Kitex’s Exit from Kerala and the Fallacy of Ease of Doing Business

Kitex’s Exit from Kerala and the Fallacy of Ease of Doing Business

1. Introduction

“J6 was our room. It was about 120 square feet big. We (13 people) were supposed to stay inside that room. We used to sleep on the floor with heads opposite to each other. There were blocks [from A] till K at that time. Every room was in a similar condition. More than 1500 people used to live like this in those rooms.”

(Translated excerpt from a Facebook note by a former male employee at Kitex Garments.)

The controversial withdrawal of the Kitex group - primarily a garment manufacturing firm - from Kerala and subsequently shifting its plants to Telangana have brought into limelight an old debate. Is Kerala an unsafe place for industrial investment? The comments made by Sabu Jacob, the managing director of Kitex group against the present Left-led government in Kerala have added to this discussion. His remarks that the Industry Department of Kerala is a “frog in the well” and that they are unaware of the investor-friendly environments in other states (The Hindu, 2021) lead us to a larger question of what constitutes the concept of Ease of Doing Business (EoDB) and the flaws that exist in ranking countries or states according to this parameter. Against this backdrop, an attempt is made to compare the EoDB of the two States involved in the controversy- Kerala and Telangana- along with other indices, to have an informed comparative picture of business conditions that characterise these States.

2. What is Wrong with the EoDB?

Before moving into the comparative study of the States, we have to analyze how good a parameter EoDB is for measuring the pro-business nature of a region. The practice of ranking countries on the basis of EoDB was initiated by the World Bank in the 2000s. The first report of the World Bank came out as the Doing Business Report (DBR) in 2003. Simeon Djankov, Andrei Shleifer, and their team worked behind this Report. A set of eight indicators were used for the creation of DBR.[1] Interestingly these parameters do not take into account the welfare of labourers, an important stakeholder in business operations, or compliance with environmental procedures. R. Ramkumar, in a strong critique of the EoDB, claims that the World Bank’s measurement is flawed and misleading. According to him, the political bias in ranking system is only aimed at pushing the developing countries into more neoliberal reforms. Similar to the structural adjustment programmes, DBR was used to push neoliberal reforms after 2002 (Ramakumar, 2020). Flora Sonkin and Bhumika Mucchala, argue for the scrapping of DBR as the rankings “are hindering efforts for a ‘green, inclusive and resilient’ COVID-19 recovery” in a recent article. The rankings in effect led to an international business race among the countries and the World Bank acting as the “referee and rulemaker” for this race (Sonkin and Mucchala, 2021). However, after a series of controversies over the political bias within these rankings, the World Bank (WB) in a statement released in August 2020 announced that it has decided to pause the publication of DBR. “A number of irregularities have been reported regarding changes to the data in the Doing Business 2018 and Doing Business 2020 reports, published in October 2017 and 2019,” reads the WB statement (World Bank, 2021). In a nutshell, DBR has proven to be a politically motivated tool for some  institutions over the last two decades. The proponents of the idea have not been able to come out with anything yet in defense of their idea.

India’s position in the DBR 2018 is 100. India’s jump from 130th position in 2016 to 100th position in 2018 was viewed with suspicion by experts. Sonkin and Mucchala argue that countries like India and Indonesia have designed national reforms with the sole intention of climbing up the ranks. Considering the major changes brought about in labour code bills, relaxations made in the field of mining, and reduction in effective corporate tax to 25.17 per cent,  such an argument cannot be rejected. It was in addition to the above-mentioned reforms that the Department of Industrial Policy and Promotion (DIPP) was made responsible for ranking the States according to their EoDB. The rankings began in 2015 by considering several parameters such as setting up a business, dealing with construction permits, electricity connection, getting credits, paying taxes, trading, employing workers, protecting minority investors, and contracting with the government. DIPP comes out with a Business Reform Action Plan, which States are supposed to meet. Ramkumar in his above- article raises his disagreements with respect to the methodology of calculating EoDB. He highlights the disparity between results of several indices and compares the Statesof Kerala and Uttar Pradesh (UP) . UP is at second position in EoDB 2019 measurements, while Kerala’s position slipped from 21st to 28th from the previous round to 2019.  But Kerala’s Gross State Domestic Project (GSDP) was increasing at a higher rate in comparison to the GSDP of UP and Gross Domestic Product (GDP) of India in the years of 2016-18. Prof. Ramakumar observed that new investment projects (in the private sector) announced in Kerala increased during this period (2017-19),  while it decreased in UP. The State Investment Portal Index (SIPI) released by National Council of Applied Economic Research (NCAER) does not concur with the rankings according to EoDBHence, Ramakumar concludes that just like at the international level, EoDB at national level is used by the Central Government to push for neoliberal policies at the State level by promoting competition to follow the BRAP.

