India’s new labour codes, with draft central rules released in December 2025, have been presented as a reform with transformative potential. The Economic Survey 2025-26 makes an optimistic case: these codes are expected to increase formalisation from 60.4% to 75.5%, generate 77 lakh jobs, reduce unemployment, boost female labour force participation and contribute 1.25% to GDP by 2029-30. These projections assume that simplifying compliance for firms will incentivise formalisation and expand registered employment.
However, over 80% of India’s workers are in the informal sector, and they remain outside most of the labour code protections. The scale of informality is increasing. Firms, when given flexibility, tend to respond by shifting away from formal employment. Between 2011 and 2023, direct factory employment fell from 61% to 47%. Contract workers grew to 42% of the factory workforce. Regular employment in central public sector enterprises declined by 30,000 workers in 2024 alone, replaced by casual and contract workers (Public Enterprises Survey 2025). The organised sector, once associated with stable employment, is shrinking in India. And the new codes accelerate this by loosening regulatory definitions and protections, making it easier for firms to avoid permanent employment relationships.
Formalisation illusion
A striking feature of the codes is how they respond to informality by raising the thresholds for protections. The Occupational Safety, Health and Working Conditions Code raises the definition of a “factory” from 10 workers to 20 (with power) and from 20 to 40 (without power), increases the contract labour threshold from 20 to 50 workers and raises the threshold for prior approval for lay-offs from 100 to 300 workers.
At the same time, the government expects these codes to increase formalisation. This rests largely on expanding “fixed-term employment”, that is, letting firms hire on short-term contracts instead of permanent jobs. Formal employment has historically meant job security, regular wages, social security and the ability for collective bargaining. Fixed-term employment offers some benefits under the codes, such as appointment letters and equal gratuity after one year, but undermines the key feature that distinguishes formal work from precarious work: job security.
Grey areas
While the codes require platform companies to contribute 1%-2% of annual turnover for gig worker schemes, rules on how companies must contribute, benefit levels, coverage and claim details are all left to be “notified through subsequent schemes”. The reskilling fund for retrenched workers follows the same pattern: employers must deposit 15 days’ wages per worker. How to access these funds, who provides training and what skills are taught are unspecified. Like India’s many cess and welfare funds, collection may happen, but utilisation may lag perpetually.
Editorial | Labour and honour: On the four Labour Codes, the path ahead
The Code on Wages creates a National Floor Wage and a National Minimum Wage but offers no clear methodology for setting either and how they will differ. The new rules make space for greater administrative discretion instead. Defenders of flexible labour markets often argue that minimum wages destroy jobs. The logic is that if you force employers to pay more than market rates, they will hire fewer workers. But decades of empirical research have shown that the job loss predictions consistently fail to materialise (Dube 2019). Higher wages reduce turnover costs for firms. And, when low paid workers get raises, they spend more on food, transport, housing and goods. The increased consumption boosts aggregate demand. In labour markets where employers often have substantial power to set wages below competitive levels, minimum wages actually improve efficiency by reducing employer exploitation.
Data | Future of work: India’s youth under the new Codes
Further, the rebranding of labour inspectors as “Inspector-cum-Facilitators” might sound progressive, but when inspectors become facilitators helping employers comply, enforcement weakens. This is made explicit by allowing employers to compound serious violations such as wage theft or unpaid overtime by paying prescribed fines. If penalties are lower than compliance costs, breaking the law can become a rational business decision. This is particularly damaging in the informal sector. In the absence of unions, labour courts or workers’ awareness of rights, labour inspectors could have been the only channel for redressal. Converting them to facilitators eliminates even this minimal accountability.
There are many assumptions
The labour codes fail to confront what drives informality in the first place. It is not that regulations are too complex for firms to navigate but that informality is structurally profitable. While technology is automating routine jobs, the new platform jobs it is creating are bypassing employment relationships entirely.
The optimistic projections of the Economic Survey rest on assumptions that contradict many of the labour market realities. Making formal jobs more flexible will not lead to formalisation as long as informality remains cheaper and more profitable.
Lower compliance costs will also not create better jobs if firms respond by replacing permanent workers with contract workers. The numbers may eventually materialise, such as higher formalisation percentages, but they will measure changes in how firms account for workers, not improvements in how workers actually live.
Krishna Priya Choragudi is a Research Fellow at the Centre for Study of Indian Economy, Azim Premji University, Bengaluru. The views expressed are personal
Published – March 13, 2026 12:08 am IST
