Expect Labor Reforms at the State Level in 2015

February 6, 2015 Posted by India Briefing Reading Time: 5 minutes

By Adam Pitman, International Business Advisory Manager, Dezan Shira & Associates

Foreign companies should begin preparing for labor reforms at the state level in the coming year. Following national labor reforms in November 2014, public and private interest groups have renewed calls for labor reforms in 2015.

Local media reports claim the federal government (known locally as “the center”) is interested in streamlining the country’s vast body of labor law into simplified categories. However, companies shouldn’t hold their breath.

The ruling Bharatiya Janata Party (BJP) has an expansive reform agenda; it is unlikely to expend any more political capital on contentious labor reforms. Instead, businesses should expect labor reforms at the state level. In most cases this will entail business-friendly policies for key industries, but foreign companies, especially those in labor-intensive industries, need to begin preparing for change.

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A Bird’s Eye View

Foreign companies without on-the-ground experience often run into human resources (HR) and, ultimately, legal trouble. Business Advisory Associate Shilpa Goel notes that, “There are so many labor laws – coupled with judicial decisions and states’ power to make their own laws – that a lot of newcomers do not know what is expected of them. In the absence of one unified labor law code, like a civil or criminal procedure code, foreign companies often find it difficult to stay abreast of all the labor rights and obligations that impact their operations”.

Further, rigid labor laws sometimes encourage risky business practices. Professor Vasabjit Banerjee, a policy expert at the University of Tennessee-Chattanooga, notes that national labor laws in India “incentivize domestic capital owners – especially smaller ones – to remain within the informal sector or utilize loopholes within the laws”.

Professor Banerjee traces this rigidity to the 1926 Trade Union Act, 1947 Industrial Dispute Act, and 1970 Contract Labor Act. According to him, the Trade Union Act has led to the “wholesale politicization of trade unions, disconnecting union interests from capital interests”. The Industrial Dispute Act “not only dis-incentivizes firms from expanding their labor force, but also increases exit barriers for loss making firms”. Although the Contract Labor Act helps domestic firms dodge difficult regulations for permanent staff, “these options are not often viable for multinational corporations who face greater scrutiny in India and abroad”.

State Governments Pushing Ahead

In contrast to the federal government’s piecemeal reforms, state governments have smartly targeted uncompetitive labor laws with allowances for key industries. In the early 2000s, Gujarat – a hub for industrial activity – amended aspects of the Industrial Dispute Act to facilitate investment. Similarly, Karnataka exempted the Information Technology and Business Processing Outsourcing (IT and BPO) sector from the 1946 Industrial Employment Act to maintain its global competitiveness.

Recently, the Rajasthan state government won plaudits for its comprehensive labor law reform. The state government relaxed the Trade Union Act, Industrial Dispute Act, Contract Labor Act, as well as the 1948 Factories Act and 1961 Apprenticeship Act to spur economic development and attract foreign investment. These reforms sought to balance labor and capital interests, and ultimately limited union strength, simplified compliance reporting, provided greater freedom to hire and fire employees, and incentivized the employment of young workers.

Chiranjit Banerjee, labor expert and Managing Partner for PeoplePlus Consulting, says, “It is now becoming apparent that individual states are pushing ahead with labor reforms to attain a higher level of industrialization – like Rajasthan – instead of waiting for a cue from the center”. This trend will continue, according to Banerjee: “Competitive federalism is the current flavor in India, where some states – Gujarat and Rajasthan, notably – will pull ahead of national standards by evolving more sensible labor laws”.

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2015 Outlook

Following business-friendly labor reforms in Rajasthan and Madhya Pradesh last year, many policy experts are watching state governments in Gujarat, Maharashtra, Haryana, Telangana, and Andhra Pradesh. The Gujarat state government is expected to introduce new labor reforms in the first half of the year, while the new government in Maharashtra has announced plans to support industrial development with labor reforms.

The new state government in Haryana is also mulling Rajasthan-style labor reforms, while state governments in Telangana and Andhra Pradesh are keen to attract foreign investment. Chiranjit Banerjee advises multinational corporations (MNCs) in the manufacturing segment to keep their eye on Rajasthan, Gujarat and Maharashtra, while MNCs in infrastructure and IT should watch developments in Andhra Pradesh.

Although any forthcoming reforms remain indefinite at this time, aspects of the Trade Union Act, Industrial Dispute Act, Contract Labor Act, and Factories Act frustrate state governments seeking to industrialize and develop formal sector employment. Due diligence is important for MNCs with plans to expand in India; human resource and legal personnel in labor-intensive industries should consider these best practices:

Independent legal advisory services
Quarterly reviews of national and state labor laws
Bi-annual reviews of HR policies
Regular HR training and meetings for employees
Periodic HR newsletters briefing employees of policy changes
Crisis communication plans for management and laborers
Established points of contact for unionized labor

About Us

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

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