Labour Reforms in India: Economic Survey Promises vs. Structural Realities

After Reading This Article You Can Solve This UPSC Mains Model Questions:

Effective implementation of labour reforms requires strong institutional capacity. Evaluate the statement in the light of prevailing labour market realities in India. 15 Marks (GS-3, Economy)

Context

• The consolidation of 29 central labour laws into four comprehensive Labour Codes, finalized with draft rules in late 2025, represents a paradigm shift in India’s regulatory architecture.
• While the Economic Survey 2025–26 projects these reforms as a catalyst for formalization and massive job creation, deep-seated structural informality and evolving employment patterns present significant hurdles to achieving these optimistic macroeconomic goals.

Background: Constitutional Foundations and Structural Transformation of Labour Laws in India

The evolution of India’s labour governance represents a transition from a fragmented, archaic legal system to a unified, modern regulatory architecture. This shift is deeply rooted in India’s democratic values and judicial mandates.

A. Constitutional and Judicial Foundations of Labour Rights

Labour welfare is not merely a policy goal but a fundamental mandate under the Indian Constitution.

1. Fundamental Rights (Part III):

• Article 14: Ensures equality before the law, preventing arbitrary discrimination among different classes of labour.
• Article 19(1)(c): Guarantees the right to form associations or trade unions, essential for collective bargaining.
• Article 21: Interpreted by the Supreme Court to include the Right to Livelihood as part of the Right to Life.
• Article 23: Prohibits forced labour and human trafficking, protecting vulnerable sections of workers.

2. Directive Principles of State Policy (Part IV):

• Article 38: Directs the State to promote a social order based on social, economic, and political justice.
• Article 39(d): Advocates equal pay for equal work for both men and women.
• Article 41: Calls for ensuring the right to work and public assistance in cases of unemployment or old age.
• Article 43: Aims to secure living wages and decent working conditions ensuring a dignified standard of life.

3. Key Supreme Court Judgements:

• Olga Tellis v. Bombay Municipal Corp.: Established that the right to life includes the right to a means of subsistence.
• Randhir Singh v. Union of India: Ruled that “Equal Pay for Equal Work” is a constitutional goal, even if not a fundamental right per se.
• Bandhua Mukti Morcha v. Union of India: Emphasized that the right to live with human dignity is paramount for the working class.

B. Institutional Reform through Consolidation of Labour Laws

1. Consolidation of Labour Laws: To address complex compliance requirements and reduce legal ambiguities, the Government of India consolidated 29 central labour statutes into four streamlined codes. This reform aims to balance industrial productivity with worker protection.

• Code on Wages (2019): Simplifies the definition of wages and universalizes the provision of minimum wages and timely payment to all employees, irrespective of the sector.
• Industrial Relations Code (2020): Enhances labour market flexibility by introducing Fixed-Term Employment (FTE) and increasing the threshold for layoffs and retrenchment in industrial establishments.
• Code on Social Security (2020): Extends social protection to previously excluded categories, specifically gig workers and platform workers, facilitating a more inclusive safety net.
• Occupational Safety, Health and Working Conditions Code (2020): Standardizes workplace safety norms and health standards, specifically easing the compliance burden for multi-state establishments.

Economic Survey 2025–26: Projections for Labour Market Transformation

The Economic Survey 2025–26 presents an optimistic roadmap for India’s labour market, suggesting that the reduction in regulatory complexity will catalyze a “virtuous cycle” of investment and employment. By streamlining 29 laws into four codes, the government aims to modernize the workforce through the following strategic projections:

• Ambitious Formalization Targets: The Survey projects a substantial increase in formal employment, rising from the current 60.4% to 75.5% by 2030.
  • This transition is expected to be driven by the legal recognition of Fixed-Term Employment (FTE), which allows firms to hire workers on a temporary basis while providing them with formal benefits like gratuity and appointment letters.
• Employment Generation Dividend: Simplified compliance, such as single-window licensing and easier entry-exit norms, is anticipated to generate approximately 77 lakh jobs.
  • The economic survey suggests that when businesses face fewer administrative hurdles, they are more likely to expand their operations and payrolls.
• Expanding Female Participation: A major highlight is the transformative rise in the Female Labour Force Participation Rate (LFPR), which has surged from 23.3% in 2017–18 to 41.7% in 2023–24. This growth is supported by gender-responsive provisions, including:
  • Legislative enabling of night shifts for women with mandated safety protocols.
  • Mandatory provision of creche facilities and expanded maternity benefits.
  • Removal of statutory barriers preventing women from working in hazardous industries.
• Macroeconomic Impact and Governance: The effective implementation of these reforms is projected to contribute an additional 1.25% to the GDP by 2029–30.
  • This growth is facilitated by a shift from a punitive inspection regime to an “Inspector-cum-Facilitator” model.
  • Moreover, this new approach prioritizes administrative guidance, digital transparency, and cooperative compliance over traditional litigation.
• Enhanced Skill Development: By integrating the National Apprenticeship Promotion Scheme (NAPS) and industry-aligned training, the reforms aim to bridge the skill gap. Tools such as Skill Impact Bonds and Direct Benefit Transfer (DBT) for stipends are designed to link funding directly to verified employment outcomes.

