As the world’s most populous nation, India has an opportunity to become a global manufacturing hub, especially with China losing favor in international markets due to rising tariffs and geopolitical tensions. Yet, as highlighted by a recent Wall Street Journal report by Shan Li and Megha Mandavia, systemic challenges continue to hinder India’s manufacturing sector. To seize this opportunity, India must reform its industrial landscape and support its factory owners in overcoming longstanding barriers.
What India Needs to Do to Compete
- Simplify Labor Laws
- Eliminate the need for government permissions to hire or fire workers in factories with over 100 employees.
- Streamline processes for adding second shifts and other operational changes to improve flexibility.
- Reduce the complexity of labor compliance rules, such as maintaining dozens of separate registries and licenses.
- Enable Economies of Scale
- Encourage the growth of larger factories by removing regulatory and logistical hurdles.
- Promote economies of scale to reduce overhead costs, similar to successful models in Bangladesh and Vietnam.
- Modernize Trade Policies
- Sign free-trade agreements to lower tariffs on Indian exports, making them competitive in global markets.
- Reduce duties on synthetic fabrics and other raw materials essential for fast-fashion production.
- Streamline Government Approvals
- Delegate regulatory authority to industry trade groups to expedite approvals, as practiced in Bangladesh.
- Introduce technology-driven processes to cut red tape and minimize in-person interactions with bureaucrats.
- Expand Workforce Participation
- Remove restrictions preventing women from working night shifts.
- Create incentives for young workers to join the manufacturing sector instead of opting for gig jobs.
- Attract Domestic and Global Investments
- Reduce barriers to foreign direct investment in labor-intensive industries.
- Build infrastructure to ensure efficient logistics, shorter production cycles, and competitive costs.
In the southern city of Bengaluru, A. Dhananjaya, who has run a garment manufacturing company for nearly three decades, says he grapples with high labor costs and hundreds of labor-compliance rules. He wouldn’t dare grow beyond about 100 workers, because that would mean more forms to fill out, more licenses to apply for, and more expenses.
Factories in India with over 100 employees require government permission to fire workers. Those with at least 50 female workers must set up an on-site nursery. Adding a second shift to turn around large orders quickly also requires prior government approval. Dhananjaya said he has kept his full-time workforce small to avoid regulations that require going in person to the local labor department to obtain an updated labor license every time a factory wants to expand. They require proof that the facility has staff trained in first aid and bathroom facilities to handle the extra workers.
His manager devotes a large portion of time to keeping books and updating dozens of different labor registries, including overtime, accidents, and salaries. He pays his workers about 45% more than the prevailing minimum wage in neighboring Bangladesh. “Labor is just a headache,” he said. “It adds costs that make us less competitive.”
An overhaul of the labor code by Modi’s government aimed to loosen labor laws, including allowing firms of up to 300 to fire workers without government permission. But they have yet to be widely implemented after facing pushback from labor unions, which organized marches this year calling for the repeal of the laws.
Obstacles Hindering Progress
India’s path to becoming a manufacturing powerhouse is obstructed by several entrenched issues:
- Cumbersome Regulations: Labor laws discourage scaling operations, making Indian factories less competitive compared to streamlined setups in countries like Bangladesh.
- Union Influence: Strikes and labor disputes deter businesses from investing in large-scale factories.
- High Costs: Elevated wages and excessive compliance costs leave Indian manufacturers unable to compete with their regional counterparts.
- Trade Disadvantages: The absence of favorable trade agreements and high tariffs on essential inputs have limited export growth.
- Cultural and Gender Norms: Restrictions on women working late and a cultural preference for gig work over factory jobs have narrowed the talent pool.
In contrast, Bangladesh has streamlined its permitting process by handing over some regulatory powers to the country’s main trade group, the Bangladesh Garment Manufacturers and Exporters Association. The trade group issues a same-day permit to factories for hiring additional staff and handles labor department paperwork on behalf of companies, said Shovon Islam, a director of the association. Some permits for importing fabric duty-free are also issued by the group, which acts as a middleman with customs officials.
Nearly 60% of Bangladesh factories have 3,000 workers or more, compared with an average of 150 workers per factory in India. Islam, who used to operate out of India, said the streamlined regulatory process was partly what pushed him and his Indian business partner to gradually move their factories over the past decade from the southern Indian city of Chennai to Bangladesh. Now his four factories in the Bangladeshi capital Dhaka have an average workforce of 5,000 people, more than tripling the capacity of his Indian factories, he said.
“When you have large factories, the economies of scale are very high,” he said. “It takes factories in Bangladesh two or three weeks to produce and ship an order, compared with twice as long in India, according to industry sources.”
The Potential Impact of Change
If India can overcome these challenges, the rewards could be transformative:
- Job Creation: Expanding manufacturing would provide employment for millions of young Indians entering the workforce annually.
- Economic Growth: A larger share of manufacturing in GDP could accelerate India’s rise as a global economic leader.
- Global Market Share: With competitive costs and improved efficiency, India could capture a significant portion of the market that China is losing, particularly in textiles, furniture, and electronics.
- Regional Leadership: By emulating the success of Bangladesh and Vietnam, India could reassert its dominance in labor-intensive manufacturing sectors.
A Race Against Time
As manufacturers like Radnik Exports demonstrate, survival and success require adaptability and innovation. However, for most Indian factories, the lack of systemic support makes it an uphill battle. Without significant reforms, India risks missing the opportunity to position itself as the world’s factory floor.
The message is clear: for India to challenge China and compete globally, it must get out of the way of its factory owners. By removing barriers and empowering businesses, India can unlock its true manufacturing potential and chart a path to long-term prosperity.