Let us now look at  the EoDB of Kerala and Telangana- two of our states in focus- and also try to fill in the gaps that we have found in EoDB by taking into consideration other parameters such as labour welfare and enforcement of labour and environmental laws . We shall  also look into the GSDP of both States and the rankings according to SIPI.

2.1 Relative Positioning of Kerala and Telangana in EoDB

According to the DIPP’s 2019 rankings, Telengana is at 3rd position after Andhra Pradesh and Uttar Pradesh in terms of EoDB. Kerala is at 28th position among the 36 entries. In 2015, Telangana was at 13th position and Kerala was at 18th. Kerala has fulfilled 157 out of 187 (83.96%) reforms coming under BRAP 2019, while Telangana has fulfilled 165 out of the 301(54.82%) reforms. We should note that this was 53 percent for Kerala in 2017-18.  Ramakumar notes that the Left Democratic Front-led government in Kerala is pledged to promote private entrepreneurship in the State without undue relaxation of labour laws. Interestingly, one among the BRAP reforms reads “differentiate compliance inspection requirements based on risk profile (such as High, Medium and Low risk) of industries under all the labour laws.” The measure taken by Kerala Government to meet this reform was to constitute a Central Inspection System integrated with KSWIFT – Online Single Window Clearance Mechanism. It was through such a series of inspections that the Kitex group was found in violation of a number of labour laws!

When we consider the growth of Micro and Small Medium Enterprises (MSME), we can see a clear distinction between both States. In Telangana since its formation, 13,379 MSMEs were registered with an investment of Rs 18,465 crore, which generates 2,43,556 jobs (Government of Telangana, 2021). On the other hand in Kerala, 13,695 MSMEs were started with an investment of Rs 1,338.65 crore and created 46081 employment opportunities in 2019-20. Among these 52,137, were set up after 2016 (See figure 1.0).

Comparison of MSMEs in Kerala and Telangana
Source: Kerala Economic Review 2016, 2019 & Telangana Socio Economic Outlook of respective years

While comparing the Gross State Value Added (GSVA) by manufacturing sector, we see that Telangana’s performance is better than Kerala. But considering the kind of calamities that affected Kerala  in 2017-20, such a depression in manufacturing sector is not unexpected. However, the share of manufacturing in the GSVA of Kerala rose from 9.8 per cent in 2014-15 to 13.2 percent by 2018-19. This shows that amidst two floods, the Nipah outbreak, and Ockhi cyclone that hit Kerala hard, the State’s manufacturing sector managed to perform better than it could in the earlier years. Whether this is a sign of Kerala’s increasing ease of doing business or not is open to debate, but one cannot ignore that various projects, especially those aimed at bringing up the MSME units - Vyavasaya Bhadratha special package for relief and Financial Assistance to MSMEs in Kerala in the wake of Covid-19 - have played their  role in supporting the manufacturing sector of the state.

GSVA added by manufacturing sector
Source: Kerala Economic Review & Telangana Socio-Economic Outlook of respective years


2.2 Missing Labour Welfare in EoDB

Liberalisation within labour laws are seen as central to promoting Ease of Doing Business anywhere. Anshul Pachouri, in a blog written in World Bank Blogs, notes that strict labour laws and regulations that exist in India are responsible for its low ranks in DBR (Pachouri, 2014). He adds that a large number of regulations has resulted in high cost of compliance for enterprises both in terms of time and money. The large number of labour laws comes with frequent inspections, which will make the business environment vulnerable. The NDA government which came into power in 2014 had aims of making India into a hub of business. The three new labour codes passed in Lok Sabha in 2020 were seen as a drastic step towards ensuring ease of doing business in the country by many experts. The three bills- Industrial Relations Code Bill, 2020, Code on Social Security Bill, 2020, and Occupational Safety, Health and Working Conditions Code Bill, 2020 will also lead to providing employers with more flexibility in hiring and firing workers. The threshold for requiring a standing order – norms of behaviour for workers in industrial premises — has been raised to more than 300 people under the Industrial Relations Code. This means that businesses with fewer than 300 employees will not be required to provide a standing order, allowing them to impose arbitrary service restrictions on employees. We have to analyze the response of Kerala and Telangana  towards these changes, which will have long-term effects on labourers of the country.

