How to get the weave right

The government must target labour market rigidities to maximise gainful employment in the textile sector.

July 21, 2016 01:29 am | Updated 01:56 am IST

India’s textile and apparel industry is all set for an overhaul as the new >National Textile Policy will soon be placed before the Cabinet for approval. The government has already accepted a >Rs.60 billion special package for this sector with an aim to create 10 million new jobs in the next three years, attract investments of $11 billion, as well as generate an additional $30 billion in exports. The key measures that have been approved include additional incentives for duty drawback scheme for garments, flexibility in labour laws to increase productivity, and tax and production incentives for job creation in garment manufacturing. As part of the reform agenda, the Ministry of Textiles would also seek to lower excise duty on man-made fibre to 6 per cent from the existing 12 per cent. It has also placed on the table other specific interventions to encourage value addition so that India becomes an exporter of value-added (garment) products rather than just raw material (fibre and yarn).

Maze of labour regulations Undoubtedly, the ‘textile package’ has set the ball rolling for a much-needed reform agenda. The organised textile industry has been facing a slowdown for quite some time, due to which a large number of mills are reported to have shut. Workers who have been displaced are left with no choice other than to move to the unorganised segment or work on a contractual basis.

It has been reiterated time and again that the stringent labour laws and the cumbersome nature of compliance with labour regulations and norms act as a barrier to growth of the manufacturing sector. The textile industry is affected the most owing to its labour-intensive nature and hence high potential to absorb people. While the government has agreed to reform the archaic labour laws to generate more employment in this industry, in some cases it may require changes in the legislation, which is a challenge in itself. The system of labour regulations in India is quite complex, with over 200 labour laws, including 52 Central Acts. In their book India’s Tryst with Destiny , Jagdish Bhagwati and Arvind Panagariya maintained that it is impossible to comply with 100 per cent of the labour laws without violating at least 20 per cent. Each State has its own way of dealing with the industry and making amendments in the labour laws.

Among many laws, the biggest challenge is to bring reforms in the Industrial Disputes Act (IDA), 1947, that forms the basis for regulation of job security in the organised manufacturing segment, due to strict dismissal norms laid down under it. As per Chapter V-B of the Act, any firm employing 100 or more workers has to seek permission from the labour department, with jurisdiction over the firm, before any layoffs or retrenchment. The concerned labour department rarely gives such permission, even in cases where the unit is unprofitable and on the verge of closure. As a result, the industry may find it advantageous to either employ people on a contractual basis or shift to the unorganised segment.

Contract workers as an expedient The restrictive impact of this Act and also other regulations impinge largely upon industries such as textiles majorly employing unskilled or low-skilled workers. The problem becomes more intricate knowing that the textile industry has a significant number of women workers on the rolls, which may require modifications in the existing laws along with new schemes and incentives to retain them.

Statistics show that India’s textile industry is the second largest employer after agriculture, >providing direct employment to around 45 million people. The sector also accounts for 14 per cent of India’s total industrial production, which is close to 4 per cent of the country’s gross domestic product. The annual rate of growth in employment in the organised sector has been modest at 2 per cent since 2000-01 with some signs of deceleration, especially from 2007, a period that coincided with the removal of the Multi Fibre Arrangement that governed world trade in textiles and garments with quotas on exports from developing countries to developed countries. However, an increase in employment is accompanied by a growing share of contract workers in total workers from 8.42 per cent to 13.45 per cent (see graphic). The trend in organised manufacturing overall is similar to that observed in the textile sector, where the share of contract workers has risen from 21.3 per cent to 34.6 per cent during this period.

An increasing informalisation of employment within the formal sector could be explained by the labour market rigidities and growing competition, among other factors. The industry may employ temporary or contract workers in a bid to escape Chapter V-B of the Act despite the contract labour system being more expensive. Furthermore, the share of contract workers in total workers is much higher in firms employing less than 100 workers, and not falling under the ambit of Chapter V-B of the IDA. The share has significantly gone up in two segments, viz. preparation and spinning of textile fibres and weaving of textiles, from 8.21 per cent to 20.72 per cent and 18.38 per cent to 24.95 per cent in a span of 11 years. It is much higher compared to the firms employing more than 100 workers falling outside the domain of Chapter V-B.

This clearly indicates that the organised industry could be following an escape route by employing contract workers to replace the regular workers. Since firms employing less than 100 workers do not fall under the ambit of the Chapter V-B, they have an incentive to remain outside by hiring more contract workers. On the other hand, the firms which have already crossed this threshold of 100 workers have a much lower incentive to hire contract workers.

Towards gainful employment Such informal arrangements may hamper the industry’s growth in productivity and development in the long run. The trend, which has been continuing since the nineties, needs to be reversed. The Economic Survey 2016 has rightly pointed out that stringent labour regulations act as “regulatory cholesterol”, inhibiting the industry from generating employment and hiring regular workers. It is therefore important that as part of the ‘textile package’ the government should at least try to reduce, if not remove labour market rigidities for creation of gainful employment. Provision of better wages to casual workers, along with social security and other benefits, will contribute to higher productivity. The industry would also avoid hiring contract workers, be able to reduce contracting cost and move towards expansion. Some propositions have been in the offing, such as considering fixed-term workers on a par with permanent workers in terms of wages and allowances, providing tax benefits to firms employing permanent workers for at least 150 days, making provident fund contribution by employees earning less than Rs.15,000 per month optional, and the government contributing on behalf of the employer towards Employees’ Provident Fund Organisation for the first three years.

These initiatives, if implemented, can go a long way in reviving growth and generating gainful employment in the textile industry. The government must also focus on bringing amendments in the IDA which may otherwise act as a stumbling block. Rajasthan, Gujarat, Madhya Pradesh and Haryana are making some headway in this direction. There are provisions to reform labour laws in the new textile policy. It is hoped that the Ministry of Textiles under Smriti Irani will get the new National Textile Policy approved and speed up the reforms. Much depends on how capably she would fast-track flexibility in labour laws and regulations with cooperation from the Ministry of Labour and Employment.

Seema Bathla and Prateek Kukreja are with the Centre for the Study of Regional Development, JNU.

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