Not long ago, India’s biggest export categories related to leather, textiles and diamonds.

There was one factor common to these three – they employed huge numbers of people collectively, though individually, no unit employed more than 100 people. They were characterised by the smallness of their operations, often scattered across cities and states.

This was – and is – because of India’s labour laws, which made it very difficult for units to shut shop once they crossed a certain number of employees or a certain threshold of capital employed. While this is not a deterrent for large organisations, it does deter small entrepreneurs.

After all, the very act of putting in capital to start a business, involves huge risks. Why compound this risk with a structure that makes it difficult for an entrepreneur from cutting his losses when things go wrong?

As a result, India has not been entrepreneur-friendly at all. But when a country compels its entrepreneurs to think small, it also reduces their global competitiveness. Not surprisingly, labour laws are the primary reason India’s garments industry has lost its global competitive edge.

Export of garments, once considered a sunrise export industry, today barely manages to cross an annual billing of $1 billion. Contrast this with Bangladesh, which has pushed up its garment exports to over $26 billion a year! 

China is today the world’s largest exporter of garments, but is likely to lose this market as its labour costs increase. India could have been a beneficiary of this opportunity shift, but may miss the bus again, primarily because it has not been able to change its labour laws.

This is sad. India’s policymakers have literally allowed the country’s growth potential to languish, or even shrivel up just because 6.3% of its workforce (see table) does not want labour laws relaxed. As a result, business areas in which India could have competitive advantage are allowed to move to other countries.

Many entrepreneurs are also persuaded to think small, because few like the suffocating embrace of the inspection raj that the labour department has unleashed on India’s businesses.

Not surprisingly, India’s organised workforce remains small. It also explains why wage differentials between the organised and unorganised workforce can be uncomfortably large. This was in stark evidence when casual workers at Maruti Suzuki’s plant went on strike.

Not having flexible labour laws invariably ends up in exploitation of unorganised workers.

The only way out is to have flexible labour laws that would apply to all units, not just organised workplaces. Such laws would encourage the creation of more jobs, even if it meant unviable units retrenching employees, after paying them reasonable compensation.

If India wants capital to become productive, it must allow businesses to come up easily and also allow them to redeploy those assets in other businesses that promise better opportunities.

Only then does an economy become vibrant and entrepreneurial. Obviously, 6% of the workforce cannot be allowed to destroy the very fabric of India’s economy.