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Monday, July 23, 2012

The disaster at Maruti

The news from Maruti is disgusting. I have been curiously watching how the stock market takes it in:

That Maruti has serious labour problems has been known for a long time. But the brutality that unfolded in recent days was out of the world. It was news. When I read about it on Thursday, it seemed to me that Maruti was facing a Tata Motors style situation: of suffering the fixed cost of closing down the existing plant and relocating to a state with better governance. The costs faced in this would be substantial. In that case, a 6 per cent decline of the stock price seemed pretty modest. I watched the small recovery on Friday with surprise. Surely, the cost and complexity of moving out of Manesar is worse than 5%.

Today, on Monday, the market has shifted from a less sanguine assessment to a 10% drop in the stock price. I wonder if this is new information or a modified judgment about how this will play out. Were the speculators on late Friday evening just wrong, or did some new information break?

Bad macroeconomic outcomes and social stress

I would conjecture that poor macroeconomic performance -- low GDP growth and high inflation -- is correlated with greater stress of this nature. With inflation, the logic is straightforward: The worker who had a nominal wage contract finds the need to renegotiate when the value of the rupee changes. This links back to the earlier discussion here on why solving India's inflation crisis is important. Too often, we in India are cavalier about inflation. But we should see inflation as an acid that corrodes all nominal contracts, whether stated or unstated. Renegotiation is costly.

Turning to GDP growth, most people that I know seem to think that a couple of per cent of real per capita GDP growth is important for keeping the peace. A lot of people become a lot more unhappy when growth slows. Indian democracy does a pretty good job of containing the angst. There will be no revolution here. But life is substantially easier if the engine of GDP growth is purring. When it stalls -- as it appears to have done in 2012 -- a whole host of social problems erupt.

Law and order as the fundamental foundation of civilisation

This is a reminder to us about how law and order is the fundamental precondition of civilisation. The most important public good of all, the first claim on the resources of the State including the time and attention of the senior leadership, is police, courts and laws. The entire story of the market economy and high GDP growth can only come about when safety of life and property is guaranteed. The events in Maruti are an important reminder to every investor about the weaknesses of governance in Haryana.

In tracking conditions in any state, I find it useful to watch the time-series of the share of the state in the overall all-India investments outstanding, that are `under implementation', in the CMIE Capex database. Here's an example, for Bihar:

November 2005 is the date that Nitish Kumar became the new CM of Bihar. He is widely reputed to have made important progress on improving law and order. At first, the share of Bihar (in all-India under implementation investment) continued to drop. I am sure the changes brought about by Nitish took time; Rome wasn't built in a day. And, after improvements come about, skeptical investors would take some time in making up their minds that conditions are now better. From 2009 onwards, it appears that there is some upward movement. The overall gain seems to be roughly 1 per cent of the all-India total, which is a significant change.

Compare this with Haryana:

There was a big spurt in the share of Haryana in the overall under-implementation investment in India. After that, the numbers have steadily trended down. Is Haryana suffering from a resource curse in terms of proximity to Delhi?

Rethinking labour law

In the early decades about independence, India constructed a remarkable legal framework which was strongly pro-trade-union. Few countries have enshrined trade unions into laws on the scale that India has done. In those years, trade unions were primarily led by socialist/communist parties. While we may disagree with their views, there was a fundamental decency about them. Some of the best human beings in India, in the 1950s and 1960s, were communist. Perhaps this coloured our thinking, and encouraged us to respect and empower trade unions strongly in the legal framework which fell into place over the 1960s and the dark days of the 1970s.

Today, a hyper-empowered trade union is a potent tool for extortion in the hands of local goons. To solve this problem, it is important to rethink the checks and balances embedded in labour law, which have gone too far in the direction of making trade unions strong. Now that we know that the people in trade unions are most likely local goons, do we want to hyper-empower them through labour law?


  1. Mr Shah.
    I would say that you have missed a point or two.There was problem at Manesar earlier,There have been problems of the management getting physical with the workers.The same was filmed by the workers on cell and was shown by NDTV.
    The management does not want the workers to form a union and stresses upon them to join the factory sponsored union-which is illegal as per the Trade Union Act (1926 )The management paid 40 lacs and above to the previous striking ringleaders and wants to ride rougshhod over the workers.The management is equally culpable

  2. That is the entire point being argued here about the trade unions. Not only are the trade unions corrupt, but they have lost their relevance and become a tool of abuse. The management is correct in its position of not wanting trade unions and dealing with veiled extortionists. The problem with the Trade Union Act is that it is from 1926 ;-)

  3. The investment climate in Haryana will continue to suffer as long as the government focus will remain on only one city and that's Gurgaon. While looking at the real-estate holdings of top politicians from Haryana, one can easily say that How other parts of Haryana region are ignored.

    As an example, Nanocity , HSIIDC technology park and so many other investments never started in Panchkula just because of government reluctance, red-tapism, politics of the region and integrity deficit.

    Governance will remain the issue because all the state agencies, top bureaucrats and politicians wanna make money in highly lucrative real-estate market awhile ignoring every other job, region and public service. Until they concentrate on education, better opportunities for youth, uniform growth, this state will continue to suffer.

    Unfortunately, this incident has exposed the state failure once again and sadly the media is busy in painting aggressive nature of workers only. Its still hard to believe that this problem is just because of workers-management tussle and governance. It looks more like ignorance and arrogance from heads of state.

    This incident should calm down the rampant speculation of Gurgoan real estate. The only lever of growth is disturbed now. And these politicains have already ignored the growth unifromity across regions in past.

  4. Tarrifs, protectionism, trade unions all spring from the same devil - mistrust.

    This merely exposes our deeper social inequality and injustice and skewed opportunities based on birth that mushroom into such broader social issues between the employers and employees.

    On the day our society collectively empowers our worker's at-will decision to remain employed or otherwise, there will be no need for "unions" in manesar-like situations.

    sadly, my bet is that social inequality and its pregnant problems will prevail in various avatars through out mankinds future as its has in its history.


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