Kerala Finance Minister, while responding to media after the Kitex row, commented that Ease of Doing Business is not dismantling labour laws (PTI, 2021). The response of Kerala State Government towards the practice of making relaxations in labour laws for promoting EoDB is clear in his answer. Prior to this, Minister of Industry, P. Rajeev had stated that the State stands for responsible investment; a strategy and practice to incorporate environmental, social, and governance (ESG) factors in investment decisions. Meanwhile, the Government of Telangana has released measures to reduce the regulatory compliance load on the business through a recent circular dated 20.02.2021. Certain provisions of the Factories Act, 1948, and Telangana Factories Rules, 1950 were exempted from applications for the sake of ease of doing business. Factory law compliances such as return filing and statutory reporting, inspection, examination, and audit requirements, maintenance of registers and records, display requirements, and employee safety and welfare requirements, among others, were exempted. Relaxations have been brought into many provisions in factory law, which came into existence after the Bhopal Gas tragedy of 1984. Experts and various trade unions have already turned against the decision, which according to them will lead to a disaster (Oommen, 2021). We can clearly  see two distinctly different models followed by both States.

Telangana had the highest number of cases registered under Child Labour (Prohibition & Regulation) Act according to National Crime Rrecords Bbureau’s statistics - 314 cases. Kerala had one of the lowest number that year, which was merely two cases. In the Interstate Migrant Policy Index (IMPEX) developed by Mumbai-based research non-profit India Migration Now, Kerala is at the top with a score of 57, while Telangana has a comparatively lower score of 34. This index took into account several factors such as education, labour market, children’s rights, political participation, housing, health and sanitation for this calculation.[2] Uttar Pradesh, another state which has a high ranking in EoDB, is also at a lower rank according to this index with a score of 35.  The EoDB achieved by many of the states comes with violation of labour rights, social exclusion of migrant workers.

The National Council for Applied Economic Research (NCAER) launched an initiative in 2015 to measure each State’s investment climate and potential and to track it over time - the NCAER State Investment Potential Index (N-SIPI).[3] According to this index, Kerala is at 6th rank, while Telangana is at 8th position. This index is more conclusive as it considers many more factors than the EoDB indices. While looking into the profiles of both States, we see that Kerala’s average wages in manufacturing sector is at 69.1% while of Telangana’s it is 53.8%. Kerala has a lesser share of contract workers in total labour force compared to that of Telangana. In case of infrastructural facilities, Kerala has better road and rail density than Telangana. Interestingly in Telangana, the survey results show that 2.6% of respondent investors face problems in acquiring land. On the other hand in Kerala, no one faces any difficulty in doing this. Thus, the N-SIPI shows us a different picture than the one shown in the EoDB index. The possible factor behind this is the factors considered in addition to what is not calculated in EoDB.

2.3 From Supermarket to Political Party: The Kitex Story

A popular joke is that  the East India Company was the only company prior to Kitex to be directly involved in the power structure of our country! The trajectory of Kitex group in Kerala has shown a crooked way of sustaining a business model, which is primarily against labourers and environment by making use of the support gained from local residents in various forms. Sabu M. Jacob established his garment unit in 1992. The Kizhakkambalam production unit started operations in 1995. From then the turnout of the firm has been considerably huge and has been selected as one of the best Asian Companies by The Forbes.[4]

In 2012 the residents around the area, where the plant is situated, alleged that the company not only discharged effluents into the Periyar valley canal and paddy fields in the neighbourhood, but also consumed water to the tune of more than eight lakh litres per day (The Hindu, 2012). The residents’ protest continued for 100 days but ended in vain. No considerable action was taken against the company, but it was given a clean chit by the State Pollution Control Board (The New Indian Express, 2012).[5] The setting up of 20-20 Kizhakkambalam, which was founded as an NGO to implement Corporate Social Responsibilities of the company, in 2013 was not  a mere coincidence. The long-term objective of 20-20 was to make Kizhakkambalam a model village by the year 2020 – a model of sustainable development, replicable anywhere in India and the world.[6] The Company used to provide goods and services at subsidized rates to the people of Kizhakkambalam through which they grabbed a lot of attention.[7] The next step was to enter the political structures. After the appeasing acts carried out through the CSR, it was easy for this NGO to win local body elections.[8] They also contested the last Assembly elections where they could not win any seats. Citing an inspection by the District Labour Officer following complaints regarding the company to the National Human Rights Commission, Sabu Jacob stopped the company’s expansion in Kerala. Sabu, while talking to the media, said that his firm was “hunted like an animal” and it provides better wages than what is being given in other States. However the experience of workers from the company tells us a different story. Aravind[9], who was an employee of Kitex Kizhakkambalam unit shared his experiences of working over there in a recent Facebook post. Workers including him were harassed by the security guards for no apparent reason. Working conditions were extremely hostile and whenever the Government inspections happened, workers were asked to get out of the factory through fire exits. Leaves were not given to employees even under emergency conditions. One of the arguments raised by supporters of the Kitex company and 20-20 initiative is that it generates an enormous amount of employment for people of that locality. But Aravind’s post states that this was not the case till the dying plant was started in 2005, which caused the pollution in adjacent areas and water bodies.

