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Informality in Automobile Value Chains

in India
Timothy Kerswell and Surendra Pratap

India’s automobile sector has emerged as an important growth engine of the Indian economy. The Northern
automobile cluster in Haryana is not only the center of the automobile sector, but also a center of industrial
unrest. This article questions informality in India’s automobile sector through the application of commodity
chain analysis to explain why India’s automobile sector is beset by informality, low wages, and insecure
working conditions. The article illustrates how leading firms in India’s automobile industry, with the
connivance of the Indian state, exploit the automobile commodity chain to marginalize both subordinate
firms and the contract and casual workers who now make up the majority of the industry’s workforce. The
very structure of India’s automobile industry locks many workers and firms into insecure work, where
productivity gains are eaten up by leading firms, further reducing the margins of lower level suppliers and
the wages of workers. While the automobile sector, and the demand for vehicles in India is growing, the
wages and conditions of the workers in the sector are not improving. This qualitative study of Haryana’s
automobile sector attempts to explain why this is the case. The article concludes that India’s industrial
relations regime has long ceased to reflect the actual balance of power between labor and capital, institu-
tionalizing noncompliance with the labor law and providing the basis for the industry’s informalization.

Introduction

The current phase globalization systematically established the free play of

capital’s logic and the destruction of some of the traditional economic sectors.
Globalization has led to industrial restructuring where certain informal sectors
are increasingly linked with global value chains as part of new profit maximizing
strategies. Globalization and liberalization in India have led to mass unemploy-
ment, creating a huge reserve army of labor surviving in precarious informal
sectors. The informalization of the workforce emerged as a cumulative impact of
certain development strategies. This was done in two ways: informalization of
the workforce in formal sectors and the transfer of jobs from the formal to
informal sectors by expanding the value chains to informal sectors. Firms are
increasingly operating with a small core of permanent formal wage workers and
a growing periphery of informal wage workers in different types of workplaces
scattered over different locations. Rapid growth in cross-border commodity

WorkingUSA: The Journal of Labor and Society · 1089-7011 · Volume 18 · December 2015 · pp. 533–553
© 2015 Immanuel Ness and Wiley Periodicals, Inc.
534 WORKINGUSA: THE JOURNAL OF LABOR AND SOCIETY

chains leads to a situation in which the final producer in many cases is the
informal economy in developing countries.
The automobile commodity chain in India is typically structured in three
tiers. Lead firms, the main assembling plants of the brands, are limited to final
assembling of the product. This is done by using components supplied by Tier
I factories, which assemble components using basic parts supplied by the Tier II
factories. There is a huge network of Tier II factories, mostly small-scale infor-
mal enterprises that employ most workers in India’s automobile industry. In the
lead firms and Tier I factories, most of the workforce is informalized. Informal
workers in the auto industry account for 70–80 percent of the workforce (ET
Bureau 2011) in lead firms and Tier I factories, and almost 100 percent in Tier
II factories.
This study explores the nature of informality in various tiers of the automo-
bile value chain in India and its implications on wages and working conditions.
The industry produces about 1.69 million vehicles per year, including passenger
and commercial vehicles. From April 2000 to July 2013, the sector accounted for
about 4.5 percent of the total Foreign Direct Investment inflows in India. India’s
automotive sector employs more than 13 million workers, making it a significant
part of India’s industrial base (India Brand Equity Foundation 2015). The study
is located in the two major industrial clusters of Haryana, Gurgaon-Manesar and
Faridabad-Ballabhgarh, which form the major part of the National Capital
Region automobile manufacturing hub.

Methodology

Primary data were collected through semi-structured interviews with

workers, trade union officials, and firm managers in the Gurgaon-Manesar and
Faridabad-Ballabhgarh regions of Haryana, India. Haryana is one of the most
important hubs of India’s automotive manufacturing sector and was selected for
its significance. As a leading producer of automobiles and automotive compo-
nents, Haryana accounts for 75 percent of passenger cars, 50 percent of tractors,
and 60 percent of motorcycles manufactured in India (Confederation of Indian
Industry 2015), and is home to some key producers such as Maruti-Suzuki, Hero
Honda Motors Limited and Honda Motorcycle, and Scooter India. The most
prominent manufacturing centers of the state are located in Gurgaon-Manesar
and Faridabad-Ballabhgarh. The Gurgaon-Manesar region hosts many major
assemblers and a huge base of supplier companies. Faridabad also hosts some
lead firms but it is a major manufacturing center of light automotive compo-
nents, where there are huge clusters of small-scale auto part manufacturing
enterprises. Such is the dominance of the industry in this area that the automo-
bile sector accounts 55 percent of the total business in Faridabad (ibid.).
The interviews, conducted in 2013–2014, covered two lead firms, four Tier
I, and fourteen Tier II factories, with the overall sampling approach being
purposive sampling whereby the entirety of the automobile value chain would be
studied. Lead firm and Tier I factories were selected on the basis of chain referral
Kerswell and Pratap: Informality in Automobile Value Chains 535

sampling through preexisting networks in the trade union movement. Tier II

factories, centrally important to the study, but largely unorganized, were
selected via a random sampling approach. Within the factory environment,
purposive sampling was conducted in each category of interviews (workers,
unionists, and managers). In total, there were management interviews in one
lead firm, four Tier I firms, and 10 Tier II firms. There were interviews with ten
lead firm workers, ten Tier I workers, and twenty Tier II workers. Finally, there
were interviews with three trade union groups covering enterprises in lead firms
and in Tier I firms (Tier II being unorganized, there could not be trade union
interviews).

