Managing reform risks

Karnataka cannot relax after its bold move on labour law changes and should focus on their careful execution

In a move that has gone largely unnoticed, the Karnataka legislature has approved an amendment to the state government’s labour law that would allow its industries to extend working hours from the existing 9 hours to 12 hours a day, increase overtime from 75 hours in three months to 145 hours and permit women to work during night shifts. These relaxations, however, are subject to a cap of 48 hours of work in a week and the provision of a safe and healthy work environment for women during night (from 7 pm to 6 am).

The Factories (Karnataka Amendment) Bill, 2023, was passed on February 24 without a debate in the Assembly even after facing opposition from members of the Congress and Janata Dal (Secular), who staged a walk-out in protest. Media reports also suggested that a member of the Bharatiya Janata Party opposed the amendments, when they were moved and passed in the Legislative Council. Labour unions are understandably unhappy with these changes. The Centre of Indian Trade Unions has appealed to the Karnataka governor to reject the amendment Bill, and all trade unions in the state are expected to go on a protest on March 23.

Unconfirmed reports also suggest that the labour law changes would help Karnataka convince Foxconn, a Taiwanese manufacturer of Apple phones, to set up one of its factories in the state. Indeed, allowing women to work during night shifts, operation of two shifts during the day and longer working hours have been among the main demands of foreign companies before setting up manufacturing or assembling plants in India. Chinese labour laws are flexible and if Karnataka were keen to attract foreign investments and boost manufacturing, it must bring about such changes, the state’s information technology minister, C N Ashwath Narayan, was reported to have indicated while introducing the amendments in the Legislative Council.

Such public statements of intent on labour policy reforms are rare in India. It is rarer when you consider that Karnataka will soon go in for Assembly elections. It is, therefore, likely that the labour law changes might face stiff resistance on the ground. Note that the amendments to the labour law were passed without any debate, which suggested that the state government might have gone ahead with the changes without building political consensus or holding consultation with legislators from the Opposition parties. It is almost certain that Opposition political parties will use these labour law changes and the manner of their passage in the legislature during their campaign in the forthcoming elections. Trade unions have already taken steps to oppose the changes.

Foreign investors or even domestic investors, for that matter, are understandably a little wary of committing their capital in any country or a state, where a change in the economic laws could become controversial. They do want reforms to improve their ease of doing business, but they also want that the durability of the changes proposed by any government is not threatened by political developments like protests. Obviously, the Karnataka government has taken a political risk. If it can overcome the political resistance to the labour law changes and secure fresh investments from Foxconn and other companies, it might well become a model for other states to follow, heralding the onset of a new political climate in the country.

Remember that Karnataka has some catching up to do after having done quite well in recording a huge increase in its foreign investments in the last couple of years. In 2020-21, it had garnered foreign equity investments of about $7.7 billion, next only to Gujarat’s $22 billion and Maharashtra’s $16 billion. A year later in 2021-22, even as India’s foreign direct investment dipped marginally, Karnataka emerged as the biggest destination of foreign equity among the states at $22 billion, leaving Maharashtra and Gujarat way behind at $15 billion and $3 billion, respectively. But when India’s foreign equity fell by 15 per cent in the April-December period of 2022-23, Karnataka also saw a major dip in its foreign investment, losing its number one status to Maharashtra, which increased its foreign investments even as Gujarat’s foreign investment also fell and occupied the third slot.

Illustration: Binay Sinha

Perhaps this downward trajectory in Karnataka’s foreign investment has driven it to come up with such bold labour law reforms. If it succeeds in reversing the trend seen so far in the current year, its policy gambit, in spite of the political risks, would be seen to have yielded rich dividends. But is there a way to de-risk such policy reforms? This is important as there should be no repetition of the kind of rollback that agricultural reforms saw in 2021 after the Centre failed to bring about political consensus on the key changes proposed. Imagine the adverse consequences for labour law reforms in the country, if the amendments in Karnataka’s factories Bill have to be rolled back!

Two steps — both at the state level — could be considered. The Karnataka government should be under no illusion that its job is over after having amended the labour laws. Indeed, the real task should begin after the laws have been changed. The state government machinery must actively engage with workers and trade unions to allay their fears. The fears and doubts over any policy change are the most intense in the early days of its implementation. If the government of the day is missing in action during those early days, even the best ideas can fail.

Additionally, it should set up joint consultative mechanisms, with participation of both employers and employees, to address any concerns that could arise out of the implementation of the new labour law changes. There would be many concerns and even misuse of some of the newly relaxed provisions in the law and these cannot be allowed to go unaddressed. Memories of violence at a phone factory of Wistron, another Taiwanese company, are still fresh. That factory, located near Bengaluru, was also engaged in producing Apple phones. Nobody in India can afford another Wistron-like development, particularly after the recent labour law changes in Karnataka. There is a need to reform laws, but equally important is to tread cautiously on such reforms and establish mechanisms to douse potential fires.