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The tale of Indian manufacturing falling short of its potential is one that has been told and retold on many an occasion. Considering the size of India’s population, and therefore its labour force, the manufacturing sector ought to be one of the brighter spots of the Indian economy. There are those firms which stand out, but viewed against the backdrop of the vast landscape of manufacturing in this country, a stark contrast becomes instantly visible. The government is often blamed.

There are various stages in the development of a nation’s economy. The trajectory often follows the path of moving from agriculture to manufacturing to services. This has at least been the case with the advanced economies of the West. When the British left, agriculture’s contribution to the GDP of India stood at 54%. Today it is less than 13%. If we look at the historical data about the share of manufacturing towards India’s GDP, it has never crossed the 18% mark. In fact, it has always hovered around 15%. In comparison, China’s manufacturing sector made up more than ⅓ of its economy a mere 15 years ago. It still contributes more than a quarter. The share of Indian manufacturing, however, is at the lowest it’s ever been (according to World Bank data dating back to 1960)

The modus operandi for a country with an enormous population would be to base its economy on manufacturing. China would be the model to follow for a country like India. This simply hasn’t happened, and we seem to have skipped a step and transitioned directly into a services economy. This may not necessarily be a bad thing, as each country ought to follow its own path. When we look at the service industry in India, however, we see that the jobs are primarily in the low-skill and low-wage category. This does not bode well for the equitable development of a country.

Many reports have been published by various organisations over the years about why manufacturing in India hasn’t taken off yet. The reasons primarily revolve around government policies. The latest bit of research to add to this list has identified an act enacted during independence, which still exists today, as being another contributor to the state of manufacturing in India today. The Industrial Disputes Act, 1947, was enacted as a measure to prevent mass job losses in Indian factories as British companies were leaving India. The government feared that Britain’s exit, unemployment would reach crisis-like levels. As a newly formed country, the fewer the problems the better.

The side-effect of such a policy is that it disincetivises people from investing into the manufacturing sector. Why take the risk of setting up a plant if in a few years things don’t work out but you are stuck with a workforce that you are legally obliged to keep on your payroll? U.S manufacturing firms grow by a factor of 8 over a three decade period. Indian firms don’t grow at all within that same timeframe. Does this mean that the Industrial Disputes Act (IDA) is to blame?

Well, when we look at data from the year 2000 onwards, the number of employees hired and the average productivity of each worker have both increased. This is likely due to the fact that in 2001, the Supreme Court made a ruling wherein it stated that, “there is no implicit requirement of automatic absorption of Contract Labour by the Principal Employer”. According to the IDA, firms are only obligated to retain full-time employees. Contractual workers do not fall under the category of full-time employees, and as such, since 2001, manufacturing firms have increased the share of contractual labour in their workforces.

The IDA has been replaced by the Industrial Relations Code in 2020 and the new law allows for more flexibility in the hiring and firing of workers on behalf of the employer. How much this will improve the situation remains to be seen. What we do know is that the IDA has had a hand in stifling the growth of India’s manufacturing sector thus far.

This does not mean, however, that the government ought to give industrialists free rein to conduct business according to their preferences. Worker rights need to be protected. The Industrial Relations Code was allegedly drawn up with little to no cooperation with any workers union in the country. Contract labourers essentially perform the same tasks as their full-time counterparts, but do not receive the same benefits. It does not have to be a situation where either the sector grows or the workers are protected – achieving both should be the aim.

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