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Economists and investors have long warned that India’s onerous and byzantine labour laws are preventing the country from capitalising on its vast and youthful demographics. Attempts at reform have frequently run into political resistance. This changed late last month, when Prime Minister Narendra Modi pushed through a sweeping deregulatory package that promises to ease compliance burdens for businesses, improve flexibility, and raise security for workers across the jobs market. For a country that aspires to reach “developed nation” status by 2047, the measures mark an important step forward.
The reforms build on legislation passed in 2020 that has been stymied by opposition parties and unions. But state election victories for Modi’s coalition and US President Donald Trump’s steep tariffs on the country have provided a new impetus. The government has now introduced four new labour codes that update and consolidate 29 former laws, some of which date back to the colonial era. The rationalisation alone will be a boon for large businesses. The number of rules that govern workers is estimated to have shrunk from 1,400 to about 350, while the volume of form-filling has been slashed by over a half.
The most promise for raising India’s already fast growth rate, however, comes from three particular rule changes. The first is a change to a rule that meant companies with over 100 workers had to obtain approval to hire and fire workers, relocate or shut down. This led many industrial firms to restrict their workforce, thereby forgoing expansion. The latest reforms raise this threshold to 300.
Second, restrictions on where and when women can work have been lifted. Rules that have prevented women from working night shifts, longer hours or in certain factory roles have reinforced long-held stigmas around their role in society. At 33 per cent, India’s female labour force participation rate is more than 15 percentage points below the global average. Changes should now support more women to enter the workforce.
New regulations also seek to formalise the country’s sprawling jobs market. This includes initiatives to expand the coverage of welfare to include India’s more than 10mn gig workers and establish the right to minimum salaries. Job insecurity in India’s vast informal sector has held back savings rates and social mobility, which acts as a restraint on the country’s internal consumer market.
As with most supply-side reforms, the changes are not pain-free. Despite the streamlining, new rules — particularly the expansion of workers’ rights and a statutory wage floor — will be a notable additional cost for small and medium-sized enterprises. There is a political price too. Labour organisations are concerned that changes to rules around lay-off notifications increase the risk of redundancies. The majority of states have incorporated provisions of the reform, but there are some holdouts.
The government should hold firm and support the implementation of its measures. Any immediate costs for some businesses and workers will be more than offset by the long-run, economy-wide benefits of improved hiring incentives, lower unemployment and productivity gains.
On their own, the reforms are unlikely to deliver the sustained 7.8 per cent annual growth India needs to reach its high-income goal by the time of its independence centenary. For that, the government must pair it with land reforms, investments in education, and better infrastructure. Still, the labour law changes are significant reforms: by making better use of the country’s close to 1bn-strong working-age population, they have given India a solid foundation on which to build.
