Why India’s New Labour Codes May Not Significantly Impact Labour Market Regulation and Ease of Doing Business

India’s new labour codes—consolidating 29 laws into four codes—are seen as a monumental reform. However, even with full implementation, these changes may not significantly improve labour market regulation or boost India’s standing in the World Bank's Ease of Doing Business Index. Here's why, backed by data, legal analysis, and international case studies.

India’s Labour Market Data: India’s labour force is overwhelmingly informal, with over 90% of workers in the unorganized sector . According to the International Labour Organization (ILO), this informal economy accounts for more than 80% of India’s total employment . The new labour codes, such as the Code on Wages, focus primarily on formal sector workers, missing the majority of India’s workforce, which remains unregulated.

While the Code on Social Security attempts to extend protections to gig and platform workers, it lacks a comprehensive enforcement mechanism. Moreover, the Niti Aayog estimates that the number of gig workers will rise to over 23 million by 2030 . These workers often fall outside the formal protections provided by traditional labour laws, which poses a challenge for ensuring social security and fair wages.

International Comparison: Countries like Germany and South Korea have formalized a significant portion of their labour markets through a mix of regulatory incentives and worker protection schemes. South Korea's Basic Labor Act allows flexibility in hiring but mandates comprehensive worker benefits, which India’s reforms fail to match .

2. Compliance Costs and the Burden on Small Businesses

Impact on MSMEs: India’s MSME sector—responsible for 30% of the country’s GDP and employing 110 million people—faces complex compliance issues. According to a 2020 survey by the Federation of Indian Chambers of Commerce & Industry (FICCI), small businesses find compliance with labour regulations burdensome even after the consolidation of laws . While the Industrial Relations Code simplifies some processes for smaller businesses, its reach is limited, and state-level variations create additional complexity.

Legal Complexity: The Code on Wages creates a national floor wage, but states can still set varying minimum wages. This inconsistency increases compliance costs, particularly for businesses operating in multiple states . A 2020 study by the All India Manufacturers Organization (AIMO) reported that 46% of small and medium-sized enterprises (SMEs) continue to find compliance costly and difficult to navigate .

International Example: Singapore, ranked 2nd in the World Bank’s Ease of Doing Business Index, offers a single window for compliance, integrating labour laws with taxation and social security systems. India's fragmented compliance structure, even with the new codes, still contrasts sharply with such integrated models .

3. Weak Enforcement Mechanisms and Corruption Concerns

Despite the reform, enforcement remains a weak link in India’s labour regulation. The Occupational Safety, Health, and Working Conditions Code mandates basic safety standards, but enforcement is weak in smaller factories and informal sectors . The Centre for Monitoring Indian Economy (CMIE) found in a 2019 report that around 65% of non-compliance in safety norms occurs in industries with limited regulatory oversight .

ILO’s View on Enforcement: According to the ILO’s 2018 report on labour law enforcement, India ranks low on enforcement compared to other developing economies. Countries like Vietnam and Malaysia have made significant improvements by adopting digital tools for monitoring compliance .

4. Impact on the Ease of Doing Business Index

India’s improvement in the World Bank's Ease of Doing Business Index, from 142nd in 2014 to 63rd in 2020, was driven by improvements in starting a business, access to credit, and resolving insolvency . Labour market regulation, however, is only a small part of the index. Even with these reforms, other factors—such as enforcement of contracts, land acquisition laws, and infrastructure bottlenecks—continue to drag down India's overall business environment.

Global Practices: Countries like New Zealand and Denmark, both of which rank in the top 10 in the index, combine labour flexibility with strong social protections, offering models of success. New Zealand's Employment Relations Act ensures worker rights while maintaining ease for businesses to hire and fire based on economic needs .

5. Worker Protections and Social Security

Dilution of Worker Protections: The new labour codes, particularly the Industrial Relations Code, have drawn criticism for reducing protections for workers. Section 77 of the code makes it harder to form unions and conduct strikes . According to a report by the International Trade Union Confederation (ITUC), these changes significantly weaken the position of workers in labour-intensive sectors such as textiles and construction .

Even with the introduction of the Code on Social Security, which extends some benefits to gig workers, enforcement remains vague. Countries like France offer comprehensive social security coverage funded through taxes on employers, something India lacks . This gap could result in further marginalization of vulnerable workers, especially in low-wage sectors.

Industry Examples: In 2020, the automotive industry, a significant contributor to India’s GDP, saw labour unrest with strikes at companies like Honda and General Motors due to contract worker exploitation . The new codes, which make layoffs easier, could exacerbate tensions in industries that rely heavily on contract and temporary labour.

Conclusion

India’s new labour codes represent an attempt to modernize an outdated regulatory system. However, the deep-rooted structural challenges in the labour market—such as high informality, weak enforcement, and state-level legal complexities—mean that the expected improvements in both labour regulation and ease of doing business are likely to be limited.

To see meaningful change, these reforms must be part of a larger, more holistic approach. This includes improved enforcement, clearer regulations across states, and stronger social security systems. International models show that successful labour market reforms require both flexibility for businesses and comprehensive protections for workers. Without this balance, India’s new labour codes may fall short of their transformative potential.

References:

International Labour Organization. (2019). "India’s Informal Workforce."

ILO. (2020). "Informality in India: Policy Solutions for Formalization."

Niti Aayog. (2021). "India’s Gig Economy Report."

OECD. (2019). "South Korea’s Labour Market Flexibility."

Federation of Indian Chambers of Commerce & Industry. (2020). "Impact of Labour Codes on MSMEs."

Indian Ministry of Labour. (2021). "Code on Wages Overview."

All India Manufacturers Organization. (2020). "Labour Compliance and MSME Burden Study."

World Bank. (2020). "Ease of Doing Business Report: Singapore Case Study."

Centre for Monitoring Indian Economy. (2019). "Occupational Safety Compliance in India."

CMIE. (2020). "Labour Law Enforcement in Indian Factories."

ILO. (2018). "Labour Law Enforcement in Southeast Asia."

World Bank. (2020). "Ease of Doing Business Rankings."

New Zealand Government. (2021). "Employment Relations Act."

Industrial Relations Code, India. (2020). "Section 77 Provisions."

International Trade Union Confederation. (2021). "Labour Reforms and Worker Rights in India."

OECD. (2020). "Social Security Systems: A Global Comparison."

Economic Times. (2020). "Labour Unrest in India’s Auto Sector."