Theoretical/Conceptual Framework of the Study

Informality has been understood through three basic theoretical frame-

works, the dualist, legalist, and structuralist approaches. Dualism sees the infor-
mal sector as being part of a residual precapitalist economy, arguing that as
capitalism develops and modernization occurs the formalization of the work-
force will occur. This perspective is best exemplified by the approach of Nobel
Laureate Arthur Lewis (1954), who saw a strict division between subsistence
activity and high productivity capitalist manufacturing. The experience of indus-
trialization in most developing countries has discredited the dualist school. In
India’s case, an estimated 84 percent of the manufacturing sector workforce is
employed in the informal sector (Mishra and Shankar 2013, 5). This is a strong
empirical case against the association between the informal sector and the
subsistence economy.
The legalist school emerged with the work of Hernando de Soto (1989),
whose approach focuses on the interaction between enterprises and the formal
environment of regulation. In particular, de Soto argued that collusion between
formal sector capitalists and government lead to the development of bureau-
cratic “rules of the game.” This perspective is most closely associated with the
ideology of neoliberalism, and views the entrepreneur as creatively avoiding the
legal strictures of big government.
The structuralist school sees the informal economy as part of a symbiotic
relationship with the formal economy. The competitive drive to reduce labor
costs leads capitalists to promote informal production (Moser 1978; Portes,
Castells, and Benton 1989). Capital thus secures a cheap supply of labor and
other inputs. This study contributes to the debate about understanding the
informal sector, particularly in terms of the debate between the legalists and
structuralists.
An additional objective of this study was to explore the dynamics of auto-
mobile production in India. To accomplish this, commodity chain analysis
method has been selected. Hopkins and Wallerstein (1986, 159) define a com-
modity chain as “a network of labour and production processes whose end
result is a finished commodity.” The global commodity chain method was
developed by Gereffi (1996) to analyze the impact of globalization on various
536 WORKINGUSA: THE JOURNAL OF LABOR AND SOCIETY

industries. Gereffi focuses on the way lead firms institute a governance struc-
ture regulating how other firms operate within a commodity chain (Humphrey
and Schmitz 2001, 3). The power of lead firms to dictate the structure of
production, and therefore the amount of value that flows to each sector,
enables lead firms to extract maximum value from the production process. Part
of this study’s objectives will be to identify the way lead firms are extracting
value from subordinate firms, and assessing the impact this has on workers in
subordinate firms.
Barrientos, Gereffi, and Rossi (2010, 1) have noted that the “analysis of
global production networks and value chains has focused mainly on firms, often
overlooking the role of labour” by treating labor as a mere factor of production
as opposed to a view of workers as social agents (for example in Sen 2000). This
study helps to address this gap through a focus on work, workers, and working
conditions, highlighting the way firms are systematically violating India’s labor
laws and transgressing certain international labor rights norms. The study raises
questions for political agents, such as policy makers, political parties, trade
unions, and nongovernment organizations, which are centered on the improve-
ment of workers’ conditions.
This study attempts to use commodity chain analysis in order to understand
the informalization of India’s automobile sector, in particular in its northern
cluster based around the state of Haryana. In this respect, the study is breaking
new ground both in the application of the commodity chain analytical method,
and also in terms of the areas of study. Most commodity chain analysis has
focused on globally traded industries. While India’s automobile sector engages
in a degree of export production, particularly of automobile parts, most of the
sector produces parts domestically for domestic consumption. The study dem-
onstrates the way lead and Tier I firms exercise power over both Tier II suppliers
and the automotive workforce as a whole to extract maximum value from the
commodity chain. This creates dynamics that lead toward the immiseration of
the automobile workers, going some way toward explaining the rising tide of
industrial conflict in the sector.
Another key concept in the commodity chain perspective is industrial
upgrading, where commodity chain participation offers the possibility of
improvement where firms participate in higher value-added activities. Gereffi
(1999, 39) suggests “participation in global commodity chains is a necessary step
for industrial upgrading because it puts firms and economies on potentially
dynamic learning curves.” From an economic standpoint, industrial upgrading is
thought to occur when physical and human capital develop as a result of invest-
ment in certain industries (Porter 1990).
Gereffi argues that the accumulation of capital is a necessary but insufficient
condition for industrial upgrading. In particular, Gereffi compels an explanation
of how firms (and nations) can possibly transition from being part producers or
assemblers into full package producers. Critical to this process was the devel-
opment of knowledge that would enable supplier firms to compete in the market
for higher value-added goods (Gereffi 1999, 39). The study will examine
Kerswell and Pratap: Informality in Automobile Value Chains 537

whether or not industrial upgrading is occurring by examining the extent to

which technological transfers are taking place.
The study provides a detailed examination of production relations in India’s
automobile sector, particularly the informal sector. As we have seen, the dualist,
legalist (Gurtoo and Williams 2009 and Martin 2009), and structuralist
(Chakrabarti and Kundu 2009, 27) perspectives have led to various studies of
informality, including in India. However, to date there have been no in-depth
studies of the automobile sector in India from the perspective of how informality
is produced. While there have been various studies of the automobile supply
chain in India (Babu 2012; Balakrishnan et al. 2004; Sutton 2004), the use of
commodity chain analysis is rare and mostly oriented toward the performance of
firms. There have been no studies that focus on the position of labor or the issue
of informality within a commodity chain in the automobile sector in India.
Finally, the study demonstrates the irrationality of the production relations
that have emerged as a result of the anarchy of capitalism in India’s automobile
industry. Baran (1973, 133–4), in introducing the concepts of the “actual eco-
nomic surplus” (the difference between production and consumption in society),
contrasted this with the “potential economic surplus,” the surplus that would be
possible if production relations were rationally ordered. Central to his theory
were the ideas that unproductive work should be eliminated from the process of
production, and that the productive apparatus should be organized in a rational
way that eliminates waste. The study will demonstrate the way unproductive
middlemen, in particular labor contractors, accumulate part of the surplus.
Additionally, the study will demonstrate that the organization of the productive
apparatus in India’s automobile sector generates waste both at the micro level in
terms of rejected parts, and also at the macro level where the way firms are
organized leads the industry to cannibalize itself at the expense of small-scale
firms and their workers.

