Montek Singh Ahluwalia urges states to ease retrenchment ceiling

Former Planning Commission Deputy Chairman Montek Singh Ahluwalia urged states to liberalise retrenchment norms and cut duties on industrial inputs to strengthen manufacturing competitiveness

Former Planning Commission Deputy Chairman Montek Singh Ahluwalia on Thursday urged state governments to use the flexibility available under India's new labour law framework to further liberalise retrenchment norms, arguing that such reforms could make states more attractive investment destinations and boost manufacturing.

 

Ahluwalia said states should consider significantly raising the threshold beyond which firms require prior government approval for layoffs, instead of retaining the current limit of 300 workers. He suggested that states could even raise the threshold to 3,000 workers, saying such a move would "electrify" the MSME sector and signal that they are serious about attracting investment. The Centre had indicated it would approve such state-level changes, which is a "major breakthrough", he added.

 

 

Ahluwalia was speaking at the launch of the book India Out of Work by Santosh Mehrotra and Jajati Parida.

 

Under the Industrial Relations Code, 2020, industrial establishments employing fewer than 300 workers can retrench employees, lay off workers or close operations without seeking prior permission from the appropriate government. The Code raised this threshold from 100 workers under the earlier Industrial Disputes Act, 1947. The Code also allows state governments to prescribe a higher threshold through notification, subject to the provisions of the law, giving them room to undertake further labour market reforms.

 

Referring to the evolution of India's labour laws, he said the current 300-worker threshold was not unprecedented. According to Ahluwalia, establishments employing up to 300 workers did not require prior government permission for retrenchment around 1980, before the threshold was reduced to 100 workers through subsequent legislative changes.

 

"People forget history... it was 300 in 1980. What we have achieved in these 46 years is that we brought the policy back to what it was in 1980," he said.

 

Ahluwalia questioned why no state had yet announced a higher threshold despite having the opportunity to do so, arguing that chief ministers should compete to become the most attractive destination for manufacturing investment rather than relying solely on fiscal incentives.

 

"We speak a lot about cooperative federalism, but having a system of competitive federalism can be very beneficial," he said.

 

He also urged industry associations such as the Confederation of Indian Industry (CII) and the Federation of Indian Chambers of Commerce and Industry (FICCI) to engage directly with chief ministers and encourage them to use the flexibility available under the labour law framework.

 

Turning to trade policy, Ahluwalia also argued that India should complement its push for free trade agreements (FTAs) with lower import duties on industrial inputs, saying the country's manufacturing competitiveness would otherwise remain constrained.

 

Expressing support for India joining more trade pacts, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), he said FTAs alone would not deliver their full benefits unless domestic tariffs on inputs were reduced.

 

He said duties on petrochemicals, man-made fibres, steel, aluminium and copper remain too high, even as the rupee has depreciated by around 12 per cent over the past year, raising input costs for manufacturers.

 

"We keep talking about these FTAs. If you're confident that we're going to sign these FTAs, lower all these duties tomorrow," he said, arguing that tariff cuts need not wait for the annual Budget.

 

Calling such measures a "stroke-of-the-pen reform", Ahluwalia said reducing import duties was an operational decision that could be implemented almost immediately, unlike reforms in education and skills, which typically take years to yield results.