The United Progressive Alliance government has made it clear to states that it will not permit them any relaxation in labour laws in special economic zones, petrochemical hubs and industrial parks such as easing norms for hiring and firing and employment of women and restricting union activity, among others.

Over the past two weeks, at least three state governments have seen their proposals for relaxing labour laws in duty-free areas being rejected by the Centre.

On Wednesday, a committee of secretaries headed by cabinet secretary KM Chandrasekhar turned down a proposal from the Andhra Pradesh government to provide labour law flexibility within a petrochemicals and petroleum investment region (PCPIR) in Kakinada.

Last week, a proposal from the Maharashtra government for labour law relaxation under its SEZ law was also rejected.

The Gujarat government received the same response to its request to relax labour laws in industrial parks.

The move is considered a major setback to economic reforms. Easing labour laws in SEZs and other such duty-free zones was considered a key means of attracting more investors, especially foreign investors, who have been wary of rigid rules governing retrenchment and so on.

Labour is a concurrent subject under India's Constitution, so states are required to submit their laws for central clearance. Some states had also suggested relaxing the Industrial Disputes Act, a Central law, but this has not been considered so far. Significantly, the Centre's own efforts to liberalise labour laws by arming itself with powers under the SEZ Act failed under pressure from Left parties that support the ruling coalition.

States that had earlier relaxed the labour laws in such zones will, however, not be required to reverse these relaxations.

"Some states got away by relaxing labour laws in these specific regions before the United Progressive Alliance came to power. But this government has made it clear that all existing laws will be applicable in states. Flexibility in hiring or firing or any other element will not be provided," a senior labour ministry official told Business Standard.

This means, while some states will continue to have labour law relaxation in such duty-free zones, others will have to do without it. Independent observers said companies in the affected states may alter their investment decisions if two sets of rules are in operation.

At least two states  Gujarat and Uttar Pradesh  had enacted SEZ laws before the central law was passed in 2005 to provide a simpler labour law dispensation within the duty-free areas.

The Centre has even turned down requests for minor flexibility such as ensuring that an office bearer of the labour union should be a worker of a unit, which amounts to barring outsiders to be part of a union.

"The idea was to ensure that only someone affected was part of a union and units were not hit by political intervention," the source added. Similarly, a state government under its SEZ law sought advance notice for strikes in SEZs to ensure that export consignments are not hit.

A consultant for a host of mega projects  both in SEZs and within the domestic tariff area said state governments and developers are seeking simplification of norms like a single-window clearing house and easier forms apart from relaxation of some labour law procedures.

"Most of us were not expecting any relaxation of rules. But by turning down procedural simplifications too, the government is sending a wrong message to investors," he said.

"What the labour ministry is saying is that no one other than the Centre has the power to decide labour laws. States have been providing flexibility not in the core areas but on peripheral activities that have not affected workers at all but have only benefited the industry. The only section that's been affected are unions since netagiri will end and its clout will diminish," said an official.

Labour ministry sources, however, pointed out that even the commerce department which administers the SEZ Act and had been keen on pushing for labour law flexibility within duty-free areas  has made it clear that labour laws will be applicable within such zones.

"There are certain cases in which the powers under various labour laws are delegated to the development commissioner. In all these cases, we will monitor all labour-related aspects and any complaints coming from the zones will be dealt with sternly," the ministry official said.

Officials said that the labour ministry opposed the proposal on Kakinada on the grounds that it will result in "virtual serfdom". "The special zones tend to be casual about deal with labour issues. Most of the proposals on flexibility are bad for labour and our objections were being dealt in a very casual way. So, the ministry made has made its stand very clear," the labour ministry official said.