Findings of the Study

The Nature of Informality in Lead Firms and Tier I Factories and Implications

Informality in workforce. Informality in lead firms and Tier I factories is reflected

in the structure of the workforce, which varies considerably in the different tiers
of the automobile supply chain. In lead firms, the number of workers per factory
was significantly higher, with the lead firms in our study engaging approximately
6,000 and 3,000 workers, respectively. The proportion of contract workers in
lead firms was 62 and 67 percent. Few (<1 and 4 percent) workers in lead firms
were engaged as casual workers directly by the company. The proportion of local
workers (workers who had not migrated from another state in India) was rela-
tively higher in lead firms in comparison to Tier I and II factories.
Demographically, the education of contract workers is at equal or higher
level than the permanent workers, and the permanent workers are older than the
contract workers. This was an interesting finding that would be seen repeated
538 WORKINGUSA: THE JOURNAL OF LABOR AND SOCIETY

across the various companies, particularly lead firms and Tier I factories. A
major reason for this is that the contract workers are relatively new recruits. In
the prevailing situation of unemployment and jobless growth, more and better
educated workers are seeking low-paid jobs in factories. Moreover, the education
level in India’s society has also increased in recent decades. Workers who were
able to secure formal positions either began work prior to or in the initial years
of India’s liberalization, or because they were fortunate enough (or at times well
connected enough) to secure permanent employment and gain significant
advantages over far more qualified workers.
The workforce in the Tier I factories ranged from 100 workers to a little
more than 1,000 workers. The structure of the workforce varied considerably
with the nature of products and production operations. In a labor-intensive
plastic molding factory, contract workers formed as much as 97 percent of the
workforce, but in a capital-intensive factory the proportion of contract workers
was 60–70 percent, almost same as that in lead firms. Migrant workers formed
more than 70 percent of the workforce in Tier I. Most contract workers inter-
viewed in Tier I were 25–30 years old, while most permanent workers were
30–40 years old. The educational qualifications of both contract and permanent
workers varied from tenth standard to industrial training institute qualifications
(technical or trade certification). The mode level of qualification for contract
workers was higher secondary school (completion of the twelfth year board
examination), whereas for the permanent workers it was secondary school
(completion of the tenth year board examination).

Wages and working conditions. Wages and working conditions varied considerably
in different tiers of the automobile supply chain. In lead firms, wages and
working conditions for both formal and informal workers are far better than in
Tier I. Lead firms’ management reported an active concern for the position of
contract workers and ensured similar working conditions for contract and
regular workers. The contract workers do the same work as the regular workers,
and the nature of work, working hours, overtime hours, and workloads are the
same for both. Contract workers are provided with the same facilities at the
workplace as the regular workers, such as drinking water, toilet and canteen
facilities, uniform and safety equipment, and transport facilities.
The main difference between permanent and contract workers in lead firms
is the lower wage of contract workers. Of the two lead firms studied, the average
monthly wages of contract/permanent workers were Rs 18,000 (approx.
US$300)/Rs 45,000 (approx. US$730) and (Rs. 6,500 or US$105)/Rs 30,000–
40,000 per month (US$485–650).1 Despite this, the wages and other benefits
that the contract workers received in lead firms were higher than in most Tier I
factories.
The benefits of Employees State Insurance (ESI, a health insurance scheme)
and Provident Fund (PF, a retirement pension scheme) were issued to the
contract workers in lead firms with the active involvement of the management.
An annual bonus was also provided to contract workers, along with paid weekly
Kerswell and Pratap: Informality in Automobile Value Chains 539

days off and paid annual leave. Overtime is a feature of work in this industry and
was variously reported at two to four hours daily, albeit varying significantly
according to industry demand. In one factory, the contract workers benefited
from a premium rate of over time; however, in the other factory, the overtime
payment was at the rate of single hourly wages for contract workers, as against
double wages for regular workers.
The trade unions actively look into the issues of contract workers and ensure
them legal benefits. It was reported that in one of the factories the contractors
many times failed in depositing the ESI and PF contributions of contract
workers, and on the pressure of trade union the management started its active
involvement in insuring these benefits to workers. Trade unions are present in
most of the lead firms.
In Tier I, there were noticeable variations in wages and working conditions
of contract workers determined by the nature of production operations with
compulsions to retain certain key skills. In addition to this, there were variations
associated with the presence or absence of effective trade unions. Of the four
Tier I factories, two had active trade unions. The wages of regular workers in
different factories varied from Rs 8,000 to 28,000 (US$130–454), with total
earnings including overtime from Rs 12,000 to 30,000 (US$195–490). On the
other hand, the contract workers generally received only the minimum wage in
all Tier I factories and their total earnings varied from Rs. 7,000 to 10,000
(US$115–165).
Workers reported that previously the rate of overtime extended between two
and four hours daily. At the time of interviews, it was suggested that there was a
decline in overtime, reflecting a downturn in the industry. This led to a decline
in their total earnings. In the factories where trade unions were present, perma-
nent workers were getting an overtime payment at either 200 percent or 150
percent the wages. Contract workers in these factories were paid for overtime
only at the rate of single hourly wages. In the factories with no trade union
presence, both permanent and contract workers were generally paid for over-
time only at the rate of single hourly wages.
The problem of contractors failing to deposit ESI and PF contributions of
the contract workers and in providing them with formal documentation includ-
ing ESI cards and PF slips was also reported in factories with no trade union
presence. In one factory where a union was present, unions suggested that two
out of five contractors often fail to deposit the ESI and PF contributions of
contract workers, a matter which the trade union routinely raises with manage-
ment. That this issue could be prevalent in a unionized factory at the higher end
of the commodity chain exposes the likelihood of this phenomenon being
widespread in India’s automobile sector, and the manufacturing sector more
broadly.
There was variation between permanent and contract workers in various
work benefits in some factories. For example, in one factory, contract workers
were only provided with a shirt for their uniform, and a lower subsidy was
provided to contract workers for transport and canteen than permanent workers.
540 WORKINGUSA: THE JOURNAL OF LABOR AND SOCIETY

By contrast, in another factory, these benefits were more or less similar for both
contract and regular workers. In factories with no presence of trade unions,
there were cases of both transport and canteen subsidy being denied to both
permanent and contract workers, and in others transport and canteen allowance
was provided only to permanent workers. However, safety equipment and work-
place facilities (drinking water, toilets) were the same for both contract and
regular workers in all the factories. The nature of work, workload, working
hours, and overtime hours were also the same for both contract and regular
workers. The workers reported that workloads were very high. Daily work
targets are fixed for all the workers, and not fulfilling the targets has implications
in terms of warnings. It often results in losing incentive payments.

