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India's Modi kicks off overhaul of creaky labor rules

Employees install interior panels and fittings to a Mahindra & Mahindra XUV 500 sport-utility vehicle (SUV) on the production line at the company's facility in Chakan, Maharashtra, India.
Udit Kulshrestha | Bloomberg | Getty Images
Employees install interior panels and fittings to a Mahindra & Mahindra XUV 500 sport-utility vehicle (SUV) on the production line at the company's facility in Chakan, Maharashtra, India.

India will simplify employment rules and ease the way for people changing jobs to move social security funds, Prime Minister Narendra Modi said on Thursday, unveiling steps to reform the labor sector long sought by investors.

India's outdated labor laws strictly limit hiring and firing, while an onerous 'inspector raj' deluges employers with paperwork, discouraging them from expanding and adding staff.

"Fifty types of departments chase them, 50 types of forms have to be filled in. The world has changed," Modi said, adding that companies would now only need to fill a single form online.

The change would benefit chiefly firms that employ just a few people, he said. In 2009, 84 percent of India's manufacturing workers were employed by firms with fewer than 50 staff, research by the Asian Development Bank shows.

Read MoreIndia's Modi eyes first labor overhaul in decades to create jobs

Just 8 percent of Indian workers have formal jobs with any security and benefits, such as the Provident Fund, while the vast majority work in the informal sector, experts say.

Even though the World Bank says India has one of the world's most rigid labor markets, fears of a trade union backlash and partisan politics have deterred governments from reform.

Business leaders have high hopes for Modi, an advocate of smaller government and private enterprise, to change that.

Industry groups said Thursday's measures would warm business sentiment and help boost the slowing economy.

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"These reforms will further help create a more conducive manufacturing environment," Ajay Singha, executive director of the American Chamber of Commerce in India, said in a statement.

On Thursday, the Hindu nationalist leader also promised easier movement of accounts in India's Provident Fund scheme by using a universal account number.

The payroll-funded program has 80 million members.

Because transfers are so difficult, more than 270 billion rupees ($4.4 billion) lie idle in such accounts.

Read MoreModi seeks to revive India's 'zombie factories', not abandon them

"I need to return this money to the poor," the prime minister said. "The world asks, 'What is Modi's vision?' They will see it in this effort."

Inspection of businesses will be made more transparent, with a computer lottery being used to pick the enterprises to be inspected and officials required to upload a report within 72 hours, Modi said.

A new website, managed by the labor ministry, will allow companies to fill forms online and raise their grievances.