India’s big step on labour

India has taken a major step by bringing its labour laws into the modern era. If the new labour codes are implemented well, they offer a chance for the economy to boost long-term growth, although businesses may face short-term adjustment costs. Effective last-mile delivery will require cooperation by states.

The new laws, effective November 21, merged 29 regulations into four codes, aiming to reduce overlap and make compliance easier. Employers will no longer face criminal charges for minor compliance mistakes, improving the ease of doing business.

Critics of previous labour laws had claimed they created uncertainty and raised transaction costs. Companies had to spend significant resources on compliance, making it hard to adjust workforce sizes when business conditions changed, and hurting profitability. By decriminalising minor compliance lapses, focus will shift from punishment to support, from a rigid legal stranglehold to incentives and nudges.

The new codes also introduce a single registration and license for businesses, replacing multiple registrations under different laws. All filings – returns, registers, and records – will now be digital through unified portals. This ensures real-time monitoring, transparency, and fewer discretionary inspections.

Worker protection          

Earlier, minimum wage laws varied across India’s states and often excluded informal staff due to inconsistent definitions of “workers” and “wages.” Only a limited set of sectors were covered.

The new wage code advocates a national minimum wage, includes all types of employment, and standardises key definitions. A national floor wage matters for fairness because state-level disparities are large. States can still set higher wages to reflect local living costs.

The laws also extend social security to contract workers on par with permanent employees. If implemented well, this will bring informal workers – including the growing base of gig and platform workers – under social security for the first time. A NITI Aayog study estimated that in 2020-21, about 7.7 million people worked in the gig economy, and 78 per cent were in low or medium-skill jobs.

This change is significant. India’s informal sector contributes 45 per cent to 50 per cent of gross domestic product and employs around 400 million workers. Over one-fourth of these workers are in non-agricultural sectors.

Under the new law, salary structures will also change. At least 50 per cent of pay must now be basic salary, which means higher social security contributions, possibly mildly reducing the share of take-home pay.

Flexibility

The threshold for government approval to downsize or close operations has increased from 100 to 300 workers. This gives businesses more flexibility to manage costs.

Research offers mixed views. Some studies say the 100-worker limit discouraged firm growth and formal employment because companies avoided crossing that threshold to escape stricter rules and higher compliance costs. Others argue such an impact has been overstated. Still, raising the limit is progress for firms seeking flexibility.

The impact could be far reaching. India has about 260,000 factories, according to the latest Annual Survey of Industries. A Data for India study shows in 2001, only one in ten factories employed more than 100 workers. By 2023, that share doubled to 20 per cent.

Policymakers seem to have noted a key warning from labour-market studies that relaxing labour laws without improving worker protections can both worsen inequality and increase informal work. The new codes try to balance easier hiring and firing with fair wages and social security.

The wage and social security changes also fit the bigger macro picture. India’s growth over the last decade hasn’t been wage friendly. The profit-wage gap has widened, meaning company earnings have grown at the cost of salaries. High inflation and rising household debt have further weakened potential consumption growth, which in turn has held back capacity use and private investment.

From this angle, the new labour laws are not just supply-side reforms – they have an important demand-side implication too. By possibly shifting some economic surplus from firms to households, they could boost spending and growth. But the real impact on household welfare and employment will only be clear in time.

Road ahead

The spirit of the new labour codes is commendable, but success depends on rigorous and coordinated implementation across states – a formidable challenge given India’s vast and complex labour market. Some past studies even argue the old laws failed more because of poor enforcement than bad design.

Labour laws are a concurrent subject in the Indian Constitution, and states issue the final notifications while the central government has set the template. This creates a risk of dilution, which must be avoided to unlock the full potential of these reforms. Building and maintaining consensus among states, worker unions, and businesses will be crucial.

Labour law reforms will be more effective when paired with human capital development. As artificial intelligence changes the way jobs work, employees must quickly upgrade their skills. Otherwise, new laws may help formalisation but not generate enough jobs for India’s needs.

Dhiraj Nim is an Economist & FX Strategist at ANZ Research