The Nature of Informality in Tier II

Tier II enterprises are small-scale enterprises not registered under India’s

Factories Act, which would compel these enterprises to follow stricter regula-
tions about the design and operations of their businesses. The workshops are
generally 50–60 square meters, with the exception of a few larger ones with 80-
to 100-square meter space. None of these small factories have proper lighting,
ventilation, or air conditioning, with only some workshops providing evapora-
tive coolers. At most we observed only ceiling fans, which created a horrible
environment during summer for the workers. The lack of safety was extreme,
and we routinely observed workshops where hot metal forging took place by
hand without any safety equipment. Workers were hand pouring molten steel
into molds in dark and unventilated workshops.
Tier II enterprises are largely stagnant in terms of their size and technologi-
cal standards and were not showing upward mobility in the supply chain. Man-
agement in Tier I also reported that generally speaking, no upward mobility is
seen in the Tier II enterprises even after years of business relationships with Tier
I. Tier I management listed problems like limited vision, skills, and profession-
alism behind this lack of upward mobility. However, a different picture emerged
in interviews with Tier II enterprises where managers/owners emphasized that
the whole environment in which they are doing the business blocks the paths of
any upward mobility for them.

Workforce informality. Tier II enterprises produce the smallest component parts

of a motor vehicle. The structure of Tier II enterprises was noticeably different
from the rest of the supply chain. The workforce size of Tier II enterprises
varied from five to fifty workers, but some enterprises engaged as many as sixty
to eighty workers across two shifts. In most enterprises, there were less than
twenty workers. Almost all the workforce in Tier II were casual workers directly
engaged by the enterprises. Labor contracting is rare as contractors generally
charge a commission on total wages paid to the contract workers, a cost that the
smaller enterprises in Tier II cannot bear. There are rarely any permanent
workers in Tier II. In Tier II, we find the emergence of piece rate work as
Kerswell and Pratap: Informality in Automobile Value Chains 541

opposed to fixed salaries albeit not in a uniform way. In one of the enterprises
studied, some workers were engaged on piece rate basis, while other workers
were engaged on monthly/daily basis. This tier of the supply chain is almost
completely run by the migrant workers, mainly from India’s poorer states such
as Uttar Pradesh, Bihar, and West Bengal.
In Tier II, there was a notable difference in the presence of women
workers in an otherwise male-dominated industry. Most of these workers
worked as helpers, but some were machine operators. Of the fourteen Tier II
enterprises studied, we found women workers engaged in four enterprises. All
the women workers were married and in the age group of twenty-five to thirty
years. Various workers informed us that for some reason employers do not
engage unmarried women workers. The education of women workers varied
from basic levels of literacy to five years of schooling. The age group of
workers interviewed in Tier II varied from nineteen years to forty-eight years,
and the education of workers varied from basic levels of literacy to the
completion of twelve years of schooling.

Wages and working conditions. In Tier II, all operators were paid the minimum
wage. It appears that there are some differences in wages of helpers. In some
enterprises, helpers get the minimum wage, while in others they get less than the
minimum wage. In particular, the wages of women were less than those of men,
a matter highlighted by the women machine operators. Even when wages were
the same, total earnings of workers varied considerably due to differences in
overtime availability. Total earnings of helpers and women operators ranged
from Rs 5,500–7,000 per month (US$90–115), and the earnings of male opera-
tors ranged from Rs 7,000–10,000 (US$115–165) per month. This contravenes
an Indian labor legislation, including the Equal Remuneration Act 1976, the
Minimum Wages Act 1948, and various articles of India’s constitution. The
extent to which India’s laws are broken or circumvented will receive further
discussion later in this article.
As noted, in Tier II, some workers are engaged on a piece rate basis. The
total earnings of piece rate workers were generally higher than the time rate
workers, but they face more problems, like irregular work and irregular earn-
ings. The workers suggested that there is regularly between two and four hours
of overtime, which can change when the industry faces a downturn. The workers
reported that workloads were very high. Daily work targets are fixed for all the
workers, and not fulfilling the targets has implications in terms of warnings. It
often results in wage deductions.

The Living Conditions of Informal Workers

Living conditions for informal workers are very poor. Generally, the workers
migrate from their hometown or village without their families as their income is
insufficient to live with family. We found that four to five workers would share
rented slum accommodation, which would typically include no toilets and no
542 WORKINGUSA: THE JOURNAL OF LABOR AND SOCIETY

kitchen. They would effectively live in a single room and prepare food there as
well. More than ten workers share a communal washroom. We found in most
cases that rooms have no proper lighting and ventilation, and often face power
cuts. This makes the lives of workers particularly difficult in India’s summer. To
reach the workplace on time, they have to wake up very early in the morning to
get ready for work, a problem exacerbated by the lack of facilities like washrooms
and drinking water supplies. Considering that when overtime is included, work
is a ten- to twelve-hour day, their living circumstances are a serious concern. To
compound these problems, the workers reported that room rents are subject to
yearly increases, and currently workers’ pay about Rs 600–1,000 (US$10–16) per
month per head in rent if four workers are sharing the room.

