The state, controlled by the ruling Bharatiya Janata Party, made it easier for companies with as many as 300 employees to fire workers and avoid other contentious provisions of strict labor-protection laws.
The liberalization of the labor market in Rajasthan, which received federal approval last month, appears to be part of what one policy analyst called “reform by stealth,” in which states become test cases for measures that would be too politically risky to implement nationwide.
But in an indication of the resistance Prime Minister Narendra Modi can expect, federal labor unions on Friday held protests in several Indian cities, including New Delhi, to draw attention to the difficulties they face. The protesters sought to highlight some of the central government’s changes, which they say dilute safeguards for workers and signal a policy direction that could result in poorer working conditions and less-stable jobs.
When Mr. Modi and the BJP swept to power in May after a landslide victory, some supporters expected him to use his mandate to push such unpopular measures federally in an effort to revive India’s economy.
But Mr. Modi appears to be taking a different tack, using states his party governs as laboratories for greater economic openness, while pursuing more-gradual steps in the national Parliament.
“The Rajasthan changes can be seen as a pilot,” an official in India’s labor ministry said. “It will create healthy competitiveness among states and will also give us a chance to study the gains of such amendments.”
Rajasthan’s moves have drawn fire from trade unions. And an attempt by Mr. Modi to replicate them nationally would face major opposition in Parliament—and from labor groups.
But officials hope the liberalization in one state will spark interest from others. If businesses in Rajasthan announce expansion plans or if manufacturers start relocating there, it could motivate other state governments to make similar changes, officials say.
Haryana, which shares a border with Rajasthan, has already suggested that it is planning such steps—a process that will likely get a boost after a BJP government took charge there in October.
Mr. Modi is trying to invigorate the country’s underperforming manufacturing sector with his “Make in India” campaign. But rigid and complex regulations have discouraged investment in labor-intensive industries in India, while other Asian economies have grown rapidly by developing export-oriented businesses.
Many economists say India’s labor laws have encouraged enterprises to stay small, rely on informal labor or substitute capital for workers. A report by the Paris-based Organization for Economic Cooperation and Development said for India to return to a high-growth trajectory, it must “reduce barriers to formal employment by introducing a simpler and more flexible labor law which doesn’t discriminate by size of enterprise.”
Finance Minister Arun Jaitley has repeatedly said “reform is the art of the possible.” The Modi administration doesn’t think it prudent, he says, to introduce changes that would meet with stiff opposition and jeopardize the government’s broader agenda.
By inducing states to take the difficult measures, the government appears to see a solution, albeit an imperfect one.
“This is not a random process, it is happening by design,” said Subir Gokarn, an economist and director of research for Brookings India. “It is not a big-bang way of doing things, but a nudges-and-pushes approach to keep moving ahead one step at a time.”
At the federal level, Mr. Modi has gone for low-hanging fruit: reducing the powers of labor inspectors, replacing onerous paperwork with digital submissions and bringing a raft of modest labor-law amendments that remove restrictions on women working at night, improve factory conditions for workers, ease regulations on hiring apprentices and facilitate overtime.
“These steps will make it easier for employers to evade labor laws and weaken protection for workers,” said Baij Nath Rai, president of the Bharatiya Mazdoor Sangh, a trade union affiliated with the BJP. “We don’t like these unilateral changes.”
After a meeting with the heads of labor unions last week, India’s labor minister, Bandaru Dattatreya, said, “The government is committed to labor reform but not at the cost of the working class.” In a statement Friday, he appealed to the protesting labor groups to “understand the real spirit” behind the changes.
In private, officials in Rajasthan and in the federal government say that India’s existing labor laws hurt not just businesses, but also workers, 93% of whom are in the unorganized sector.
Before the recent law change, 86% of businesses in Rajasthan employed fewer than 100 workers—the previous threshold for the labor-protection rules. When companies remain small, they are reluctant to regularize workers, who end up losing out on social security and other legal protections, they say. Officials say raising thresholds would allow small companies to expand, creating more formal jobs.
“This is a lose-lose situation, where the person who is running the factory is frustrated and the worker is also unhappy,” said Rajat Kumar Mishra, Rajasthan’s labor commissioner. “That’s why we are pushing a change at our level.”
Write to Niharika Mandhana at email@example.com
Corrections & Amplifications
The Organization for Economic Cooperation and Development is based in Paris. An earlier version of this article incorrectly said it was based in London.
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