By Owen Jollie

The concept of devolving power to India’s states to foment competition is once again in vogue. There is growing sentiment in India that recently passed labor law reforms in Rajasthan are indicative of the new competitive dynamic, but it remains to be seen whether similar reforms take hold across the country. It is helpful to look at what Rajasthan has done in this regard to get a better understanding of its possible wider impact.

Last July, the state assembly of Rajasthan voted to amend the Industrial Disputes Act of 1947, and changes to the law were approved by President Pranab Mukherjee on November 7, 2014. These changes, voted by Rajasthan’s BJP-led assembly, are designed to give firms more flexibility in hiring and firing workers. Other laws that Rajasthan amended included the Apprentices Act, the Factories Act, and the Contract Labor Act. Under the Industrial Disputes amendment, employers will be able to dismiss workers without prior permission from the government if they employ less than 300 workers—a three-fold increase over the previous ceiling of 100 workers.

Since the implementation of these reforms in Rajasthan, a larger nationwide conversation on the issue of labor reform has begun with national and state leaders considering similar changes.[Update: Lawmakers in Madhya Pradesh have moved forward with a series of labor reforms very similar to those enacted in Rajasthan.] Lawmakers in Haryana are reportedly debating the issue in their state assembly, and the Union government recently passed an amendment to the Apprentices Act that resembled Rajasthan’s.

Jurisdiction of industrial disputes is mentioned in Part XI of India’s constitution, which describes the relationship between the Union government and the State governments. Part XI enumerates three lists delineating jurisdiction of legislative areas to the State governments, the Union government, and the State and Union governments concurrently. Regulation of industrial disputes is placed on the concurrent list. This explains why the state of Rajasthan was able to amend a federal law, and had to get President Mukherjee’s assent after passage of the amendment.

The original Industrial Disputes Act was written in 1947. Labor laws in India are often described as archaic, outdated, and antiquated. The law is nearly 70 years old, and an important aspect of the law’s history is the political environment in which it was written. The Industrial Disputes Act was written in India’s first year of independence, and many of its provisions are written for an economy just emerging from colonization. Having a low threshold for hiring and requiring governmental oversights for dismissal of employees was clearly an attempt to curb large-scale, exploitive employment—which is what much of India experienced under British rule. This historical context is essential to understanding the nature of worker protections and labor regulations in India. India has a long history of labor union action, much of which is intertwined in local politics. The strong presence of labor unions and their connections with politics will have to be balanced by any pro-business legislative regime that arises.

It is clear that any comprehensive amendment of the law will need the concurrence of the Union government and India’s powerful regional parties, and will need to take into account the changing economic landscape in India. Rajasthan was able to reconcile competing interests with a package of labor reforms. While the amendments to the Factories Act and Contract Labor Act generally benefit business by increasing employment flexibility for firms, the amendment to the Apprentices Act is a labor protection. The government in Rajasthan hopes these changes result in job growth and improved worker training and skills development to help workers who are laid-off get rehired.

So far Madhya Pradesh has been the only state to follow Rajasthan’s example by recently amending several of its own labor laws. However, hesitation by the Union government to approve the amendments shows that labor reforms remain difficult to carry out. While Haryana is contemplating following suit, the state assembly has not moved on the issue.

The Modi government is working to foster a competitive environment among the states, while simultaneously attempting to unseat opposition parties in state assemblies. The party has announced that it will be ranking states on ease of doing business, and surely labor laws will factor into that ranking. If the Union government is unable to introduce comprehensive investor friendly labor laws at the national level, it will remain incumbent on India’s states to decide if they want to take the political risks necessary to enact difficult reforms such as deregulating labor laws. So far the Rajasthan experiment has not shown to be as infectious as observers had hoped.

Mr. Owen Jollie is a researcher with the Wadhwani Chair in U.S.-India Policy Studies at CSIS.

Updated on April 2, 2015, to note that the state of Madhya Pradesh has passed similar labor laws to Rajasthan.