Supply Chain Relationships

Between lead firms and Tier I factories, formalized long-term relationships

are formed for supplying specific components. Interviews with lead firm man-
agement confirmed this, with the management acknowledging that while small-
scale manufacturing contributes the basic parts for the automobile industry, lead
firms have no relationships with small-scale manufacturers. Allegedly, the terms
and conditions of most contracts also include compliance with Indian labor laws,
but as will be demonstrated this is a formal requirement not substantively
practiced. Specialists from lead firms allegedly visit Tier I factories for quality
control and contribute some technical improvements or training. Tier I man-
agement reported a significant cost pressure. In contract negotiations, lead firms
are only concerned with the quality and timely supply of parts, in addition to cost
cutting.
The Tier I firms have a subordinate position in the commodity chain and
depend on the lead firms for their survival, enabling lead firms to squeeze Tier
I firms for additional surplus by maintaining low prices for components. Man-
agement of lead firms and Tier I firms confirmed there is no technology transfer
from lead firms to Tier I factories. As previously discussed, Gereffi (1999, 39)
noted that technology transfer is a key requirement for industrial upgrading.
However, the dynamics in the relationship between lead and Tier I firms studied
raises a concern about whether Tier I enterprises and workers will ever experi-
ence greater prosperity in the industry.
The lopsided but stable relationship between lead and Tier I factories
contrasts with the relationship between Tier I and Tier II factories which are far
more irregular. Business relationships between Tier I and Tier II are conducted
informally without long-term contracts. Long-term relationships exist, but have
emerged gradually and informally through repeated business dealings. Unlike
lead firms that generally seek single suppliers for different components, Tier I
factories generally used multiple suppliers for specific parts. This has a signifi-
cant impact on the dynamics of the industry as the quantity of orders to par-
ticular suppliers varies considerably. Managers of Tier II enterprises suggested
Kerswell and Pratap: Informality in Automobile Value Chains 543

that pressure for cost reductions was a significant concern, and that Tier I
enterprises were not interested in the viability of their enterprises or of the
well-being of Tier II workers.
The end result is that Tier II management reported that the prices of many
parts have not been revised for several years, irrespective of increasing costs of
production. The multiplicity of suppliers and the intensely competitive market
in Tier II make it impossible for the Tier II companies to increase prices, which
means any productivity gains are absorbed by Tier I. As with the relationship
between lead and Tier I firms, there was no evidence of technology transfer from
the Tier I factories.
This raises a major issue for the prospects of workers in this sector. Tier
II enterprises operate on extremely small margins, making improvements in
wages or working conditions almost impossible within the current industry
structure. In the lead firms and Tier I enterprises, there was some observation
of how different levels of bargaining power (in particular the role of trade
unions) tended to determine the share of value that workers received.
However, in Tier II enterprises, workers have very little bargaining power. But
even if they were able to obtain significant leverage over their employers,
there is very little in terms of a margin that workers could obtain while
running a viable enterprise. From this we can conclude that the miserable
conditions faced by workers in Tier II are a direct result of the structural
dynamics of the automobile industry, and in particular the ability of lead firms
and Tier I firms to exploit the intense competition between Tier II firms that
operate within an unregulated environment.

Flexible Production and Informal Employment

A common claim by businesses and academic economists alike is that enter-

prises need labor market flexibility in order to operate efficiently and success-
fully. Solow (1998, 1), for example, points to various policy measures as falling
under the definition of labor market flexibility, stating that a labor market is
inflexible “if the level of unemployment-insurance benefits is too high or their
duration is too long, or if there are too many restrictions on the freedom of
employers to fire and to hire, or if the permissible hours of work are too tightly
regulated, or if excessively generous compensation for overtime work is man-
dated, or if trade unions have too much power to protect incumbent workers
against competition and to control the flow of work at the site of production, or
perhaps if statutory health and safety regulations are too stringent.”
One of the key arguments of the legalist school is that the informal sector
exists in order to avoid the oppressive nature of the regulatory environment of
the formal sector. In this section, it will be noted that despite the majority of
employment in India’s automobile industry being informal employment, the
ultimate conditions of labor market flexibility, in practice this flexibility is
hardly ever utilized by the enterprises in the study. The automobile industry is
544 WORKINGUSA: THE JOURNAL OF LABOR AND SOCIETY

constituted by a stable workforce, with varying levels of demand being handled

by increases and decreases in overtime hours.
This sheds light on the political aspect of the argument for labor market
flexibility. Guha (2009, 45) demonstrated that there is no statistically significant
relationship between labor market flexibility, employment, and output growth.
In this section, the overtly political way in which managers in the Indian auto-
mobile industry think about flexibility is exposed, with managers making the
frank admission that the industry could easily operate under conditions of
predominant regularized employment. The concept of flexibility is thus laid bare
as nothing more than a pseudo-technical justification for a distribution of power
in the workplace that favors capital, preventing development of trade unions and
collective bargaining frameworks.
There were no significant variations over time in the size of the workforce in
lead firms and Tier I reported by either management, workers, or unions. These
were more commonly reported in Tier II. Across the supply chain, there is a
general practice of engaging a downsized workforce and meeting work quotas
through overtime. This practice takes care of the normal variations in demand
and therefore production. When there is a need to decrease production, over-
time work is reduced to a minimum or even stopped.
Unlike the lead firms and Tier I enterprises, Tier II enterprises generally
have no long-term relationship with their customers. Work orders are very
erratic, with the size of the workforce varying significantly in accordance with
demand. This is one of the critical factors that gives lead firms and Tier I
companies a commanding position in the commodity chain, and the power to
extract maximum value from Tier II firms. The Tier I companies keep multiple
suppliers in Tier II and are able to play Tier II enterprises against each other,
deriving maximum benefit from the competition.
In interviews with lead firm management, it was specifically mentioned that
orders to suppliers in Tier I remain more or less stable when suppliers source
parts from a single vendor. However, when sourcing parts from multiple
vendors, the order rate is more erratic. Lead firm managers noted these fluc-
tuations are not significant, occurring only in exceptional cases due to the need
to establish long-term relationships with suppliers. Managers suggested that
only in a serious downturn would there be a significant change.
In lead firms, there is no variation in workforce size based on demand. The
normal ebbs and flows of demand are taken care of by increasing and decreasing
overtime work. Industry downturns are also responded to through recruitment
freezes and natural attrition. While the status of contract workers is insecure, it
is inaccurate to say that they are simply thrown out of work. Managers reported
that company human resource departments work out a strategy based on recruit-
ment freeze and reallocation of workers to different departments, and very rarely
are contract workers discontinued. This finding was corroborated by unions and
workers.
Thus, despite the insecure work status resulting from contractualization of
workers in the automobile sector, workers remain more or less consistently
Kerswell and Pratap: Informality in Automobile Value Chains 545

