Tag Archives: Economics

In my first job out of business school with Hindustan Lever, as Area Sales Manager I had a team of over 20 unionized salesmen. I ran a Voluntary Retirement Scheme in my first year and then again in my third year by which time we were down to half the original team size. Yet we introduced new brands in the market, grew our sales and in general did well as a team.

In my third year I took over a small new business of hot beverage vending for Lipton (at that time a division of HLL). The business was small but growing rapidly as we expanded our city coverage. In Sales, Distribution and Service we had about 50 people. Of this the number of direct Hindustan Lever employees was 2. The rest were all outsourced, contract or distributor’s employees.

I then moved to Infosys in the US and over my 11 years there, hired scores of employees onto the company’s US payrolls. I also had to let go of some people for performance or other reasons. At all times, I was acutely aware that I myself was an ‘At Will’ employee. I could be fired with two week’s wages without giving a reason. As long as the reason was not discriminatory (race, sex, religion etc.) I could not bring legal action upon the company.

My experience with the vastly different labour environment in both India and the US has driven home a very important lesson – a business exists to make money for its investors, not to provide employment. And that is, paradoxically, the best way to generate employment.

Let’s take a look at how India’s labour laws distort the business environment and harm employment and employees:

1. It discourages capital investment – particularly in service oriented industries. Investing capital means taking risks. Market risk – the risk that the business may not succeed – is a risk that ‘comes with the territory’. In most countries, investors know that if their business fails in the market, they close down the business, sell off the assets at knocked-down prices, book the loss and take the remaining capital to some other investment opportunity. However, in India, failure, or a downturn, in the market also means that you are still saddled with the payroll costs because you can’t restructure or layoff anybody. You can’t exit the business because employees will lose jobs. That’s something investors don’t have to deal with in most countries. You look at so many rusting factories in every major city in the country where the factory owner has not been able to layoff employees even when the networth of the company has gone down to zero, and you wonder – what a colossal waste of assets. You also wonder –  what do future investors think when they see these rust-buckets? More likely than not it’s – ‘That could be my investment 10 years from now.’

2. It provides no incentive for raising productivity through automation. Look at all the government offices or offices that have unionized staff like banks. To the last one, they opposed computerization. Why? because it could do the job faster and so it would reduce the number of jobs.

Yes it will and that is a good thing. Doing more work with fewer people raises productivity. Productivity raises incomes. The developed world’s prosperity is entirely linked to higher productivity. Also higher productivity creates the surplus (or the profit) that can be invested to create more jobs.

3. If you want to produce a quality product or service it needs carrots AND sticks. With an employee who is not performing, you train, you mentor, you put them on Performance Improvement Plans. But in the end, the employee needs to know that if his performance does not improve he can lose his job. Without this freedom for businesses to manage for performance, it may be possible to compete against companies who are similarly hampered, but it is a clear disadvantage in the global market.

4. It pushes employment generation into the informal sector. In my second stint at Levers I would have loved to hire people directly into the company instead of outsourcing critical functions like Sales. With the Levers brand name as an employer we would have got great talent which would have been better for the company. However, Levers would not do that for a new business that could have failed leaving them with employees they wouldn’t know what to do with. So all of the hiring was done by outsourced contract firms. Did these employees get the PF and benefits they would have got at Levers? I doubt that very much. I don’t think these contract firms even paid any taxes since they were probably classified as Small Scale.

In summary, the current labour laws in India distort the business environment to where it reduces employment generation by discouraging investment, reduces income growth by discouraging productivity increases, reduces quality by taking away the freedom to manage for performance and pushes employment generation into the informal sector.

Whenever I bring this up with people in industry in India, I am given many reasons why this is not a problem. Someone says ‘Only 20% of my workforce is unionized, I just work around them’. Another one will say ‘If you really want to fire an employee for performance, it can be done.’ But most of all the reason I get is ‘But the economy is doing so well why do we need to think about redundancies and labour flexibility?’ On the contrary, it is because the economy is doing so well that this is the right time for labour reform.

I believe this is the most important reform that government must now address. However, this is also the most difficult. Dismantling industrial licensing was like a walk in the park compared to this. With the government dependent upon the CPI(M) to stay in power makes it almost impossible to do major reforms. But major one-shot reforms aren’t the right answer anyway. There should be a 10 year road map on labour reform. But starting now. Let’s begin the discussion.

The recent fiasco in France holds many lessons for democracies everywhere.

France has this strange combination of a thriving corporate industry and high unemployment especially amongst youth. The culprits here are France’s rigid labour laws which make it almost impossible to dismiss or layoff employees. Companies therefore prefer not to hire. If they have to, they use temporary workers. Since older employees can’t be fired easily, unemployment hits the youth. Much of the unemployment is among the children of immigrants which ultimately was the cause of rioting in France a few months ago. People with no jobs are more likely to riot – they have time on their hands and nothing to lose.

The government in France, with the best of intentions, decided to fix some of these problems to regenerate employment amongst youth. But they could not suddenly change labour laws across the working population. If layoffs were permitted across the board, sure, growing companies would start hiring young people, but there would also be a lot of older workers laid off and out of jobs. So the government decided to make it easier to fire only young workers in the first two years after they join.

Big mistake. Within days, massive student and youth protests were organized across the country. Colleges shut down because all the students were in the streets protesting against what they were calling a law unfairly targeting young people! The government first said it was willing to negotiate the time period – make it 18 months instead of 2 years. In the end, Jacques Chirac just withdrew the bill, in effect dashing the Presidential hopes of his trusted luitenant Dominique de Villepin who was the author of the bill. So were all students against the new bill? No. Last week they were interviewing a law student from the Sorbonne on BBC. The student was being asked about the law and the protests. She was against the protests and for the law. She didn’t like the fact that the colleges had been shut for the past 4 weeks and who knows what would happen to her final exams. But more importantly, she thought that the new bill would generate employment for the youth! She also said that none of the economics and law students of her university were in the protest marches.