Key Challenges and Structural Gaps in the Implementation of Labour Codes

Despite the ambitious objectives of India’s labour reforms, several structural constraints, labour market realities, and institutional weaknesses raise concerns about the effectiveness of the labour codes. While the reforms aim to promote formalisation, labour flexibility, and economic efficiency, the dominance of informal employment and weak enforcement mechanisms may limit their actual impact.

1. Persistently High Informality

• More than 80% of India’s workforce is employed in the informal sector, often lacking written contracts, job security, social protection, and labour rights.
• A large proportion of these workers remain outside the effective coverage of labour regulations, including several provisions of the labour codes.
• As a result, labour reforms may benefit only a limited segment of the workforce, while the majority continues to remain in precarious employment.

2. Rising Contractualisation and Decline of Stable Employment

• There has been a growing shift from permanent employment to contractual and casual labour, even in the organised sector.
• Direct factory employment declined from 61% (2011) to 47% (2023), while contract workers increased to around 42% of the factory workforce.
• In 2024, regular employment in Central Public Sector Enterprises declined by about 30,000 workers, many of whom were replaced by casual or contract workers.
• Greater labour market flexibility under the codes may further encourage firms to prefer temporary or fixed-term hiring over permanent employment.

3. Higher Regulatory Thresholds and the Risk of “Formalisation Illusion”

• The labour codes raise several regulatory thresholds, which may reduce the number of establishments covered by labour protections.
  • The definition of a factory has been increased to 20 workers (with power) and 40 workers (without power) under the Occupational Safety, Health and Working Conditions Code.
  • The contract labour threshold has been raised from 20 to 50 workers.
  • Government approval for layoffs and retrenchment is now required only for establishments employing more than 300 workers, compared to 100 earlier.
• While these changes reduce compliance burden, they may also exclude many establishments from regulation, creating formalisation in statistics rather than improvements in job quality or security.

4. Expansion of Fixed-Term Employment (FTE)

• The labour codes recognise Fixed-Term Employment, allowing firms to hire workers for short-term contracts.
• Workers receive appointment letters, equal wages and certain benefits, including gratuity eligibility after one year.
• However, FTE may weaken job security, stable income, and collective bargaining power, making formal jobs more precarious and temporary in nature.

5. Ambiguities in Gig Worker Welfare

• The Code on Social Security provides welfare provisions for gig workers (workers engaged in platform-based, on-demand or app-mediated jobs such as ride-hailing or food delivery services).
• Platform companies are required to contribute 1–2% of their annual turnover towards gig worker welfare schemes.
• However, key aspects remain unclear, including contribution mechanisms, benefit coverage, eligibility criteria, and fund management, raising concerns about effective implementation and utilisation of welfare funds.

6. Uncertainty in the Reskilling Framework

• The labour codes propose a reskilling fund for retrenched workers, requiring employers to deposit 15 days’ wages per worker.
• However, there is limited clarity regarding access mechanisms, training institutions, skill programmes, and monitoring of outcomes, which may reduce the effectiveness of this initiative.

7. Lack of Clarity in Wage Determination

• The Code on Wages introduces the concepts of National Floor Wage (the minimum benchmark wage set by the Central Government below which states cannot fix minimum wages) and National Minimum Wage (a statutory wage level ensuring a minimum income standard across sectors).
• However, the framework lacks clarity regarding methodology, coordination with state wages, and revision mechanisms, leading to potential policy inconsistencies across states.

8. Weakening of Labour Enforcement

• Labour inspectors have been redesignated as “Inspector-cum-Facilitators”, focusing on guidance rather than strict enforcement.
• Employers may compound certain violations by paying fines, which may weaken deterrence if penalties remain low.
• In sectors with weak unions and limited worker awareness, reduced inspection powers may limit grievance redressal and regulatory accountability.

Way Forward: Toward Inclusive Labour Governance

To ensure that the labour reforms meet their intended goals of equity and growth, the following strategic interventions are necessary:

• Universal Social Security Portability: Fully operationalize the Universal Account Number (UAN) to ensure that social security benefits remain attached to the worker, regardless of their sector, state, or employment type.
• Evidence-Based Wage Fixing: Establish a clear, inflation-indexed methodology for the National Minimum Wage to ensure it effectively supports consumption-led economic growth.
• Institutionalizing the Care Economy: To sustain the projected rise in Female LFPR, the government must treat the “Care Economy” (Anganwadis and creches) as a critical infrastructure sector, providing the support system necessary for women to remain in the workforce.
• Strengthening Enforcement Accountability: Enhance the Facilitator model with technology-driven, randomized inspections to prevent employer harassment while ensuring that the safety and rights of the worker remain non-negotiable.
• Enhance Skill Development and Reskilling: Strengthen training and reskilling programmes for workers affected by automation, restructuring, or retrenchment by promoting STEM enrolment and supporting workforce reintegration initiatives such as “Back to Work” and “Returnship” programmes.

Conclusion

The new Labour Codes offer a roadmap for an aspirational economy. However, as the Economic Survey notes, success depends on whether “flexibility” for firms is balanced with socio-economic resilience and dignity of labor for the Indian workforce.