employed. Here we see evidence of a direct violation of India’s labor law. The
Contract Labour (Abolition and Regulation) Act (1970) was designed with the
explicit policy objective that contract labor should only be used temporarily, not
for the regular operation of a firm. This act reflects a bygone period of India’s
industrial relations based on Fordist production, which has been transcended by
the increasingly informal and flexible nature of manufacturing in India.
In one of the lead firms, management claimed about 90 percent of the
contract workers are effectively employed on a permanent basis. A significant
proportion has been working in the company for more than five years, and most
more than three years. A small number of contract workers are genuine tempo-
rary employees who are hired and fired frequently, but based on the interviews
with management and the workers, if considered over a five-year period the
workforce size has remained about the same. In another lead firm, trade union
interviews revealed a similar story corroborating the management perspective.
There was no significant variation in the size of the workforce, including the
number of contract workers in the last five years, with most contract workers
working in the same company for more than three years.
In Tier I companies, a similar system operates with a highly downsized
workforce and excessive use of overtime. Most contract workers have worked for
the same company for three to five years, and there was no significant change in
the size of workforce in the last five years. In analyzing the discourse of man-
agement, a kind of cognitive dissonance was observed. Managers stated in their
interviews that flexibility and thus contract workers were the only effective
strategy to deal with the variations in production. Despite this, they also spe-
cifically stated that changes in demand do not significantly impact their human
resources strategy in hiring and firing contract workers. They also mentioned
that workforce size remains stable, including the number of contract workers. In
one of the interviews, the management was explicit in saying on the one hand
that there is no consistency in demand so a flexible workforce is a compulsion,
then admitting that more than 70 percent of the contract workers have been in
stable employment with the company for three to five years.
In Tier II, there were more variations in the production orders reported,
with a consequence for the size of the workforce. There were only a few
enterprises with a more stable relationship with their suppliers and accordingly
less variation in production orders. In most enterprises, managers reported no
formal long-term contract for supplying parts, with orders based on monthly or
even weekly demands. This does not mean that customers change suppliers
every month/week, but the amount of orders may vary for particular suppliers
each month. Here we see evidence of the irrationality of the industry structure
produced by market forces, and the impact this has both on small-scale firms, but
also on the small-scale manufacturing workforce.
A frequent occurrence in Tier II enterprises are one-time orders to supply
certain parts, particularly in situations when other suppliers have failed to supply
parts, or when the Tier I customers want to change their suppliers and provide
orders as a test case. Customers use multiple suppliers and make several changes
546 WORKINGUSA: THE JOURNAL OF LABOR AND SOCIETY

to the amount of orders for different suppliers according to their wishes. There
is intense competition among Tier II suppliers for orders, and the Tier I
customers often divert their orders to alternative suppliers to take advantage of
this. Many Tier II suppliers also produce certain spare parts for the open market
whose demands vary significantly.
The cumulative impact of these factors is reflected in varying demand for
labor. This creates churn with some workers moving from enterprise to enter-
prise, mostly within the same industrial area. Generally, however, the enterprises
maintain a very small workforce and decrease/increase overtime work to take
care of changes in the volume of work orders. In most enterprises, interview data
from both workers and management indicated a stable number of workers. In
our interviews, we found that some casual workers worked for the same company
for more than two to three years, meaning even if casually employed they are a
stable part of the enterprises.

Noncompliance with Labor Laws and Implications for Informality

Noncompliance with India’s labor laws is a serious problem across the

automobile supply chain, with the seriousness of the problem increasing toward
the lower end of the supply chain. India’s Contract Labour (Abolition & Regulation)
Act 1970 clearly prohibits engaging contract workers in the core activities of a
business. Despite this, large numbers of contract workers are engaged on a
regular basis across the supply chain. The act clearly directs that such workers
should be given permanent and regular employment.
To escape this regulatory requirement, factories have developed a work-
around. A revolving list of labor contractors is utilized, with workers being
shifted from one contractor to another to avoid legislative requirements for
formalization. Contract workers reported getting a regular “break” in service
every six months, amounting to shifting their names from one contractor to
another, while continuing work in the same factory. Interviews revealed that
workers were often not even aware which contractor employed them as they had
been shifted so many times.
India’s industrial relations law provides for equal wages for equal work and
prohibits wage discrimination based on employment status. Despite this, con-
tract workers were observed to perform the same work as regular workers, but
receive between half and one third the wages of regular workers. Interviews
revealed there were contract workers who have worked five years in the same
company, still receiving the minimum wage. The most extreme case was a
contract worker in a Tier II factory who reported working in the same company
for almost ten years on the minimum wage.
Tier I and Tier II managers downplayed this, emphasizing that regular
workers had longer service, justifying the wage differentials. On further exami-
nation, this was less than convincing, as many contract workers were in the
same factories for up to ten years without approaching the pay level of per-
manent workers. While there are some differences in the length of service, the
Kerswell and Pratap: Informality in Automobile Value Chains 547

