India’s long-awaited labour reforms promise to simplify a maze of 29 central laws into four streamlined codes. Yet, as States finalise rules, much of the new legislation merely repackages outdated provisions, offering limited respite from regulatory burdens. Core problems originate from imposing heavy compliance, micromanagement, and low thresholds where many laws apply to firms with just 10 workers, thereby discouraging businesses from scaling.
Labour laws: A recap
First, a short recap of the existing labour framework, which suffers from many maladies: excessive regulation, an Orwellian inspection system, criminal penalties for minor violations, and low employee thresholds for applicability. The numbers tell the story.
India’s regulatory framework contains 1,536 laws, 69,233 compliance requirements, and 6,632 filings across federal and State levels. Labour regulations comprise 30 per cent of laws, 47 per cent of compliances, and 46 per cent of filings. Rather than establish standards, these rules dictate minutiae, from wage slip formats to uniform colours to canteen utensils.
This micromanagement extends beyond hiring, firing, and working conditions. Instead of setting general safety standards, labour regulations specify toilet paper quality, urinal heights, and types of tiles used. Inspectors penalise deviating firms, even when alternatives are equally effective.
Labour inspectors, a relic of the license-permit raj, exploit these intricate rules, demanding bribes and levying criminal penalties for non-compliance; 80 per cent of labour laws include provisions for imprisonment. Missing a weekly floor cleaning or failing to display work hours could result in three months to 10 ten years in prison.
Onerous regulation
The excessive regulation, permission-based inspection system, and criminal penalties impose high costs on formal hiring, making low-skilled labour prohibitively expensive in a labour-rich country. A lesser-known issue is that most labour regulations apply to firms with as few as 10 workers.
A company with nine employees faces a dilemma: hiring a tenth worker would subject it to the full spectrum of labour laws, from the Factories Act, 1948 to the Sexual Harassment Act, 2013. These laws overwhelm small businesses with their volume and operational mandates.
Economists Amirapu and Gechter estimate that for firms with 9+ employees, labour regulations increase unit labour costs by an average of 35 per cent, with significant state-wise variation. Costly labour regulation incentivises firms to either hire additional workers informally or halt expansion.
Consequently, India has become a country of small enterprises, with over 95 per cent of firms employing under 10 workers.
Back to the new codes, which collapses 29 central laws into four — the Code on Wages, the Industrial Relations Code, the Occupational Safety, Health and Working Conditions Code (OSHWC), and the Code on Social Security — reducing provisions from 1,232 to 480.
For example, the OSHWC Code merges 13 laws, including the Factories Act, 1948 and Mines Act, 1952. This consolidation eliminates overlapping provisions and redundancies, such as multiple registers for employee details and working hours; employers can maintain a single electronic/manual register, simplifying record-keeping requirements. Thankfully, the most absurd micromanagement, like specifications for spittoons and paint colors, seems to have been eliminated.
The reforms rebrand inspectors as “Inspector-cum-Facilitators”, adding compliance advisory tasks to their enforcement duties. A web-based inspection system with potential randomized assignments may promote transparency.
However, without dismantling regulatory micromanagement and the old “inspector raj” system entirely, corruption will persist especially since the new codes have increased fines to deter violations, up to 20 times in some cases. One significant improvement, however, is that minor offences won’t lead to imprisonment.
The thresholds for the applicability of laws remain largely unchanged, typically affecting firms with 10 to 20 workers. A welcome exception is the Industrial Relations Code, which raises the threshold for government approval on layoffs and closures from 100 to 300 workers. This change provides flexibility, but only for hiring/firing/closures etc.; since micromanagement stems from other provisions, it fails to address the high cost of overregulation of small firms.
States’ role
States should raise labour law thresholds to drive growth and competitiveness. According to the Economic Survey (2018-2019), Rajasthan’s 2014 reform, which raised the Factories Act threshold from 10 to 20 workers, significantly boosted factory output and productivity.
The issue goes beyond regulatory minutiae, it is crucial for India’s development. Until 2030, 8–12 million young Indians will join the workforce annually. Unlike East Asia, which leveraged export-led manufacturing to absorb surplus labour from agriculture.
India bypassed this route, shifting from agriculture to services: 43 per cent of Indians in agriculture contribute 17 per cent to GDP. Manufacturing, at 13 per cent of GDP and 26 per cent of jobs, isn’t growing fast enough to absorb the surplus labour. And with cost-increasing regulations, firms remain too small to scale or generate employment. The challenge of “jobless growth” and informality persists.
High regulatory cost
While consolidating numerous labour laws into four codes is an important development, it doesn’t go far enough in tackling a fundamental obstacle to job creation and manufacturing growth: the artificially high regulatory cost of hiring low-skilled workers.
Extending similar reforms nationwide, with thresholds increased to at least 1,000 workers, could unlock scale for small enterprises, create jobs, and position India as a stronger player in global manufacturing.
Rajagopalan is a Senior Research Fellow at the Mercatus Center at George Mason University; and Shah is a researcher with India Political Economy Program at the Mercatus Center at George Mason University
