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Business News/ Opinion / A federal path to reform
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A federal path to reform

A seismic reforms event took place in New Delhi last week. The President of India signed a revised set of labour laws from Rajasthan into state law

Photo: Pradeep Gaur/MintPremium
Photo: Pradeep Gaur/Mint

A seismic reforms event took place in New Delhi last week. Like a faraway underwater earthquake, it made a mark only on those looking for it. But the resulting tsunami may yet catch everyone’s attention.

The President of India signed a revised set of labour laws from Rajasthan into state law. The Rajasthan government made changes to the Factories Act, the Industrial Disputes Act and the Contract Labour Act. These reforms have done away with government permission to retrench workers with 300 or fewer employees (was 100 before). Trade unions will now be required to represent 30% of employees (it was 15% before) and the Factories Act will apply only to firms with more than 20 employees (was 10 before). The silent earthquake is not merely that unprecedented changes have been made to state labour laws. That is impressive in itself, but the 10.0 on the reforms Richter scale comes because the President signed these reforms under the rarely used Article 254(2) of the Indian Constitution—an article that permits state law that conflicts with federal law to override the latter if it obtains the assent of the President.

To understand the full impact, let’s take a legal tour through relevant sections of the Constitution. Article 245 states that Parliament may make laws for whole or any part of India and the legislature of a state may make laws for whole or any part of that state. Article 246 says Parliament has the authority to make laws enumerated in List I or the Union List in the Seventh Schedule. The states have similar authority to make laws in List II or the State List and both have authority with respect to List III or the concurrent list. Article 254 of the Indian Constitution deals with the doctrine of repugnancy. Repugnancy here is a legal term that means inconsistency between two or more parts of a legal instrument. Article 254(1) has been neatly summarized by the Supreme Court in M. Karunanidhi versus Union of India as, “where the provisions of a Central Act and a State Act in the Concurrent list are fully inconsistent and absolutely irreconcilable, the Central Act will prevail and the State Act will become void in view of the repugnancy."

Most federal democracies embed a doctrine of repugnancy that breaks the tie between inconsistent laws made at a federal level with those made at a provincial level. Most constitutions resolve this tie in favour of the central government. For instance, in the US federal law that conflicts with state law pre-empts the state law. In Australia, the law for the territories was considered repugnant to the paramount law of the Commonwealth until 1986.

If the doctrine of repugnancy most often means that federal law trumps state law then what’s the big deal you may well ask. The magic of Article 254(2) is that it allows state law to prevail under certain circumstances. In simple terms this means assent by the President after a state legislature passes a bill. If the central government agrees (as it did in this case), then the process is quite seamless. If it doesn’t, then states still have recourse to the Supreme Court. This is the genie that has been let out of the bottle by the President signing the Rajasthan labour laws.

The use of Article 254(2) in this instance and the way it is written suggests that a wave of competitive federalism is on its way. Until now, competitive federalism has meant a war of giveaways. If J. Jayalalithaa in Tamil Nadu has given away cycles and grinders, Akhilesh Yadav in Uttar Pradesh has gifted laptops. Arvind Kejriwal topped it all by gifting electricity during his brief stint in Delhi. Rajasthan’s approach means that we will now also get states competing on reform.

The concurrent list provides a rich set of topics for the states to take a lead in reform. It covers areas such as criminal law and procedure, marriage, divorce and adoption, bankruptcy and insolvency, social security, education (including technical and medical education) and electricity. Imagine the competition for ideas if one state takes on personal law (talk about sacred cows) and another the right to education (RTE). Under the constitutional provision, the federal government can elect to respond by matching or bettering these reforms over time.

Already, Rajasthan is reworking its land acquisition law and Madhya Pradesh is on the way to amending its labour laws. Other politically stable states such as Odisha, Chhattisgarh and Andhra Pradesh should adapt rules to their respective conditions and get it passed. India’s election market has always been alive to competition. In recent decades, India’s market for political ideas and space has been a one-way populist path. The use of Article 254(2) is likely to launch a tidal wave of reform competition among states. That will be a welcome tsunami.

P.S. Referring to the states and the centre, B.R. Ambedkar said, “The one is not subordinate to the other in its own field; the authority of one is coordinate with that of the other."

Narayan Ramachandran is chairman, InKlude Labs.

Comments are welcome at narayan@livemint.com. To read Narayan Ramachandran’s previous columns, go to www.livemint.com/avisiblehand

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Published: 16 Nov 2014, 11:38 PM IST
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