Rajasthan has implemented key labour reforms that are being keenly watched by other states as well as in Delhi. Last November it became the first state to alter the archaic laws that have led more than 98 per cent of businesses to deliberately avoid expanding beyond nine employees. Small entrepreneurs say the rigid regulations – which subject factories to arbitrary inspections and allegedly favour trade unions – make it nearly impossible to fire workers or close a business.

Vasundhara Raje Scindia, the BJP chief minister who won the state election a year ago, plans to generate 1.5 million jobs by 2018. She told reporters last year that the changes would create “a habitat for job creation.”

Under the reforms, companies in Rajasthan can lay off up to 300 workers without government permission, up from the 100-employee threshold. Trade union representation can be introduced only with at least 30 percent of a company’s workers, up from 15 percent. And a strict factories law will now apply only to sites that employ 20 or more workers, instead of the previous 10.

“These laws were a big pain for the industry. Small businesses were saddled with the heavy burden of compliance and reporting and multiple inspections. A big disincentive to hire more,” said Chandrajit Banerjee, director general of the Confederation of Indian Industry. “Existing businesses will not hesitate to scale up. New labour-intensive investments will also come, which would be very critical.”

The changes in Rajasthan have been supported by Prime Minister Narendra Modi, who has promised to turn Asia’s third-largest economy into a China-style hub for global manufacturing.

But the changes have been criticised by labour unions, which argue that these erode workers’ rights.

“Industrial development is the need of the hour, but at what cost?” Ritesh Sharma, a labour rights lawyer, told the Washington Post.

“The government has the single-minded goal of improving the industrial investment in Rajasthan, and it has sacrificed worker welfare in the interest of corporate welfare,” he added.

Businesses have long complained that the labour laws constitute one of the biggest barriers to doing business in India, with 44 national and 150 state regulations to deal with.

Last October, the central government simplified 16 of the 44 national laws and created a single portal for reporting to multiple departments. The changes, observers say, can boost Modi’s “Make in India” campaign and attract large labour-intensive investment.

Meanwhile, “competitive federalism” – or competition between states – is being encouraged to push forward economic reforms by having each state make its own reforms to lure investors and set an example to the others.

“If there is one state which has taken the lead in reforms, in delivering on its commitments, it is the state of Rajasthan,” Amitabh Kant, a senior government official, told a business conference in Jaipur. “The action is in the states, not the centre.”

According to The Financial Times, Rajasthan’s position on the main freight route between Delhi and Mumbai has also attracted foreign companies such as Honda in cars, Saint-Gobain in glass and JCB in construction machinery. Raje is targeting 12 per cent annual economic growth for her state.

Several other states are now following Rajasthan’s lead, such as Madhya Pradesh, which has relaxed its labour laws. Maharashtra too has set up a committee to amend 20 labour and industrial laws.

- Karan Singh

To Learn More:

Rajasthan spearheads India’s reform drive (by Victor Mallet, Financial Times)

India’s Rajasthan state eases labor laws to spur investment in manufacturing (by Rama Lakshmi, Washington Post)

President okays Rajasthan labour reforms: Firms with 300 workers need no govt nod to sack (by Somesh Jha, Business Standard)

NDA nudge to states on labour reforms (by Prashant K Nanda, Mint)

Govt to amend 20 labour and industrial laws (by Ashish Roy, Times of India)