Context:

• India’s new labour codes are projected to boost formalisation, employment, and GDP growth by simplifying compliance for firms.
• However, critics argue that these expectations overlook the reality that over 80% of India’s workforce remains informal and outside labour protections.
• Evidence suggests that firms often respond to regulatory flexibility by increasing contract and casual employment rather than creating permanent jobs.
• Between 2011 and 2023, direct factory employment fell while contract labour expanded significantly, and even public sector enterprises are increasingly replacing regular workers with contractual staff.
  • Regular employment in central public sector enterprises declined by 30,000 workers in 2024 alone.
• As a result, instead of strengthening stable employment, the new labour codes may accelerate the shift toward precarious work and deepen labour market informality.
• This article highlights the Economic Survey’s optimistic projections about India’s new labour codes and examines concerns that the reforms may expand contractual work, weaken protections, and deepen labour market informality.

Formalisation Illusion in India’s Labour Codes

• India’s new labour codes attempt to address informality by raising the thresholds for labour protections, allowing more firms to remain outside regulatory coverage.
• For instance, the definition of a factory has been expanded and the threshold for contract labour and prior approval for layoffs has been increased.
• Despite these relaxations, the government expects the reforms to boost formalisation mainly through fixed-term employment, which allows firms to hire workers on short-term contracts instead of permanent positions.
• While fixed-term workers may receive some benefits such as appointment letters and gratuity after one year, this system weakens the core element of formal employment—job security—thereby risking the expansion of precarious work rather than genuine formalisation.

Policy Grey Areas in India’s Labour Codes

• The new labour codes introduce several welfare provisions for workers, but many crucial details remain unclear and are left to future schemes or administrative decisions.
• This creates uncertainty about how the benefits will actually function in practice.
• Unclear Framework for Worker Welfare Schemes
  • The codes require platform companies to contribute 1–2% of their annual turnover for gig worker welfare.
  • However, the rules regarding contribution mechanisms, coverage, benefit levels, and claim procedures have not yet been specified.
  • Similarly, the reskilling fund for retrenched workers mandates employers to deposit wages equivalent to 15 days’ pay per worker, but the system for accessing these funds, training providers, and the skills to be taught remain undefined.
  • As seen with many welfare funds and cesses in India, money may be collected but its utilisation could remain limited or delayed.
• Ambiguity in Wage Determination
  • The Code on Wages introduces the concept of a National Floor Wage and a National Minimum Wage, but it does not clearly explain how these wages will be calculated or how the two will differ.
  • This lack of methodology creates scope for greater administrative discretion in wage determination.
• Debate on Minimum Wages and Employment
  • Critics of minimum wages often argue that forcing employers to pay higher wages leads to job losses.
  • However, extensive research suggests that these fears rarely materialise. Higher wages can reduce worker turnover and improve productivity.
  • Moreover, when low-income workers receive wage increases, they tend to spend more on essential goods and services, which boosts consumption and aggregate demand.
  • In labour markets where employers possess strong bargaining power, minimum wages can actually improve efficiency and reduce exploitation.
• Weakening of Labour Law Enforcement
  • The labour codes rename labour inspectors as “Inspector-cum-Facilitators”, which appears progressive but may weaken enforcement.
  • Instead of strictly monitoring compliance, inspectors are now expected to assist employers in meeting regulations.
• Compounding of Violations
  • The codes allow employers to compound serious violations, such as wage theft or unpaid overtime, by paying prescribed fines.
  • If these penalties are lower than the cost of compliance, firms may find it economically rational to violate labour laws rather than follow them.
• Impact on Informal Sector Workers
  • This shift is particularly harmful for workers in the informal sector, where trade unions, labour courts, and awareness of rights are limited.
  • Previously, labour inspectors often served as the only accessible mechanism for workers to seek redress.
  • Transforming them into facilitators reduces accountability and further weakens protection for vulnerable workers.

Structural Causes of Informality Overlooked

• The labour codes assume that simplifying regulations will encourage formal employment, but they fail to address the deeper structural drivers of informality.
• Informality persists not because regulations are complex, but because it is economically profitable for firms.
• At the same time, technological changes and platform-based jobs are increasingly bypassing traditional employer–employee relationships, further expanding informal work.

Questionable Assumptions Behind Reform Projections

• The optimistic projections in the Economic Survey rely on assumptions that conflict with labour market realities.
• Making formal jobs more flexible does not guarantee formalisation if informal employment remains cheaper and more attractive for employers.

Formalisation Without Better Jobs

• Lower compliance costs may encourage firms to replace permanent employees with contract workers, rather than create stable jobs.
• As a result, official statistics may show higher formalisation, but this would largely reflect changes in accounting practices rather than genuine improvements in workers’ living conditions.