Factor market reforms: States ahead of Centre in changing land, labour laws

This may be the time for a fresh look at the reform narrative

The economic policy discourse in India, particularly since the reforms of 1991, has rightly focused a lot on the need for ridding the land and labour policies of their rigidities. While reforms in many other areas got implemented bringing in measurable benefits for the economy, experts have consistently pointed out that India’s manufacturing revival to raise its share in gross domestic product to 25 per cent will remain a pipe dream unless factor market reforms took place to relax the country’s land and labour laws. 

The Narendra Modi government, formed in May 2014, raised hopes that it would be bold enough to amend the land acquisition and rehabilitation law of 2013 to make it easy for industry to purchase land and build factories as well as roads. Labour law changes were also expected through a comprehensive labour code that would do away with the need for seeking government permission for retrenching workers at a higher compensation package as long as the enterprise concerned employed less than 300 people. 

To be sure, the Modi government did try to amend the land acquisition law and had even issued and reissued an ordinance in anticipation of securing Parliament’s nod to the amendment bill. But the political opposition to the move was so strong that it dropped the idea. 
 

Similarly, it faced resistance from trade unions to relax labour laws. What is being proposed now dilutes the original plan in as much as the freedom to retrench employees without government permission is being retained at the earlier level (for enterprises with less than 100 workers) and there is also no improvement in the compensation package for the retrenched workers. 

However, in the face of political opposition in the Rajya Sabha and resistance from trade unions affiliated to the Bharatiya Janata Party (BJP), the Modi government devised a bypass formula. It asked the state governments to frame their own land and labour laws that would remove their rigidities. There was also a suggestion that it would ensure that the President’s assent to such state-level laws would be granted without any delay or problem. 

Have states, in particular those ruled by the BJP, taken the plunge? A quick assessment reveals an interesting state of play with regard to land and labour law reforms in the country. A study by Kanchi Kohli and Debayan Gupta of the Centre for Policy Research shows how several large states have amended their land acquisition laws and framed rules that effectively dilute the central law. 

For instance, Gujarat has exempted land acquisition from social impact assessments (SIA) and consent of the land loser for several types of projects. In Maharashtra, SIA and consent requirements are now imposed only on private projects while excluding public-private partnership (PPP) projects. Tamil Nadu has exempted SIA and consent for land acquired for industrial purposes and highways, among others. Telangana too has exempted several kinds of projects from SIA and consent requirements. 

Some states have also begun framing rules for the existing land acquisition law of 2013 in a way that they give leeway to the authorities. They include Uttar Pradesh (easier SIA rules), Jharkhand (easier Gram Sabha consent process), Odisha and Tamil Nadu (release of unused land for land bank use made easier). Some states like Haryana, Chhattisgarh and Tripura have even reduced the quantum of compensation for land acquisition. 

As regards labour policy relaxation, as many as nine states have amended their industrial disputes law as a result of which retrenchment norms in Madhya Pradesh, Rajasthan, Gujarat, Jharkhand, Uttar Pradesh, Haryana, Maharashtra, Assam and Andhra Pradesh have been considerably eased. Note that all of them barring Andhra Pradesh are ruled by the BJP. In addition, Gujarat, Rajasthan and Madhya Pradesh have raised retrenchment compensation by hefty margins. 

Of course, the Centre too has allowed short-term contracts in all sectors provided statutory dues of contractual employees are maintained on a par with those who are permanent. And as for the land acquisition law, Surface Transport Minister Nitin Gadkari says acquiring land is not a problem, as long as you are willing to pay the price. If he has stepped up the pace of road construction, which requires acquisition of land, it is because he has ensured that the compensation package for land losers has been attractive. 

The benefits from such land and labour market reforms for the economy are not yet clearly evident. But if so many states including some of the most industrialised ones have relaxed their land and labour laws for at least a couple of years, it is perhaps time to change the discourse on India’s missing factor market reforms. Contrary to the earlier narrative, states that are more prone to electoral pulls and pressure, have done more on land and labour law reforms, while the Centre has been a relative laggard. More significantly, if manufacturing is yet to pick up on a sustained basis, in spite of such land and labour law reforms, the fault may lie elsewhere.