In the prequel to this article, we had argued that to get the Indian economy back on track and for it to remain resilient, both the government and the business need to carry out reforms that will lead to better wages for all Indian workers. Therefore, an important point that was raised was how to balance labour welfare with competitiveness.
To understand this better one needs to dissect the concept of competitiveness in somewhat greater detail. Competitiveness can be seen in the context of a product, a firm or a particular sector with regards to domestic as well as international market. It essentially depends on the cost and quality of factors of production at all levels of a manufacturing business. These factors can be normally clubbed into categories like raw materials, energy, technology, logistics and labour.
We had argued that since labour is the only factor directly under the control of the firm, it is also usually the one that gets compromised most easily in the interest of greater competitiveness – a fact that other industry insiders have also mentioned elsewhere. For instance, Anurag Behar of Azim Premji University also wrote in a candid foreword to the State of Working India report that industries have for years minimised the labour component, not so much because of draconian labour laws or shortage of trained labour, but simply because of the better quality, productivity, and safety of automated systems.
In this context, the key point that was raised was that with deep sectoral analysis, we may be in position to better understand how to retain competitiveness while ensuring that wages and working conditions are also better. Our research in the Textile and Apparel sector, the second largest employer in India, throws interesting insights in this regard.
What we have learnt is that in the textile sector labour costs–at an enterprise level across the country–is usually in the range of 8-10%. The major chunk of the cost, about 60% is on account of raw materials, while power and logistics costs are about 15% and 10% respectively. On the apparel side though, the wages form about 30 percent of overall cost whereas raw material forms 60% and power and logistics are within the remaining 10%.
Several of these costs like raw material and power can be substantively reduced through measures like raw material pricing at international parity and by reducing inefficiencies in power tariffs and sincere implementation of open access policy. Further cost reduction can be effected through interest subsidies, capital subsidies and credit financing mechanisms, among other things. Like in China or USA, these subsidies should be provided to the ecosystem rather than the textile or clothing producers so that they do not attract action under WTO laws.
In the context of raw materials, pricing at international parity can alone contribute very significantly. For instance, in Tiruppur, a famous knitwear export town, potential savings accrued can be to the tune of Rs 26 crores per day for 750 odd knitwear enterprises if they can get cotton yarn at international prices.
Similarly, logistics can also have a significant potential to improve competitiveness. Our own research reveals that on an average a truck in India travels at almost one-third of its capacity in a year because of infrastructural barriers and collusive anticompetitive practices by truck union. Digitization of compliances, standardization of state regulations and enforcement of competition law could lead to reduction in actual and opportunity costs incurred on the transport side as well.
With such improvements in place, even doubling of average wage rates will have no significant impact on the economic viability of an enterprise. A simple break-even analysis for a new unit reveals this clearly. For instance, a power loom enterprise that would otherwise break-even in five years in a place like Surat would take just three years to break-even if raw material is made available at international prices. Interestingly, this is despite higher wages. Competitiveness could further improve with streamlining of other factor costs like power and logistics.
Our research also reveals great disparity amongst different clusters. For example, the Bhiwandi cluster in Maharashtra engaged in weaving seems to be fading away while Tiruppur has been flourishing consistently. A prominent feature observed for those that are in better health is a more compact value chain, integrating garmenting with textiles, and availability of raw material in proximity.
Be that as it may, what can also be observed rather uniformly across all clusters is the presence of very few large firms and many small ones doing job work for larger enterprises for much less the cost. This pattern or ‘few big and many small’ is something that can be observed at an economy wide scale too where the outcome usually is that the big takes it all!!!
Making this more interesting is the fact that most of these clusters have labour coming from the same states namely UP, Bihar and West Bengal. Odisha has joined the club but for few select clusters only.
On a different note, a key question to ask, therefore, is why can’t similar enterprises be located in those states where these workers are coming from? If this question has not been asked before then it may just be the moment to ask for it could address several issues that are at the heart of economic inequality in general.
To name a few, it can prevent saturation of a cluster but particularly can address the issue of surplus labour in a cluster which drives down the labour value. Secondly, through horizontal spread of enterprises the question of scale, a factor linked to productivity, can also be addressed. The other two aspects of productivity i.e. speed and quality can then be handled through better connectivity and focussed skill training mainly through apprenticeship. Lastly, horizontal growth of enterprises can create better political agency for workers with their respective local and state governments.
At an overall level, this can not only improve enterprise well-being but also worker well-being – the two aspects with which the economy can function better.