India's Labour Code Reforms: Navigating Formalisation and the Persistent Challenge of Informality

The trajectory of India's labour market reforms reflects a fundamental tension between the imperatives of economic growth driven by Ease of Doing Business (EoDB) and the foundational commitment to worker welfare and social protection. The consolidation of 29 central labour laws into four comprehensive codes seeks to streamline regulations, ostensibly to foster industrial growth and formalisation. However, this initiative operates within the pervasive reality of India's labour market dualism, where a large informal sector coexists with a smaller, more regulated formal one, raising critical questions about the codes' potential to genuinely transform worker conditions without inadvertently incentivising further contractualisation or informalisation within the formal sector itself. This policy debate is anchored in the conceptual framework of supply-side labour market reform versus structural drivers of informality. While the new codes represent a significant supply-side intervention aimed at reducing compliance costs for firms and encouraging formal employment, their effectiveness is critically contingent on their ability to address deeply entrenched structural issues such as low skill endowments, fragmented production value chains, and insufficient demand for formal sector jobs, which collectively underpin India’s persistent informality challenge.

Arguments for the Labour Codes: Facilitating Economic Dynamism and Formalisation

Proponents argue that the new Labour Codes are a crucial step towards modernising India's archaic labour regulatory framework, which was often criticised for being overly complex, rigid, and a deterrent to investment and job creation. By simplifying compliance and providing greater operational flexibility to enterprises, the codes are envisioned as catalysts for fostering a more dynamic labour market, thereby accelerating formalisation, generating employment, and boosting overall economic growth. The Economic Survey 2025-26, for instance, projects substantial positive outcomes from their full implementation.

• Regulatory Harmonisation and Simplification: The consolidation of 29 complex and often contradictory central labour laws into four broad codes (Code on Wages, Industrial Relations Code, Occupational Safety, Health and Working Conditions Code, and Code on Social Security) significantly reduces the compliance burden for businesses. This aims to improve clarity and predictability in labour regulations.
• Enhanced Ease of Doing Business (EoDB): By streamlining procedures and reducing bureaucratic hurdles, the codes are expected to enhance India's global EoDB ranking, attracting greater domestic and foreign investment. This includes simplified registration, licensing, and inspection processes.
• Projected Formalisation and Employment Generation: The Economic Survey 2025-26 optimistically projects an increase in labour market formalisation from an estimated 60.4% to 75.5% post-implementation. It further estimates the creation of approximately 77 lakh new jobs and a contribution of around 1.25% to India's GDP by 2029-30, driven by increased industrial activity and formal employment.
• Expanded Social Security Framework: The Code on Social Security, 2020, significantly broadens the scope of social security by explicitly recognising and aiming to extend benefits to workers in the unorganised sector, including gig and platform workers. This marks a legislative acknowledgement of emerging work arrangements.
• Rationalisation of Wages: The Code on Wages, 2019, seeks to standardise wage regulation across sectors by introducing a National Floor Wage, aiming to reduce wage disparities and ensure minimum living standards for workers nationwide.

Critiques and Concerns: Weakening Protections and Persistent Informality

Conversely, critics contend that while the stated objectives of formalisation and EoDB are laudable, the design of the new Labour Codes exhibits a discernible tilt towards employer flexibility at the potential expense of worker protection. The core apprehension is that these reforms might lead to an informalisation of the formal sector rather than a genuine formalisation of the informal workforce, exacerbating pre-existing vulnerabilities and failing to address the deep-seated structural drivers of informality in India.