comparison is not one between a highly experienced worker and a junior

worker, with the contract workers in question having between three and five
years of experience. Given this, there is little justification for them to be paid
the minimum wage, or one half to one third of the permanent workers’ wages,
under the established legal principle of equal work for equal pay.
A theme in the automobile industry’s work practices is the maintenance of a
downsized workforce, coupled with high levels of work intensity and routine use
of overtime beyond legislated limits. Built into this system is the reality that most
workers’ normal time wages are not living wages, even within the context of low
living standards. Workers expressed significant concern about any drop-off in
working hours as their overtime payments form a significant portion of their
total earnings. The workers reported a general trend of two to four hours of
overtime daily across the supply chain. Management in both Tier I and Tier II
accepted that the overtime work is beyond legislated limits, but acknowledged
this as an industry-wide practice.
A premium overtime rate is legislated in India’s labor law; however, overtime
payments of contract workers were generally set at the basic hourly rate of wages
with few exceptions in Tier I factories. Often there was open discrimination
between the regular and contract workers. Despite doing the same work in the
same factory, regular workers got a premium rate of overtime which contract
workers were denied. The law provides for both paid leave and paid days off, but
in general these are denied to contract workers, except in some Tier I factories.
The question of legal documentation proving the employment relationship
is another matter where there is disconnect between the labor laws and actual
practice. The law provides that all workers must get formal contract letters, but
in most factories workers were never issued documentation. In factories without
a trade union presence, contractors reportedly made payroll deductions of ESI
and PF contributions; however, workers were not provided with ESI cards and
PF slips, meaning they are unable to claim these benefits. Unions reported that
most contractors do not deposit the ESI and PF contributions, and pocket the
additional money. While trade unions have reported mixed success in respond-
ing to this issue, if these kinds of irregularities are possible in factories with a
trade union presence, it can be assumed that it is a widespread practice, all the
more possible in nonunion factories.
Interviews with management and trade unions established that the principal
motive of sourcing labor from contractors is to minimize labor costs and mar-
ginalize trade unions. One manager stated, “in cases where a larger proportion
of the workforce is regularized there are more chances of ‘union problems’ and
of course larger proportion of regular workforce means higher costs to the
company.” Theoretically, workers in India have rights to organize and collec-
tively bargain, guaranteed by various aspects of India’s labor law, such as the
Industrial Disputes Act, Trade Union Act, Standing Order, and even India’s
Constitution. In practice, contract workers cannot even prove their place of
employment, and so under India’s trade union laws cannot form or join a trade
union.
548 WORKINGUSA: THE JOURNAL OF LABOR AND SOCIETY

In Tier II, where most enterprises are small-scale manufacturers, many of

them engage more than ten workers and should actually fall under India’s
Factories Act. On paper, they report less than ten workers to escape obligations
toward workers under various labor laws and occupational health and safety
standards. They are generally registered under the Shops and Establishments
Act, except some of those with a comparatively larger workforce.
On the other hand, whether they are smaller or relatively bigger, there were
no significant difference in wages and working conditions across the cluster
where they are located, as we observed in the Sanjay colony and Shiv colony
cluster in Faridabad. Even under the Shops and Establishments Act
(International Labour Organization 2015), it is necessary to provide formal
contract letters and follow some basic labor standards, like working hours,
overtime hours, wages, paid leave, and some occupational health and safety
standards. However, in workers’ interviews in Tier II, numerous irregularities
were reported. Overtime is so excessive that some enterprises run two 12-hour
shifts, some workers (helpers) are paid less than the minimum wage, no paid
leave is provided, and no occupational health and safety standards are followed.

Challenging Informality

The informalization of the workforce reflects the anarchy of capitalism and

is a serious problem in the automobile industry. In a rationally ordered industry,
the surplus would be distributed in such a way that firms at every level of the
supply chain would be viable and capable of ensuring living wages and safe
working conditions. The anarchy of the industry affects not only the well-being
of the workers, but also the well-being of the industry in general. India has seen
a rising tide of industrial activity in the automobile sector.
Interviews across management, unions, and workers noted a general accep-
tance that engaging a large proportion of informal workers creates its own
problems, even for the employers. In one of the Tier I management interviews,
it was raised that machines are broken by rough handling of unskilled contract
workers, creating losses for the factory. Similar concerns were raised by Tier II
enterprises. Moreover, it was generally accepted by lead firms and Tier I factory
management that managing and controlling multiple contractors and ensuring
the transmission of company benefits to the workers through contractors are a
serious headache for the companies.
Trade unions agreed that the contract labor system has created a vested
interest of local politicians and musclemen, creating a layer of corruption and
influence that further complicates matters for both the companies and the
workers by reducing the surplus available for both wages and profits. This strata
of society is the epitome of unproductive labor, which accumulates surplus that
in a rationally ordered society would either remain with the firm for capital
accumulation or be paid to the workers to improve their wages as per Baran’s
theory of the potential surplus (1973, 144).
Kerswell and Pratap: Informality in Automobile Value Chains 549

Aside from the issue of middlemen, management interviews in Tier I facto-

ries reported acute shortages of labor during the harvest and festive seasons.
Workers corroborated this perspective, confirming they go home for the harvest
and return after one to two months. Informal workers do not have any hope that
they will work in the factory for their whole working life and reported an
understanding that they may be out of work around the age of forty five as
contractors are rarely hired at or beyond this age.
This circumstance creates the incentive for an ongoing connection with
their alternative source of livelihood, such as farming or other forms of village
employment. Built into the structure of their employment is a reason to main-
tain a strong economic relationship with their home villages. In a similar way,
the status of informal workers creates little bond between the employee and the
workplace. As informal workers, with no apparent hope of regularization, they
do not identify with the interest of their employers, knowing they may get a
comparable job in any other factory whenever they come back. This is why there
is a difference in the attitudes of regular and contract workers.
A similar attitude can be observed in casual workers in Tier II who also go
home during harvest and festive seasons, returning after one to two months.
During this time, Tier II enterprises face an acute shortage of labor. The
problem is such that to retain the workforce some employers in Tier II took
the initiative to provide subsidized accommodation to workers in the adjacent
workers “colony,” as reported by one of the workers living in this facility.
The owner rented a few rooms to workers on slightly subsidized rent. As a
result, many workers chose not to return home in order to retain the rent
subsidy.
On the other hand, management interviews revealed a clear opposition to
regularization as it would involve increasing costs and invitation of “union
problems.” In one interview with Tier I management, it was specifically pointed
out that considering the current level of flexibility required, the automobile
industry in lead firms and Tier I could afford to regularize about 70 percent of
the workforce. Management suggested this would be good for the smooth
running of production operations, as well as avoiding dealings with middlemen
such as labor contractors. However, management did not view this as a viable
trade-off due to increasing costs and potential increase in unionism.
Informality in Tier II enterprises is completely different from that in lead
firms and Tier I factories. It is largely linked with the informality of enterprises
themselves. In the areas where small-scale manufacturing clusters are located in
Faridabad, the roads are in very bad shape and the lanes get flooded during rainy
seasons (ET Bureau 2012). The enterprises face a serious transportation
problem in a situation when timely delivery of parts is a crucial factor of
business. Power cuts for long durations are a very serious problem. All the
enterprises are forced to run production through the use of generators due to the
unreliability of electricity supply. On average they spend more than Rs 24,000
(US$400) per month in fueling large generators with diesel fuel. Small-scale
enterprises also find it difficult to access bank credit. As a result, when there are
550 WORKINGUSA: THE JOURNAL OF LABOR AND SOCIETY

