Why states must not adopt shortcuts to economic reforms

Unless backed by long-term thinking & commitment, the recent labour law changes by states could go the same way as the ill-fated SEZ policy of 2006

There are enough reasons to be nonplussed at the sight of the snaking lines of migrants returning home without jobs. But there is no reason to get vituperative about the news that some states are reviving their labour laws in the hope of attracting investments. The walk back by the labourers this summer is a colossal tragedy; that of the rewrite of labour laws by them is a comedy.

The effort by states, led by Uttar Pradesh, to change labour laws is quite reminiscent of the rush of 2006-07 by them to change land laws to attract investment in Special Economic Zones (SEZs). This time the target is the foreign investor, the target then was domestic investors. Just as the rush to amend land laws came to grief, it is possible those to do with labour will also meet a similar fate.

It is likely to happen because – as entrepreneurs then found out – Indian states play with laws without care. It has happened recently too. Investors in renewable energy projects in Andhra Pradesh discovered this in 2019 when Chandrababu Naidu’s Telugu Desam Party lost the Assembly elections. Naidu had promised them long-term contracts to buy power to encourage investments into renewable energy. His successor Jaganmohan Reddy of YSR Congress told investors to submit to a new set of laws. It had a huge negative impact on India’s efforts to develop renewable energy. The renewable energy sector companies rendered out of action are clear they do not wish for favourable laws henceforth, but only for stable laws.

Bitter SEZ experience

As the earlier SEZ episode showed, it is risky to depend on enthusiastic en masse changes in laws by Indian states (depending on which is the current favourite theme) to draw in large investments. Around 2006 many states got convinced they could draw in investments without needing to improve the conditions for the supply of labour or of other facilities like roads and power.

Instead, they offered SEZ land banks as a great shortcut. The resultant political uproar was so massive, that it finally culminated in the promulgation of the strict Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (LARR). It has become almost impossible for any industry to get a plot of land without state support after it was passed. The carve-outs by some of the states have only facilitated linear projects like roads. The land is still a challenge for the bullet train project.

So just as the land notifications did then, the temporary changes in labour laws will also please only the respective state secretariats. Once the lockdowns are over it could also allow them to hold fancy investment meets. But no outcomes would result. Rather, those entrepreneurs willing to take the plunge could come away with their balance sheets red. The land banks which many real estate companies built up in efforts to become promoters of SEZs are still on their books, more than a decade after the episode.

No stomach for reforms

Why does this happen? Most Indian states are loath to do painstaking reforms for various reasons. Every government at the centre after 2000 has tried at least once to reform the power distribution sector in the states. But this would have meant the state governments needed to get serious about not promising free power to whoever could lobby hard. Irrespective of political colour, none has managed to do so. As of December 2019, the power distribution companies owed Rs 85,000 crore to the power generation companies. Large scale manufacturing industries in the early 2000s wished to get around this problem by setting up their captive power plants. We know the spectacular result of those forays. Today, if a manufacturing sector company steps into Uttar Pradesh or Madhya Pradesh, their primary concern would still be about assured supply of power instead of labour.

If power markets are difficult, it is even harder to undertake reforms in the factor markets, land, labour and capital. Instead, they have become favoured play for any weakly-administered state to extract rent from entrepreneurs. Few states have shown the appetite to do the sustained work to break these links. Instead they are tempted to use shortcuts once again. In West Bengal, the Mamata Banerjee-led TMC government has sought to get around the labour challenge by clamping down on any protests by labour. She has publicly announced her reluctance to allow any strikes in the state. It has worked but will be available so long as she is in power.

Importance of long-term thinking

The Centre has realised this. So its menu of labour reforms announced last week, which does not offer any immediate manna but calls for sustained work to make them a reality, is likely to hold good.

But the message needs to be percolated to states. As the example of the renewable energy developers in Andhra Pradesh shows, shortcuts are not a route for a long-term strategy for any industry. For instance, no diversified SEZ was able to come up from the high noon of that policy. At best, these policies allow for someone with a short-term plan to make good. So while there will be good optics from the rush to amend labour laws, even domestic investors will cavil at taking advantage from the short-term changes. Foreign investors will possibly not even include these in any assessment of policies when they evaluate their strategies for India.

(The writer is a business journalist and can be reached at [e-mail])

Disclaimer: The views expressed above are the author’s own. They do not necessarily reflect the views of DH.