Indian laborers work at a stone quarry on the outskirts of Gauhati, India on Monday, Jan. 26, 2015. (Anupam Nath/AP)

Two years ago, disgruntled workers at a leather-boot factory here went on strike, demanding a 300 percent pay raise.

As workers gathered at the gate waving red flags and shouting slogans, factory owner Rajendra Kumar Poddar found himself caught between the employees’ demands and the reality of running a business under India’s restrictive labor laws. He couldn’t afford to pay the inflated wages, but he couldn’t fire the employees, either, because of a maze of regulations requiring companies to seek government permission before firing 100 or more employees.

“That would have been a hugely cumbersome process under our labor laws,” said Poddar, 60, director of Mayur Leather Products, in the northwestern state of Rajasthan. Instead, he split the factory into two sites to stay under the 100-worker limit, which allowed him to fire people.

In November, Rajasthan became India’s first state to alter the archaic system of overlapping laws that have led more than 98 percent of businesses in India to deliberately avoid expanding beyond nine employees to skirt strict labor regulations. Small entrepreneurs such as Poddar said the laws — which subject factories to arbitrary inspections and, business operators say, favor trade unions — make it nearly impossible to fire workers or close a business.

The changes in Rajasthan, including raising the threshold for unionizing and allowing more flexibility in laying off workers, have been supported in the national government headed by Prime Minister Narendra Modi, who has promised to turn Asia’s third-largest economy into a China-style hub for global manufacturing.

The silhouette of an Indian labourer is seen against the lights of military police car as he sweeps the road after the rehearsal of the Beating Retreat Ceremony at Vijay Chowk in New Delhi on January 27, 2015. (Chandan Khanna/AFP/Getty)

But the changes also have been criticized, particularly by labor unions, which argue that they dramatically erode workers’ rights.

“Industrial development is the need of the hour, but at what cost?” said Ritesh Sharma, a labor rights lawyer in Jaipur. “The government has the single-minded goal of improving the industrial investment in Rajasthan, and it has sacrificed worker welfare in the interest of corporate welfare.”

Businesses have long complained that the labor laws constitute one of the biggest barriers to doing business in India.

Even as India has transitioned from a Soviet-style planned economy to free-market privatization since 1991 by introducing a string of economic changes — including eliminating government monopolies and allowing more foreign investment — the country’s labor laws were left untouched. Consequently, about 44 national and 150 state regulations remained in effect.

The World Bank said in a 2014 report that India — where more than 82 percent of workers labor outside the formal employment sector — remains one of the world’s most rigid labor markets, and the country comes in at 142 out of 189 in a global index that ranks nations by ease of doing business.

Hoping to change that, Modi is pushing a “Make in India” plan to increase the country’s manufacturing base, which accounts for just 16 percent of the nation’s economic output. The government wants to raise that to 25 percent by creating 100 million jobs by 2022 and absorbing the staggering number of young people reaching working age every year in this nation of 1.3 billion.

In October, Modi’s government simplified 16 of the 44 national labor laws and created a single portal for reporting to multiple departments. The changes, observers say, can boost the “Make in India” campaign and attract large labor-intensive investment to India.

Labor-related factory inspections — often called Inspection Raj — will now be decided by a software program instead of being left to the discretion of labor inspectors possibly seeking bribes.

“Our labor laws have remained moored in the old legacy of the British Raj. These reforms play a key role in easing the difficulties of doing business,” said Gauri Kumar, secretary for the Ministry of Labor and Employment in New Delhi. “The reforms take away the sting from compliance and make enforcement more efficient. We are unshackling both the workers and the industry.”

Vasundhara Raje Scindia, the chief minister of Rajasthan, told reporters last year that the changes would create “a habitat for job creation.” She said she wants to generate 1.5 million jobs by 2018. Scindia has been called “mini-Modi” by the local media in reference to a shift away from socialist-era politics to a climate in which business-friendly politicians such as Modi have become more popular.

Under the reforms, companies in Rajasthan can lay off up to 300 workers without government permission, up from the 100-employee threshold. Trade union representation can be introduced only with at least 30 percent of a company’s workers, up from 15 percent. And a strict factories law will now apply only to sites that employ 20 or more workers, instead of the previous 10.

“These laws were a big pain for the industry. Small businesses were saddled with the heavy burden of compliance and reporting and multiple inspections. A big disincentive to hire more,” said Chandrajit Banerjee, director general of the Confederation of Indian Industry in New Delhi. “Existing businesses will not hesitate to scale up. New labor-intensive investments will also come, which would be very critical.”

Banerjee cited investment plans by Britain’s J.C. Bamford Excavators, which recently announced that it will open its largest factory in Rajasthan, as an example of the payoff from business-friendly laws.

However, trade unions in Rajasthan continue to oppose the changes and have said that they were not consulted.

“Jobs may grow because of new investments, but job conditions will definitely deteriorate in the coming years. We will go back to slave-like times,” said Raj Behari Sharma, general secretary of Bharatiya Mazdoor Sangh, a trade union with membership across India.

Meanwhile, Munna, a machine handler at a ball-bearing factory in Rajasthan — who uses only one name, like many in rural India — said the “morale of the workers is down.” The owners of his factory have refused to negotiate wage increases with the registered trade union, he said.

Under the state’s reforms, complaints against an employer will not be recognized by a court unless the government gives written permission.

“The new laws now strengthen the owner’s hands and weaken ours,” Munna said. “We have been locked up in a box of helplessness.”