delays in payments or unexpected orders, enterprises lack cash flow to purchase

raw materials, forcing them to take loans from the informal market at very high
interest rates.
According to managers/owners of Tier II enterprises, Tier I customers
consistently apply pressure to reduce costs. Prices have not increased for years
even when the cost of production has increased. Moreover, there are significant
losses to Tier II enterprises in the rejection of parts by Tier I. Higher rejection
rates are generally due to two reasons: (1) lack of sophisticated machinery, and
(2) lack of skilled workers. Due to variance in the volume of work orders, it is not
sustainable for Tier II companies to retain significant numbers of skilled
workers, with Tier II companies having to make do with a largely unskilled labor
force. This problem then becomes exacerbated in times of higher demand. In
such situations, the rejection rate of manufactured parts increases, and some-
times machines are also broken due to rough handling. These problems create
losses to the enterprises. Some enterprises reported losses of Rs 15,000–20,000
(US$250–335) per month. The current rejection rate is generally reported as
being between 1 and 5 percent.

Conclusions

This study has demonstrated that India’s labor laws are significantly out of
step with the balance of power between labor and capital in the automobile
industry. This is reflected in the normalization of rampant violations of India’s
labor laws and the institutionalization of a labor relations system precisely aimed
at creating ways and means to escape from such laws. Flexible labor relations
may be a necessity in a situation of flexible production coping with fluctuating
demands. However, as observed, in lead and Tier I firms in the automobile
industry, the push for flexibility is not a day-to-day issue either in terms of the
way production takes place or in terms of the labor force itself. What we
observed was a very stable workforce performing insecure work.
The level of production flexibility could easily be handled by engaging a
small number of casual workers on an intermittent basis. Serious fluctuations in
demand are rare and could be easily taken care of within the existing legal
framework by laying off some casual workers for a period of time, and the law
provides the space for this. If by the management’s own admission 70 percent of
the workforce could be formalized, then the real question that should be asked
is why 84 percent of India’s manufacturing workforce is part of the informal
sector (Mishra and Shankar 2013, 5).
To explain this, we must understand the expectations of employers. The
study revealed that employers have a clear desire to engage low-wage labor in
greater proportions and a strenuous opposition to trade unions. Management
seeks to avoid any collective bargaining, so that profit margins remain as high as
possible. The contract labor system (or the casual labor system in Tier II) fulfills
these expectations and its normalization tilts the balance of power in labor
relations further in their favor.
Kerswell and Pratap: Informality in Automobile Value Chains 551

Due to the conflict between expectations of employers and the existing

system of labor laws, there is a reported tendency for employers to adjust the
structure of their enterprises accordingly. This involves becoming smaller, divid-
ing larger enterprises into smaller enterprises largely to escape from various
labor laws. By contrast, the necessities and expectations of workers are different,
and this is reflected in the miserable conditions of contract workers on the one
hand and the increasing tension in labor relations in India’s automobile sector on
the other.
In these situations, a political argument centered on enforcing compliance
with the labor laws is unlikely to be successful. The study demonstrated the
willingness of employers to circumvent India’s labor laws, and the unwillingness
or inability of the Indian state to intervene. The necessities, expectations, and
the power balance in labor relations is unlikely to change quickly. For workers’
conditions to change, agents representing workers would need to have a signifi-
cant impact on the balance of power between labor and capital. The current
strategy of trade unions to focus on formal legal defenses centered on the formal
sector and India’s labor law is unlikely to achieve any significant impact.
Small-scale manufacturing, such as that in Tier II, is getting new importance
and contributing a significant proportion of employment and manufacturing
gross domestic product. The necessities and expectation of Tier II are com-
pletely different. This study has revealed the serious problems faced by firms in
Tier II of the automobile supply chain that appear trapped by the position of
lead and Tier I firms and are therefore unable to show any upward mobility. The
position of small-scale enterprises in Tier II is largely ignored, and these enter-
prises along with their workers become victims to lead firms and Tier I factories
that exploit their leading position in the commodity chain.

Timothy Kerswell is Assistant Professor in Government and Public Adminis-

tration at the University of Macau where he has been working for almost three
years. His articles have been published in Monthly Review, Social Change, and
Theory in Action. He holds a PhD in Political Science and Political Economy
from Queensland University of Technology (Australia), a Master of Arts in
Political and International Studies from the University of New England (Aus-
tralia), and a Bachelor of Social Science (Hons) in Political Science and History
from Queensland University of Technology (Australia). He has previously
worked for the Australian Government in the Department of Immigration and
Citizenship in the Labour Market Branch for almost five years, resigning as an
assistant director in 2013. He has also worked as a researcher for the trade union,
United Voice.

Surendra Pratap is Director of the Centre for Workers Education in New

Delhi, India, an organization that provides research, education, and training for
the working class movement in India. Surendra is a long-time labor activist in
India who currently works as an independent researcher for various labor orga-
nizations both in India and internationally. Surendra has also worked as a
552 WORKINGUSA: THE JOURNAL OF LABOR AND SOCIETY

journalist for Dainik Jagran. Surendra earned an MA in Economics in 2000 from

Bhimrao Ambedkar University, Agra, India, a Bachelor of Laws in 1995 from
Lucknow University, Lucknow, India, a Master of Science (Environmental Sci-
ences) in 1987 from GB Pant University of Agriculture and Technology, and a
Bachelor of Science from Kumaon University, Nainital, India.

Note

1. Conversions to US$ were made on November 10, 2014.

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