• Weakening of Worker Protections and Bargaining Power:
  • Increased Thresholds for Applicability: The Industrial Relations Code, 2020, raises the threshold for government approval for layoffs, retrenchment, and factory closures from 100 to 300 workers. Similarly, the Occupational Safety, Health and Working Conditions Code, 2020, increases the factory threshold for applicability from 10 to 20 workers (with power) and 20 to 40 workers (without power). These changes exempt a large number of smaller establishments from regulatory oversight, potentially limiting worker protections.
  • Shift to Contract Labour: Data indicates a continuing trend of contractualisation. The share of permanent workers in factories declined from approximately 61% in 2011 to nearly 47% in 2023, with contract workers now constituting around 42% of the factory workforce. This reflects firms' preference for flexible labour arrangements to bypass stringent regulations, leading to a precarious work environment.
• Ambiguity in Social Security for Gig Workers: While the Code on Social Security, 2020, acknowledges gig and platform workers, the operational details regarding benefit levels, funding mechanisms, and implementation responsibilities remain largely unclear. This creates a risk of legislative recognition without concrete, enforceable social security entitlements.
• Dilution of Enforcement Mechanisms: The redesignation of "Labour Inspectors" as "Inspector-cum-Facilitators" is viewed with concern. While intended to promote cooperation and compliance, critics argue this shift may weaken proactive enforcement, inspection powers, and the deterrence of labour law violations. Furthermore, allowing certain violations to be settled through fines rather than prosecution may reduce their punitive impact.
• Limited Impact on Structural Drivers of Informality: The codes primarily address regulatory compliance. They do not directly tackle fundamental issues contributing to informality, such as low human capital, inadequate skill development, fragmented production structures of MSMEs, and insufficient aggregate demand for formal sector employment. The vast majority (over 80%) of India's workforce remains in the informal sector, lacking job security and social protection, a challenge largely untouched by these regulatory changes.

Comparative Analysis: India's Labour Framework Pre- vs. Post-Codes

The following table highlights key shifts in India's labour regulatory framework, comparing the situation before the comprehensive Labour Codes (referring to the previous regime of multiple laws) with the intended changes under the new codes. This illustrates the policy direction towards simplification and flexibility.

What the Latest Evidence Shows and Emerging Trends

As of early 2026, while the Labour Codes have been notified, their complete implementation across all states remains pending, largely due to states needing to frame their own rules. This delay has meant that the full impact and the Economic Survey's optimistic projections have not yet manifested, making comprehensive empirical assessment challenging. However, certain trends and insights are emerging even prior to full operationalisation. The ongoing shift towards contractualisation, as noted in the Economic Survey's own report on the factory workforce (decline in permanent workers), suggests that firms continue to prioritise flexibility, potentially indicating an adaptive response to anticipated regulatory changes or an existing preference for non-permanent employment forms. Data from the Employees' Provident Fund Organisation (EPFO) shows an increase in net payroll additions, which is often cited as a sign of formalisation. However, this data largely reflects social security registrations rather than the nature of employment (permanent vs. contract), and many new registrants may still be in precarious or temporary roles within the 'formal' sector. The challenge of extending social security to gig and platform workers also faces practical hurdles, including defining employer-employee relationships, ensuring contribution mechanisms, and maintaining portability of benefits, as highlighted by various labour expert committees.

Structured Assessment of the Labour Codes and Informality Challenge

A comprehensive evaluation of India's Labour Codes in addressing the informality challenge necessitates a multi-dimensional assessment:

• (i) Policy Design and Intent:
  • Strengths: Acknowledges the need for regulatory simplification, seeks to expand social security coverage, and rationalise wages. It attempts to create a more investment-friendly environment by reducing compliance burdens.
  • Weaknesses: The design exhibits a potential trade-off between EoDB and worker protection, with critics arguing for a dilution of worker rights. Increased thresholds might inadvertently push more enterprises into the unregulated informal domain or promote precarious work within the formal sector. Specifics on funding and implementation for gig worker social security remain vague.
• (ii) Governance Capacity and Enforcement:
  • Challenges: The shift to 'Inspector-cum-Facilitator' requires a fundamental change in the mindset and capacity of the labour administration, potentially leading to weakened enforcement if not adequately supported by robust oversight mechanisms and accountability frameworks. Data collection and analysis capabilities need significant enhancement to effectively monitor formalisation trends and social security coverage.
  • Implementation Hurdles: Delays in states framing their rules hinder uniform and timely implementation across the country, creating legal uncertainty and delaying anticipated benefits.
• (iii) Behavioural and Structural Factors:
  • Firm Behaviour: Businesses often optimise for cost and flexibility. If the codes, despite simplification, still present perceived regulatory hurdles or costs, firms may continue to rely on contract labour or remain in the informal economy to avoid compliance.
  • Worker Agency and Skill Gaps: A significant portion of India's informal workforce lacks adequate skills, education, and bargaining power, limiting their ability to transition into formal employment even if such opportunities arise. The codes do not directly address skill development or labour market demand-supply mismatches.
  • Informal Sector Dynamics: The structural nature of India's informal economy, characterised by self-employment, small-scale enterprises, and family labour, is often driven by survival rather than choice. Regulatory changes alone may have limited impact on these deeply embedded socio-economic realities without complementary policies in credit, market access, and skill development.

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