Modi Needs to Revamp Labor Laws to Spur Growth, Adviser Says

  • Perception reforms progressing slowly unfounded: Panagariya
  • Economy seen expanding at about 8% in next few years

India should consider changing its federal labor laws to make it easier for companies to do business and attract foreign investments, a top government adviser said.

The administration should revive efforts to merge more than 40 labor laws into four, a move that would simplify some of the world’s most rigid rules for hiring and firing workers, Arvind Panagariya, vice chairman of NITI Aayog, the government’s top policy planning body, said in an interview Tuesday. While some states have overhauled rules governing labor, there is a need to change federal laws as well to make it uniform across the country, he said.

“When we do it through states the impact is only in those states where law is changed,” said Panagariya, who resigned from the post and will serve his last day on Aug. 31. “We could also reform federal law.”

Prime Minister Narendra Modi’s top adviser sees faster movement on reforming labor laws helping the government spur economic growth, attract investments and create more jobs. After Modi’s landslide win in 2014, expectations that he will ease labor laws increased. However, more than half way through his term he has shied away from making any major changes because of opposition.

The World Bank in its Doing Business 2017 report, which measures ease of doing business across nations, said rigid labor laws in India prompt companies to use less labor rather than protecting worker rights.

Modi, who early in his tenure reformed some labor laws including one that allows companies to hire apprentices, has faced opposition from the country’s labor unions, including the Bharatiya Mazdoor Sangh that’s linked to his own political party.

Reforms Pace

Panagariya, a Columbia University professor who took a sabbatical to serve at the NITI Aayog, said perceptions of reform progressing at a slower than expected pace were unfounded and the economy expanded at an average 7.5 percent for the past three years.

The government is formulating a new industrial policy and has sought comments on labor reforms from the public including on fixed-term employment.

India’s gross domestic product grew 6.1 percent in the January-to-March period, almost a full percentage point lower than economists’ projections and the previous quarter’s pace. Much of the slowdown was attributed to the cash ban, imposed by Modi in November, which hurt consumption and investment.

“We will continue to grow or perhaps accelerate to 8 percent in the next few years,” Panagariya said. “Return on investment in India is going to be very good so I think it’s good for investors.”

Investments from the private sector are still sluggish, forcing Modi to front load government spending and stimulate the economy. That may deteriorate public finances, with the budget deficit reaching 81 percent of the full-year target in the first three months of the fiscal year started April.

A festering bad loan crisis is also weighing on economic growth. Stressed or non-performing assets, restructured debt and advances to companies that can’t meet servicing requirements at local lenders was 17 percent by the end of December, the highest among major economies, according to finance ministry data released earlier this year. There’s a need to clean the non-performing assets of banks, Panagariya said.

“After there is some substantial progress on this, we then would need some recapitalization of banks,” he said. “At that point I think we should consider consolidation.”

— With assistance by Santosh Kumar

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