Labour Codes and the Informality Challenge in India

Syllabus: GS3/ Economy

Context

• The Economic Survey 2025-26 presents an optimistic assessment of India’s labour reforms and highlights the potential of the new labour codes to increase formalisation, employment generation and economic growth.

India’s Labour Codes

• India has consolidated 29 labour laws into four comprehensive labour codes to simplify regulations and improve labour market efficiency.
  • The Code on Wages, 2019 aims to standardise wage regulation through the introduction of a National Floor Wage.
  • The Industrial Relations Code, 2020 regulates trade unions, industrial disputes, layoffs and retrenchment.
  • The Occupational Safety, Health and Working Conditions Code, 2020 seeks to unify workplace safety and health standards.
  • The Code on Social Security, 2020 expands social security coverage to workers in both organised and unorganised sectors, including gig workers.

Key Projections in the Economic Survey

• The Economic Survey projects that labour market formalisation will increase from 60.4% to 75.5% after the implementation of labour codes.
• The Survey estimates that the reforms could generate nearly 77 lakh new jobs in the coming years.
• The Survey also estimates that these reforms could contribute around 1.25% to India’s GDP by 2029–30.

Concerns with  the Labour Market and New Labour Code

• Informality in India’s Labour Market: More than 80% of India’s workforce remains employed in the informal sector without job security or social protection.
  • Informal workers lack written contracts, stable wages and access to labour grievance mechanisms.
• Reliance on Contract Labour: The share of permanent workers in factories declined from about 61% in 2011 to nearly 47% in 2023.
  • Contract workers now constitute around 42% of the factory workforce, reflecting a shift toward flexible employment arrangements.
• Changes in Regulatory Thresholds: The Occupational Safety, Health and Working Conditions Code, 2020 raises the factory threshold from 10 to 20 workers (with power) and from 20 to 40 workers (without power).
  • The Industrial Relations Code, 2020 increases the threshold for government approval for layoffs and retrenchment from 100 to 300 workers.
  • These changes reduce regulatory compliance for firms but also limit the coverage of labour protections.
• Social Security for Gig Workers: The Code on Social Security, 2020 recognises gig and platform workers as part of the labour market.
  • However, the details regarding benefit levels, coverage and implementation mechanisms remain unclear.
• Law Enforcement: The labour codes redesignate labour inspectors as “Inspector-cum-Facilitators” to encourage compliance through cooperation with employers. It is argued that this shift may weaken enforcement if inspection powers are diluted.
  • The codes also allow certain labour violations to be settled through fines, which may reduce deterrence.

What are the Structural Drivers of Informality?

• Informal employment often allows firms to reduce labour costs and maintain operational flexibility.
• Technological changes and automation are reducing demand for routine jobs.
• The growth of the platform economy has created new forms of work that bypass traditional employer–employee relationships.

Way Ahead

• The labour codes represent an important attempt to modernise India’s labour regulatory framework and improve ease of doing business. 
• However, the optimistic projections presented in the Economic Survey rely on assumptions that may not fully reflect the realities of India’s labour market. 
• The success of these reforms will depend on effective enforcement, expansion of social security coverage, and policies that address the structural causes of informality.

Source: TH