Will the changes in labour laws by state govts really benefit companies?

By Aman Malik

  • 14 May 2020
Will the changes in labour laws by state govts really benefit companies?
Credit: Reuters

India is trying to emerge from a two-month-long lockdown that has all but crippled the economy and left countless millions out of work. This, even as the number of coronavirus infections continue to rise and lakhs of unemployed migrant workers are on moving back to their native villages. 

Now, the central government and some states want to look beyond not just the lockdown but the pandemic itself. 

India is keen to attract foreign direct investment (FDI) and make itself marketable to multinational companies that may be looking to shift manufacturing and logistics operations outside China, completely or partially. And for that, states are willing to lay out the red carpet. 


To begin with, some large Indian states have brought in ordinances to do away with almost all or a significant number of labour laws for the next three years, to make it more attractive for companies to invest. 

Are all these states ruled by Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP)?

Not really. Uttar Pradesh, Madhya Pradesh, Haryana, Uttarakhand, Himachal Pradesh and Gujarat are indeed ruled by the BJP. But at least two others—Rajasthan and Punjab—ruled by the principal opposition Congress party and Odisha—governed by the Naveen Patnaik-led Biju Janata Dal—have also changed their laws to some extent.


In effect, this is competitive federalism playing out across the political divide, simply because states are hungry for investments and eager to generate more jobs for the teeming millions who are unemployed or underemployed. 

What is the central government doing on this count?

The central government, too, is on board. While announcing a Rs 20-trillion package, Modi on Tuesday made a case for “self-reliance” by making India a manufacturing powerhouse. While he didn’t say as much, his intent was clear—India should attract as much investment as possible from companies that may be looking to move out of China.


This is effectively a continuation of his government’s flagship ‘Make in India’ initiative, which was unveiled soon after he first assumed office in May 2014 but has failed to attract any notable investments into the country. 

Last year, the government reduced corporate taxes to some of the lowest in the world and also gave a tax holiday to companies setting up new factories. But the global economic slowdown, followed by the coronavirus pandemic, appear to have all but blunted the impact of the move that was then hailed as a masterstroke of sorts. 

What do the changes in the labour laws mean for companies looking to invest in India? 


Companies operating in India have to wade through a labyrinth of more than 200 labour laws that deal mostly with wages, working conditions, social and job security, and industrial relations. These are governed by various acts enshrined in the statute including the Factories Act, the Minimum Wages Act, the Shops & Commercial Establishments Act and the Industrial Disputes Act. These laws are intended to regulate working conditions and provide workers with some sort of a safety net, but are often seen as being detrimental to companies’ interests. 

Doing away with these laws will allow companies to hire and fire workers more easily and also help bring down their wage rates. 

Looked at from the employer’s perspective, the labour laws are often so constraining that they have increasingly been employing workers on daily wages, without any formal contracts because once they cross a minimum threshold of say 100 workers, they cannot lay them off at will.


Effectively, even companies in the organised sector have been bypassing these myriad laws by hiring non-contractual labour when required, and laying them off just as quickly, when not needed. 

Could these changes have a significant impact on existing companies already employing a large number of people?

Technically, they could, but only if such companies can set up or move operations to states that have made such wide-ranging changes. That may not be possible for those companies that do employ a large number of people but whose operations are region-specific.

Moreover, even those that can move operations will weigh in the relative costs of moving operations vis-à-vis gains accrued from such laws.

Also, those weighing options between countries, will have to consider the relative wage rates in countries like Vietnam and Bangladesh, where labour is typically cheaper than most regions in India.

Could more changes, especially on land reforms, follow?

On Wednesday, finance minister Nirmala Sitharaman said the government’s bailout plan will rest on four pillars—liquidity, labour, laws and land. So, it can be safely assumed that changes in land acquisition norms could follow, although there is no clarity yet on what shape the new land reforms will take.

Speculation is rife that the new laws could mean that farmers will be able to directly sell their agricultural land or barren land for industrial use, with minimal government intervention, at a mutually negotiated price.

The new laws could also allow the government to easily change land use norms from say agriculture and forests to industrial. The government could also look at quickly monetising land currently under the control of the defence establishment, especially in urban areas, by shifting cantonments outside of city limits. Excess land owned by the railways and government-owned companies like Bharat Sanchar Nigam Ltd could also be monetised.

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