November 30, 2011

India's Own Outsourcing Problem

In a New York times article titled "Outsourcing Giant Finds It Must Be Client, Too," author Vikas Bajaj explains how strict employment laws and labor regulations within India's 28 states are hurting growth and employment within the developing nation. Because the government makes hiring and firing permanent workers so difficult, many businesses find it easier and cheaper to hire temporary workers trained and provided by other companies such as TeamLease, the Bangalore-based agency owned by Manish Sabharwal. As Bajaj explains, "The practice highlights a fundamental tension between India’s socialist past and a new freewheeling, private sector that is increasingly powering the economy while chafing at what many companies say are laws so protective of workers that they blunt hiring and stifle growth." It seems as a result of its own policies, the outsourcing giant must turn to outsourcing to solve its employment problems.

Entrepreneurs such as Sabharwal have capitalized on the demand for labor in India…namely, skilled and affordable labor. "...The reason Mr. Sabharwal has thrived, he and others say, is because India needs him. The nation’s complex web of federal and state labor laws intended to protect permanent workers are so onerous that few employers want to hire them, they say. Those laws cover virtually every aspect of employment — how workers are hired, what they are paid, how many hours they can work and whether they can be fired. Factories employing 100 or more workers are not allowed to lay off employees without the government’s permission." But even he doesn't view outsourcing companies such as his own as a permanent fix. "Workarounds" such as TeamLease provide a temporary way around obstacles to growth. Such solutions aren't sufficient to continue bolstering manufacturing in the long run and create new jobs for 12 million Indians who enter the workforce every year.

These issues exist because interventionism by the Indian government negatively impacts the nation's labor market. A price for labor has emerged within various sectors of India's economy, but regulations require businesses to pay a price for labor that is higher than the market price. At this higher price many businesses cannot afford to hire permanent workers and take on the risk and costs associated with it while remaining profitable. Either that or they cannot hire as many workers as they would like, which hurts workers more than businesses. Government interventionism causes a misallocation of factors of production such as labor so that they are not utilized as profitably or efficiently as possible. The flow of knowledge and access to information throughout India have been interrupted due to government policy. Entrepreneurs such asSabharwal have set out to correct these discrepancies in the labor market, with hopes of bringing skilled and educated workers to the businesses who need them. But so long as the interventionist policy continues, the misallocation cannot be fully resolved. This is another instance of a central plan interfering with the individual plans of many.

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