The experiment carried out by the Kitex group and Sabu Jacob for the success of the business firm is an interesting model to study and ponder upon. The firm psychologically influenced the people of the locality, who were the primary victims of pollution caused by the plant, through subsidized goods and by providing job opportunities. In Kerala, struggles against factories that caused environmental degradation were led mainly by the local residents.[10] Having control over the political leadership of an area will give any corporation a “safer environment for doing business” without following stipulated norms. 20-20 Kizhakkambalam can be just perceived as such an attempt. However the future of this NGO-turned-political business firm is now at stake as the parent company has decided to shift to another state.

3. Conclusion

It might be true that Kerala has failed to generate jobs for graduates the state is producing while on the other hand Telangana has successfully produced jobs (unemployment rate in Kerala is 15.8 per cent in contrast with Telangana with 4.8 per cent according to Centre for Monitoring Indian Economy’s data). This is one front on which Kerala has to improve. However, reducing the debate of how business can be done in a state just to EoDB rankings would be a faulty idea. As the above arguments have shown, a high priority given to DBR/EoDB leads the countries/States to a condition where they have to dilute labour laws/environmental norms. While looking at the past experiences one sees that political biases are prevalent among such rankings. Without more transparency in the parameters used for measuring the indices, and considering those parameters which are inevitable for ensuring labour welfare and dealing with environmental concerns, DBR/EoDB would continue to be inaccurate for understanding business-friendly environments.  A wholesome picture of investment friendliness would be only available when we start looking into other parameters.

 

Notes:

[1] These indicators are: 1) measures of the procedures, time, cost, and minimum capital required to start a new business; 2) enforcement of contracts, with measures of the procedures, time, and cost required to enforce a debt contract; 3) measures of the strength of legal rights, which encompass the degree to which collateral and bankruptcy laws protect the rights of borrowers and lenders, and the depth of sharing credit information; 4) measures of the ease with which workers can be hired or made redundant and the rigidity of working hours; 5) measures of the time, cost, and percentage recovery rate involved with bankruptcy proceedings; 6) measures on the efficiency of customs rules; 7) effect of different tax regimes on entrepreneurship; 8) measures for investor protections (Djankov 2016).

[2] To be read alongside, Kitex was also found violating basic rights to migrant workers like drinking water, suitable washing, or sanitation facilities. We cannot expect any State government to withstand these violations, and Kerala did not.

[3] The N-SIPI measures informational asymmetries by providing a single composite investment score. It offers a comprehensive snapshot of the investment environment in all the states of India in the form of an index. More specifically, it assesses the various factors that primarily determine and influence investment opportunities such as land, labour, GST policy, infrastructure, economic governance and the business environment.” (The NCAER State Investment Potential Index 2018, Pg no.1)

[4] Initiated as Anna Aluminium the group started with manufacturing Aluminium products, Kitex later entered the garment manufacturing industry. The group also owns Saras, a spice manufacturing firm.

[5] The standoff between company and residents still continued. The protest continued for more than 500 days, and Kizhakkambalam Grama Panchayat came in support of people. (Express News Service, 2013)

[6] Year 2020 has passed and Kizhakkambalam is not yet anywhere near a model village in Kerala’s context.