I think the new bill would have worked. Not that the French government didn’t deserve the shellacking it got. They have nobody to blame but themselves for making France into an insular, inflexible place to do business. But really, this bill didn’t have a chance. Why? For two reasons:

1. The rationale for the new law is not easy to explain. It is not obvious that making it easier to fire young workers will result in higher employment among the same workers. I can imagine myself trying to explain that to a 3rd year medieval history student. Even if I knew French, I don’t think I could. On the other hand, the opposition can easily spin it the other way portraying it as an evil law designed to protect older workers or even designed to keep immigrant youth from keeping good jobs. Here I don’t just mean the Opposition in Parliament. Every change has opposition to it simply because someone is going to get hurt by the change.

2. The opposition to the law had Street Power. The people who were in favour of the new law like the Sorbonne law student and her friends, did not.

Cut to India. Labour flexibility, for decades, has been the one reform that no politician wants to touch. It is hard to believe that if you are the owner or manager of a company, your company can make losses, go bust and lose its entire net worth, but you can’t restructure your workforce. Capital treads softly where labour is inflexible. There was a time when there was talk of an Exit Policy for sick companies. A very unfortunate choice of name, if you ask me. The opposition (trade unions) quickly positioned the Exit in Exit Policy to be the exit of employees. ‘Hire and fire’ was another colorful phrase they used. The government had to bury the whole thing.

But its now resurfacing. You hear snatches of statements made by the PM and FM about the need for labour flexibility. Although they’ve picked a better name this time, I don’t like the government’s odds of passing any substantive legislation on this matter. Why? because of the same reasons that the French government failed.

How do you explain the rationale of labour flexibility to Mr. Godbole who is a teller in a bank? Mr. Godbole, we plan to make it easier to fire people such as yourself because this will encourage capital investment which will generate more jobs. I can just see Mr. Godbole’s eyes glazing over. Before he gets angry. Even Mr. Godbole can understand that making it easier to fire him is not good for his pension. Self interest is a great motivator. When it comes down to Godbole’s job security vs. more employment in the country, Godbole knows which side of his toast is buttered. And finally, Godbole is part of a union. He has Street Power. His union can call a strike, do a dharna and if it comes down to it, burn a few buses. The stakes are very high. And a burning bus is an arresting sight on TV.

The challenge of sound economic policy making is that often doing the right thing benefits a silent majority, but hurts a vocal minority. In some cases the vocal minority can make their voice heard. In others they can take their campaign funding elsewhere. You need money to run elections. You need votes to win them.

I do think that one of the most important reforms that the Indian economy can benefit from is bringing labour flexibility. This is the best time to do it when economic growth is strong. But I won’t be holding my breath waiting for it. Not while the govenment depends upon the support of CPI(M).

A couple of weeks back I spent a day in Navi Mumbai with a friend. Every time I go there I am elated by what I see there – a great city in the making. But I am also saddened. Is the only hope of urban India to build new cities? Are today’s cities doomed?

For those not familiar with it, Navi Mumbai is a 344 sq. km area on the mainland next to Mumbai. It was developed with the objective of decongesting Mumbai, which was (and still is) the land of promise in India – a cross between LA and New York with its Bollywood and Dalal Street. Unfortunately, it is a strip of land largely surrounded by the sea and its growing population had no room to expand.

CIDCO (‘we make cities’), the organization that was entrusted with the task of developing Navi Mumbai has done an all around fantastic job. It not only planned and developed the land, it also undertook much of the housing construction there, when no builders thought it would be worth their while. CIDCO continues to plan and develop and run civic services in Navi Mumbai. The results are fantastic and are noteworthy in three seminal ways.

One, Navi Mumbai is a planned city. It is laid out with what I am sure is a Master Plan behind it. It reminds one of the Chandigarh in my school days with numbered sectors and roads intersecting at right angles. Two, the infrastructure is remarkably good – roads, bridges, rail, optic fiber…it’s all there and well maintained. The administration actually runs a surplus and at this time the sale of land must be so profitable for it that investing in very good infrastructure is feasible.

But the most visible difference between Navi Mumbai and Mumbai itself is the almost complete absence of illegal construction and slums. Enforcement of property rights is complete. And that is what is amazing.

I see a great future for Navi Mumbai. There are big corporates like Reliance that are making big bets on Navi Mumbai. I think that is good for Navi Mumbai and for Mumbai itself. Mumbai can’t handle its urban crisis itself, so a helping hand from a satellite city should be welcome.

Cities like Mumbai and Bangalore are crumbling under the pressure of rapid growth. But growth is really a handy excuse. Its not like you couldn’t see it coming. Its just that it was nobody’s  problem. Unfortunately, urban development is a long cycle endeavor. Developing urban infrastructure with foresight is a waste of time for an elected government. Its benefits are not seen by the electorate in time for the next elections. On the other hand urban development is a most lucrative opportunity for corrupt politicians and bureaucrats. Planned development that benefits future administrations versus builder driven development that lines ones pockets today – the choice is easy. Even if one is an honest administrator, doing the right thing will require you to fight so many vested interests, why not let sleeping dogs lie?

Which is what saddens me. Is the difference between Navi Mumbai’s rise and Mumbai’s meltdown a matter of new versus old? Or is it the difference between governance by an elected government and a state corporation (CIDCO)? Either way, the odds are stacked against today’s Indian metros. We need strong leaders and able adminstrators. And citizens who care.