The Vasundhara Raje-led BJP government in Rajasthan recently took significant steps towards reforming labour laws by clearing the amendment to three central labour laws - Industrial Disputes Act, Contract Labour Act and the Factories Act. Archaic labour laws have often been cited as one of the deterrents to boosting labour-intensive manufacturing activity in the country.
Analysts described the Rajasthan government's move as a significant step towards boosting labour-intensive manufacturing sector in the country. Responsibility for labour policy is shared between the central government and the states.
Commenting on the Rajasthan government's labour reform initiatives, Saurabh Mukherjea, CEO of institutional equities at Ambit Capital, says other states could follow its lead soon, especially the BJP-ruled states.(See Video)
Dr. Subir Gokarn, former deputy governor of Reserve Bank of India, said, "This reform has been hanging fire for many years. Some 14 years ago, then finance minister in the NDA government Yashwant Sinha had proposed amendment to Industrial Disputes Act in his budget speech but that did not go anywhere as there was tremendous opposition." (Watch video)
Amendment of labour laws has been a contentious issue in the country. But if the government has to move people from agriculture to manufacturing then labour laws have to be amended to give industries more flexibility, says Dr. Gokarn
"The share of people of the people protected by relevant clauses of the Industrial Disputes Act and so on is relatively small. The whole of the organised sector workforce is estimated below 8-10 per cent and this (labour laws) applies to private sector. Rather than worry about people being impacted adversely the worry should be about the people left out of the opportunity," said Dr. Gokarn.
Mr Mukherjea of Ambit Capital said he expects the BJP ruled states to drive reforms in areas that are on the concurrent list of the constitution. "Wherever you have reform areas which are concurrent subjects - either centre or states can legislate in areas like land, labour, food, and power - we may see the BJP states will move reform through their legislative assembly. What the constitution says if on a concurrent subject a state assembly has signed off, then that bill has to come to the president for his assent," he said.
Mr Gokarn is optimistic that the Rajasthan government proposal will be cleared. "When a state government does (labour reforms), it requires assent of the president and that means effectively means the central government has to approve it. I presume that the Rajasthan government has got some feedback from the central government on this issue." The Narendra Modi government has promised to expand job opportunities to by promoting manufacturing industries.
If the BJP-ruled states are able to attract foreign direct investment by reforming the labour laws, then other states could follow suit, says Mr Mukherjea of Ambit Capital.
"My hunch is that BJP states will drive reforms. They will pass it through their legislative assembly and then the president will give his assent. Through this route, reforms could be percolated through Gujarat, Rajasthan and potentially MP and Chhattisgarh. If these states attract FDI, other states could follow through on this," he said.
The labour reforms would benefit the textile, sports goods and low-end manufacturing sectors, Mr Mukherjea said. "I have met many promoters who break up their companies into tiny units to circumvent labour laws. By breaking up the companies into sub-optimal units they lose out on economies of scale," he said.
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