Can New Labor Laws Get the Indian Economy Going?

Prime Minister Narendra Modi wants to turn his country into China. It's going to take a while.

Larry Downing/Reuters

With its creaky infrastructure, tight labor laws, and famously large bureaucracy, India has never been the easiest place in the world to do business; The World Bank ranks the country 134th out of 189 countries in its "ease of doing business" rankings.

Since becoming India's prime minister in May, Narendra Modi has vowed to change this reputation.* On Thursday, Modi announced a series of reforms to India's labor laws, including one allowing employees to tie their Provident account—a government-supported payroll funding scheme—to their personal bank account. This will make it easier for people to hold onto their money when they change jobs, thus increasing labor flexibility. Modi also changed India's system of factory inspections, announcing that inspectors will be assigned to factories based on a computerized system. Before, factory owners were subject to impromptu visits, leading to complaints that India's "inspector raj" system was arbitrary and unfair.

For Modi, these reforms follow campaign promises he made to stimulate India's economy, which grew by just 5 percent in 2013 after growth peaked at 10.3 in 2010. In September he launched the "Make in India" program, a series of initiatives designed to attract foreign investment and turn India into a manufacturing powerhouse.

The World Bank expects China, which as "the world's factory" transformed an impoverished agricultural economy into the world's second-largest economy, to shed 85 million manufacturing jobs in the next few years as a result of rising labor prices. With a large, young population willing to work at low wages, India is well-positioned to compete for Asia's manufacturing business.

India's reform commitments, however, have only gone so far. In July, Delhi refused to sign on to a groundbreaking World Trade Organization deal, worth a potential $1 trillion, to standardize global customs regulations, out of a desire to maintain concessions on agricultural stockpiling.

* This post originally stated that Narendra Modi was India's president. We regret the error.