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India’s labour market has been shaped by a complex legacy of well-intentioned but ultimately restrictive regulations. For decades, labour laws designed to protect workers ended up discouraging firms from growing, formalising, or hiring at scale. The sweeping labour reforms implemented through the four labour codes mark an important break from this past. By modernising outdated legislation and simplifying compliance, these reforms promise to reshape the labour landscape and unlock India’s employment and growth potential. From here on, the states that enforce these reforms with full commitment are likely to witness major investments and job creation.
The foundation of India’s labour regulation was the Industrial Disputes Act (IDA) of 1947. This created powerful disincentives for firms to expand beyond a small size. Three major distortions emerged. First, productive firms deliberately stayed smaller than optimal, fearing regulatory burdens if they grew. This prevented the development of large, competitive manufacturing enterprises. Second, India became a country of micro and small informal units, which often lacked access to technology, capital, and skilled management. These firms naturally struggled to raise productivity or offer secure, well-paid jobs. Third, the laws ended up protecting a tiny minority of formal, unionised workers, while the vast majority remained outside any legal safety net. Ironically, rules intended to defend workers benefited only those already fortunate enough to be in stable, formal jobs.
To close loopholes, the government introduced the Contract Labour Act (CLA) of 1970, increasing compliance requirements for firms hiring contract workers. Amendments in 1976 and 1982 tightened restrictions by lowering the thresholds at which firms needed government permission for layoffs. Despite India’s 1991 economic liberalisation, the labour law system remained largely untouched, continuing to discourage large-scale, labour-intensive manufacturing. Over time, this rigid regulatory environment led to a structural imbalance: India had abundant labour, but firms were reluctant to hire. Job creation lagged behind economic growth, and millions remained in informal employment.
Recognising these distortions, the government consolidated 29 laws into four comprehensive labour codes: the Code on Wages (2019), the Industrial Relations Code (2020), the Code on Social Security (2020) and the Occupational Safety, Health and Working Conditions Code (2020). Now notified, these reforms aim to balance worker protection with economic dynamism. They modernise outdated provisions, simplify compliance, expand social protection, and give firms the flexibility they need to grow.
Universal wage and social protection: The Code on Wages establishes a uniform national framework for minimum wages and timely payments. This is a major step toward inclusivity. Earlier laws covered only certain categories of workers, excluding many in the informal sector. Now, all workers across industries, regions, and job types receive wage protection. Combined with mandatory appointment letters, this pushes employers toward formalisation and transparency. The Code on Social Security expands the safety net to gig workers, platform workers, and other non-traditional categories that form a rapidly growing share of India’s workforce. For the first time, delivery workers, ride-share drivers, freelance workers, and others on digital platforms are legally recognised and eligible for social security benefits. This modernises labour law to match contemporary forms of work.
Simplified compliance and reduced bureaucracy: A major obstacle for Indian firms has historically been the complexity of labour compliance. Different laws required multiple registrations, licences, inspections, and returns. The new codes consolidate these into one registration, one licence, and one return, greatly reducing bureaucratic friction. This is crucial for small and medium enterprises, which often operate informally precisely to avoid compliance burdens. Simplified procedures make it easier and more attractive for firms to join the formal economy, hire workers officially, and expand operations.
Flexibility in hiring and managing labour: The Industrial Relations Code introduces greater flexibility in hiring and workforce management. While maintaining protections against arbitrary dismissal, it streamlines processes for layoffs and retrenchment in medium-sized firms. This reduces the uncertainty firms previously faced, encouraging them to hire without fear of crossing rigid thresholds. At the same time, worker protections remain intact through dispute-resolution mechanisms and safeguards against misuse. The goal is not to erode rights but to create a predictable, rules-based environment where both workers and employers benefit.
Modern, safer workplaces: The Occupational Safety, Health and Working Conditions Code consolidates safety and health regulations across sectors and establishes clearer standards for working conditions. This is significant in construction, mining, manufacturing, and transportation, where outdated or fragmented laws previously created confusion. A modern safety framework improves the quality of work, encourages investment in safer technology, and ensures dignity and protection for workers.
Empirical evidence from recent decades suggests that Indian states that have implemented labour reforms have benefited more from trade liberalisation. This indicates that states with less restrictive labour regulations, such as lower bureaucratic hurdles and greater labour market flexibility, have enabled their industries to better capitalise on trade opportunities. But on the whole, these state-level reforms have been rare.
India’s labour market has long been shaped by protective laws that turned into a stranglehold, pulling back its economic potential. The new labour codes represent a comprehensive attempt to correct that historical imbalance. By simplifying regulation, expanding protections, embracing new forms of work, and giving firms the flexibility to grow, these reforms create the conditions for a more dynamic labour market. If implemented effectively, the reforms can promote formal employment, raise productivity, encourage investment, and deliver better working conditions. They offer a pathway for India to move from a fragmented, informal labour system to a more modern, inclusive, and growth-oriented framework, unlocking the true potential of its vast and diverse workforce.
Courtesy: The Indian Express
Author
The writer is member, EAC-PM