[7] Some of these activities included conducting medical camps, distribution of poultry and milch animals to the distribution of laptops for students, all at a nominal cost. ‘Bhakshya Suraksha Market’ , a supermarket started by the NGO, sells most things for less than half the market price. People could purchase a kilolitre of coconut oil, for example, would cost Rs 230 at a conventional market but only Rs 57 in the Bhakshya Suraksha one given one condition- residents have to become members of Kizhakkambalam Twenty 20. (The membership is free — however, there are allegations that supporters of other political parties have had their membership cancelled in recent years.) (Joseph, 2021)

[8] The residents of the area are said to have more trust in the 20-20 representatives than those from the village panchayat. One such testimony reads: “There are ward-level executives who are appointed by 20-20. They see to the needs of the people.More than the local ward members, these executives help us. If there is an emergency or difficulty, they will verify the issue and get us the aid we need from 20-20.” (Joseph, 2021)

[9] Names have been changed  to ensure anonymity.

[10] For example, the Coca-Cola plant in Plachimada and Mavoor Gwalior Rayon factories were locked down following massive protests against environmental issues caused by the factories.

References:

1. Basheer, K. (2018, January 19). ‘Business houses can run villages better than political parties’. Business Line. https://www.thehindubusinessline.com/specials/india-file/business-houses-can-run-villages-better-than-political-parties/article8120852.ece Accessed on July 17, 2021

2. Djankov, S. (2016). The Doing Business Project: How It Started: Correspondence. Journal of Economic Perspectives, 30(1), 247-48. https://www.aeaweb.org/articles?id=10.1257/jep.30.1.247 ​​Accessed on July 17, 2021

3. Government of Telanagana. (2021). Socio-Economic Outlook 2021. Planning Department, Government of Telangana. Retrieved July 16, 2021, from https://www.telangana.gov.in/PDFDocuments/Telangana-Socio-Economic-Outlook-2021.pdf Accessed on July 17, 2021

4. The Hindu. (2012, September 30). Residents allege pollution by Kitex. The Hindu. https://www.thehindu.com/news/cities/Kochi/residents-allege-pollution-by-kitex/article3951230.ece Accessed on July 17, 2021

5. The Hindu. (2021, July 12). Decision-makers in Kerala stuck with the frog-in-the-well attitude: Kitex MD. The Hindu. https://www.thehindu.com/news/national/kerala/decision-makers-in-kerala-stuck-with-the-frog-in-the-well-attitude-kitex-md/article35276243.ece Accessed on July 17, 2021

6. The New Indian Express. (2012, October 5). Pollution Control Board gives clean chit to Kitex. News 18. https://www.news18.com/news/india/pollution-control-board-gives-clean-chit-to-kitex-514300.html Accessed on July 17, 2021

7. Oommen, P. (2021, March 15). Is Telangana govt’s decision to reduce compliance for factories justified? The News Minute. https://www.thenewsminute.com/article/telangana-govt-s-decision-reduce-compliance-factories-justified-145243 Accessed on July 17, 2021

8. Pachouri, A. (2014, August 20). Labour Regulation and Job Creation in India. World Bank Blogs. https://blogs.worldbank.org/endpovertyinsouthasia/labour-regulation-and-job-creation-india Accessed on July 17, 2021

9. PTI. (2021, July 16). "Ease Of Doing Business Doesn't Mean...": Kerala Minister On Kitex Exit. NDTV. https://www.ndtv.com/kerala-news/kerala-minister-kn-balagopal-on-kitex-exit-ease-of-doing-business-doesnt-mean-2487696 Accessed on July 16, 2021

10. Ramkumar, R. (2020, September 9). Centre’s ‘Ease of Doing Business’ ranking is pointless, it must be dumped. https://thefederal.com/opinion/centres-ease-of-doing-business-ranking-is-pointless-it-must-be-dumped/ Accessed on July 16, 2021

11. Sonkin, F., & Mucchala, B. (2021, April 22). It’s time for the World Bank to scrap its Doing Business rankings. ALJAZEERA. https://www.aljazeera.com/opinions/2021/4/22/its-time-for-the-world-bank-to-scrap-its-doing-business-rankings Accessed on July 16, 2021

12. World Bank. (2020, August 27). Doing Business – Data Irregularities Statement. The World Bank. https://www.worldbank.org/en/news/statement/2020/08/27/doing-business---data-irregularities-statement Accessed on July 16, 2021

Featured image source: Official website of Kitex Garments Private Limited.

 

Anil Sethumadhavan (asethumadhavan.20@stu.aud.ac.in) is a postgraduate student of Development Studies at Ambedkar University Delhi. Author is thankful to Prof. Babu P Remesh for encouragement and useful insights for writing this paper.