×

Modi's reform drive faces challenge as India goes on strike

Arijit Sen | Hindustan Times | Getty Images

A major workers' strike on Friday underscores the challenges Indian Prime Minister Narendra Modi faces in passing crucial reforms to make India's economy more competitive and attract billions in investment from abroad.

Several central trade unions in India have called for a countrywide general strike on September 2 to protest against what they called "anti-worker and anti-people policies" of the Indian government.

Reuters estimated this would see more than a million Indian workers in banking, telecoms and other sectors staying away from work.

A 12-point charter of demands put forth by the Centre of Indian Trade Unions showed members were unhappy with the government's plans to reform India's labor laws, disinvestments in central and state-owned enterprises and opening up sectors ranging from railways to insurance and defense to foreign direct investments (FDI).

The timing of the strike action may come as a surprise to some as it comes just days after the passage of a historic Goods and Services Tax (GST) bill in both houses of parliament that would simplify India's byzantine tax system.

Many experts had expected that the passage of the bill would usher in other measures to boost the economy, including reforms to India's labor laws that critics say blunt India's competitiveness among peers.

Modi had hoped to introduce new labor laws that would make it easier for companies to hire and fire workers, but also provide better social security and make the rules more stringent for workers to form unions or organize strikes.

Reforms in this area are crucial to India's economic future, but are a tough undertaking given India's large population.

"You cannot cut the labor force overnight, and at the same time, if you want to maintain all the benefits [to employees], it will be difficult for the public sector undertaking (PSU) companies to maintain their profitability to satisfy investors," Goutam Chakraborty, an analyst at Emkay Global Financial Services told CNBC.

A key demand of the public sector workers is higher wages, although the government's own fiscal deficit targets meant New Delhi was constrained in how much it could do, according to Radhika Rao, an economist at DBS Bank in Singapore.

In late June, India approved a more than 14 percent increase in salaries and pensions for about 10 million government employees and pensioners, which is expected to cost nearly $17 billion in the financial year through March 2017, according to Reuters.

More recently, the government announced on Tuesday the minimum wages for unskilled non-agricultural workers to be 350 rupees ($5.24) a day.

Trade unions, however, are demanding minimum wages of no less than 18,000 rupees a month as well as enhanced pensions of no less than 3,000 rupees a month.

Last year, in September, trade unions went on a similar strike where nearly 150 million workers stayed away from work in protest over the government's plans to introduce labor reform bills in parliament. Following the strike, the government shifted its focus to other areas of the economy.

"The government emphatically took land acquisition liberalization off the table last year, and intense union opposition always depressed the outlook for major labor law liberalization at the central level," Sasha Riser-Kositsky, an analyst at Eurasia Group told CNBC by email. "The demands expressed by the Unions this week are nothing new."

"GST was the last major economic reform likely to pass at the central government level before the 2019 general election," said Riser-Kositsky, adding the upcoming 15 state elections in 2017 and 2018 meant the government was "pivoting from reform to electioneering and project implementation."

Disinvestment Challenges

Since coming to power in 2014, the government has been gradually relaxing stringent regulations for foreign direct investment (FDI), in tandem with Modi's "Make In India" pitch to global multinational companies.

The government had also hoped to sell holdings in state-run entities to raise more funds as well as open up these companies to more competition.

However, these efforts have been hamstrung by opposition from employees as well as local manufacturers.

In its 2016-2017 federal budget, the Indian government set itself a target of raising about 565 billion rupees in capital receipts, of which about 360 billion rupees would come from selling off minority stakes in federal and state-owned enterprises.

But the government only achieved about 47 percent of its disinvestment targets in the last two fiscal years, according to data provided by Rao.

Dhiraj Singh | Bloomberg | Getty Images

One such company is the public-listed Coal India, where the government currently owns 79.65 percent stake. The company employs as many as 300,000 workers.

Workers from Coal India are also set to join the nationwide strike, though analysts said the one-day strike would have little impact on the company's coal and power supply provisions.

Chakraborty said most state-owned companies have a legacy of employing an unusually large number of employees, which sometimes can eat into their profitability.

"When you are a listed company, when you have to compete with others and look at the interest of your investors, [employing too many people] doesn't go well," said Chakraborty.

In a regulatory filing with the Bombay Stock Exchange, Coal India announced it would buy back about 1.72 percent of its total number of issued shares, which amounted to 108,955,223 shares on September 9, 2016.

On the assumption that no other shareholders would selling their shares, Chakraborty said the government could then bring down their stake in the company by 1.72 percent by selling their shares, making the company more valuable.

"Disinvestment has been a very important revenue source that the government has tapped over the past few years," Rao told CNBC by phone, adding that Coal India alone could account for nearly half of the government's disinvestment receipts.

"But it is also the most challenging because of the labor opposition and strikes," she added.

— Follow CNBC International on Twitter and Facebook.