NEW DELHI: Last month, hundreds of workers went on the rampage at a factory belonging to garment exporter Orient Craft, torching vehicles and smashing windows in the gritty industrial fringes of Gurgaon, a Delhi satellite city.

Increasingly common in Indian workplaces, these violent outbursts could become a thing of the past under a bold round of labour reforms planned by Prime Minister Narendra Modi.

Many businesses cheer the plans, which they say will help make India a manufacturing hub. Taiwan's Foxconn, the world's largest contract electronics manufacturer (2317.TW), plans to set up 12 new factories in India and employ one million workers.

Yet Orient Craft, which has suffered three riots in three years, fears the changes will create as many problems as they solve by making the cottonwear it exports to global brands such as GAP (GPS.N) and Marks & Spencer (MKS.L) less competitive.

Like many other low-margin businesses in India, garment makers will gain from increased flexibility to hire, and fire, seasonal labour - reforms demanded by industry since India began to shift away from socialism in 1991.

But to make this more palatable for unions, Modi wants to also extend the social security net. The government expects that will reduce labour volatility, but it will also raise costs for companies like Orient Craft whose chairman Sudhir Dhingra fears losing clients to lower-cost rivals in Bangladesh.

Dhingra said the new flexibility will enable him to hire workers according to his business requirements, but only if Indian garments remain in demand. If they are priced out of business, the net benefit evaporates, he said. "Buyers are already moving to cheaper locations," said Virender Uppal, the head of India's Apparel Export Promotion Council. "If labour costs go up further, it's going to affect business."

Modi plans to take the amendments to parliament later this year.

THE ROOTS OF A RIOT

The June 20 riot at the Orient Craft factory was sparked by an unfounded rumour that a worker had died from an electric shock. A similar rumour in February led to strife at another nearby apparel exporter, Richa Global.

Nobody was seriously hurt in these outbursts - unlike the 2012 riot at a Maruti Suzuki (MRTI.NS) plant that left one executive dead and many injured.

Workers, labour officials and managers say the cost of living, low wages and conditions in slums where migrant workers stay keep Gurgaon's labourers on edge. They can easily turn on their bosses - even at firms like Orient Craft, known for its worker care.

"When your life is so stressed, any trivial reason is capable of turning you violent," said Akshay Kumar Pal, a 42-year-old worker from Uttar Pradesh state.

Pal has lived for a decade in a cramped, dirt-floored room with a leaky roof in Gurgaon. In his block, 80 people live up to six per room, sharing three toilets and a single water tap. Rents rise every year. Pal said he was a tailor at Richa Global until April when he was sacked, accused of involvement in the February riot. He says he was not there.

At Richa, Pal earned about $200 a month after 2-3 hours overtime every day. Half of his pay went on rent and food, leaving little for his wife and two daughters back home. "There is a big mismatch between our wages and the cost of living," he said. "You cannot survive without overtime."

TOO LITTLE, TOO LATE

Orient Craft's bright, ventilated factories are recognised as offering better conditions than most. It's known for taking good care of its 32,000 employees. But even Dhingra recognises that the system is not working.

"We know the wages paid to workers are not good enough to secure them a decent and dignified living," he said. "But we cannot afford to pay more, else we will lose all our business."

The failure by successive governments to overhaul one of the world's most rigid labour markets has squeezed firms like Dhingra's between low-cost producers like Bangladesh and skilled and fast-moving innovators like China.

Modi's reforms aim to help companies go up the value chain, creating jobs for the 200 million Indians who will reach working age over the next two decades, and reducing labour volatility.

Shankar Aggarwal, the top bureaucrat at the labour ministry, said laws had not adapted to the dynamics of mobile labour forces and industry demands. The changes under discussion will improve productivity as well as industrial relations, he said.

Instead of saddling companies with additional costs, Dhingra wants the government to set up hostels for workers in industrial towns to reduce tension in the workforce.

He also wants India to sign free trade agreements with the European Union and the United States to offset the cost advantage exporters from Bangladesh enjoy.

"After starting so late, changes in laws alone will not be enough," he said.