The Indian labour market has been characterised by a paradoxical duality: a highly protected formal sector governed by archaic and complex laws, rules, and regulations, and a large informal sector vulnerable to employers’ caprices. The regulatory regime played truant with both the development and growth of the manufacturing sector and of employee welfare, a double whammy for which India has suffered for long.
Economic growth is driven by increases in productive capacity, architected by capital accumulation, technological advancements, and the contribution of the labour force. Labour is an active component that multiplies the contribution of other resources. Without the optimal contribution of the labour force, other resources, such as capital and technology, remain underutilised, leading to suboptimal value creation.
The data published by the International Labour Organisation (ILO) indicates that India’s labour productivity is around $8 GDP per working hour of labour as compared to Luxembourg’s $146 (top globally), Ireland at $143, Norway at $93, and Singapore at $74. India stands at the lowest amongst G20 countries. Even middle-income emerging economies generate output per hour worked many times that of India.
Further, India ranks amongst the top countries globally for hours worked per week, 46-48 hours, higher than even China and Japan. Yet, even with very low wages, the Indian economy stands to lose due to extremely low per-worker output. Our industries are unable to compete with rivals in countries like Bangladesh, Vietnam, and China. This is the background against which we must see the much-needed labour reforms ushered in by the Modi government in November 2025.
The old regulatory framework, saddled with 29 fragmented labour laws, was extremely complex and obsolete, dating back to the British Raj and the early decades of Independence. There were 1,436 provisions, 181 forms, eight separate registrations, and 31 reporting requirements, which were very cumbersome and, in some cases, inconsistent. The complexity led to unease in doing business, limited formalisation, and left large sections of the workforce without a safety net.
The array of fragmented labour laws has now been consolidated into four modern and simplified Labour Codes: Code on Wages (2019), Industrial Relations Code (2020), Code on Social Security (2020), and Occupational Safety, Health and Working Conditions Code (2020),and made effective from November 21, 2025.
These reforms bring a structural shift by simplifying compliance, standardising definitions, expanding coverage, and aligning regulations with the realities of the modern workforce, inclusive of the gig economy. The new codes will transform the way labour regulations function and are expected to create a balance between enhancing workers’ protections and boosting productivity.
The new labour codes can step up productivity in multiple ways. The consolidated codes will encourage formal employment; issuing employment contracts is obligatory, as is single registration, licences, and returns, thereby improving the ‘ease of doing business’ and reducing bureaucratic delays. Reducing the compliance burden will help companies focus on business activities and lower costs. The formalisation of employment facilitates manpower planning and better utilisation.
International investors cited India’s rigid labour laws, especially in labour-intensive sectors such as textiles, leather, and electronics, as a serious bottleneck and they therefore preferred working in countries like Vietnam and Bangladesh. The reforms indicate a predictable, streamlined environment that will encourage a greater flow of foreign direct investment.
The extension of benefits of medical care, sickness cash benefits, maternity cover, and disability support under the Employees State Insurance Corporation (ESIC) and the Provident Fund to unorganised, gig, and platform workers under the Code of Social Security is a landmark shift. The government’s recent clear stand against 10-minute delivery models indicates that the desire to protect workers is real and serious, even in the face of industry lobbying by quick commerce giants.
Mandatory health checkups with regulated working hours, protective facilities, and gender equality norms under the Workplace Safety & Health Standard will improve working conditions, boost workforce morale, and increase workforce productivity. The reforms permit women to work on the night shift; of course, provided safety protocols are in place.
The Industrial Relations Code allows, particularly in manufacturing, hospitality, and MSMEs, flexibility in hiring and adjusting workforce levels according to need, without navigating decades-old, complex rules. Flexibility will help enterprises respond swiftly to market dynamics, adjust workforce size, and run operations profitably. However, this rule applies only if the enterprise has 300 or fewer employees.
States have the authority to alter this rule both at the lower and higher levels. Industrial-scale, large manufacturing, processing, and logistics leverage high-volume production, automation, and advanced technology to achieve economies of scale. States like Uttar Pradesh, Bihar, West Bengal, and Odisha, which are seeking to industrialise and have large numbers of jobseekers, could raise this threshold from 300 to 30,000, or even 300,000, so that companies with scale can be established. Thousands of unemployed people from these states are forced to migrate to other states in search of economic engagement.
Trade unions, despite the potential benefits, have criticised the reforms, arguing that flexibility in employment will lead to ‘casualisation’ of work, usher in insecurity amongst the rank and file of the workforce, and erode collective bargaining rights. In fact, formalising labour engagement will improve job security and enhance workers’ and consumers’ confidence. The government has to make special efforts to take trade unions on board, something that has not yet happened.
If this is done, the reforms will stand as a watershed moment in Indian economic history. Economic impact will be multifaceted. It promises scaling up manufacturing, attracting global capital, formalising the unorganised sector, and increasing discretionary spending, and, if implemented rigorously, will undeniably create a large number of job opportunities, improve productivity, and create large, globally competitive enterprises while providing safety nets for employees.
The Billion Press
(GN Bajpai is a former chairman of SEBI and ex-chairman of LIC.)
