three decade old crisis may cripple India Inc.
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But it is not that simple. First of all there are questions whether the skill set of people will be sufficient enough to garner quality jobs. But another issue that India Inc will have to contend with is growing labour issues. Take the example of the labour unrest at Maruti's Manesar plant. While it has severely crippled the company's production and impacted its performance, there are increasing concerns that labour issues could spread beyond the auto industry to other manufacturing sectors as well. This is because industries such as capital goods and chemicals also boast of operational dynamics similar to automobiles. This is in contrast to the labour dynamics either in the IT or the construction sector. For instance, in the IT sector, with a 30-35% attrition rate, employees in such firms do not stay in one company for long enough to form a union. In construction, which is characterized by many low skilled jobs, migrant labour has a much lower chance of forming a union and giving trouble to the management.
The crux of the problem at Maruti has been that it has an increasing number of contract workers. These have been paid lower rates as compared to their permanent peers although the work extracted from them has been nearly the same. Maruti and any other company for its part have probably been lured by contract labour simply because India's labour laws are too rigid. For instance, under the Industrial Dispute Act, a firm which employs over 100 workers cannot retrench a permanent worker without government permission. No wonder the companies are far more comfortable hiring contractual workers. In times of an economic slowdown, it gives them the freedom and the flexibility to downsize the workforce if the situation calls for such a step.
Of course, problems are not new to India and the country has witnessed paralytic labour unrest in the 1970s and 1980s as well. Although one solution to this problem is for the management to consistently have communication channels open, it goes without saying that from a longer term perspective Indian labour laws need a serious overhaul. One that gives greater weight to linking pay and benefits with performance. Otherwise, stalled production and increasing unrest will hardly add anything to India's economic growth, but will take a lot away from it.
However, we believe it is too early to take a call on this issue. It may be noted that majority of the Asian companies have huge piles of cash sitting on their balance sheet. Further, companies are also delaying their expansion plans where debt is expected to be used as a source of finance. While this may hurt growth in the near term, the situation is not that grim on the liquidity front as it appears to be. But it can be said that the interest rate benefit arising from borrowing abroad has definitely narrowed down to a certain extent.
The most important factor in any economy is the human capital. As the working population ages, the number of dependents will grow at a much faster rate than the bread-earners. How China deals with this situation remains to be seen.
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