The Formalisation Illusion, Why India’s New Labour Codes May Not Deliver on Their Promise
As the Government Projects 77 Lakh New Jobs and 75.5% Formalisation, Critics Warn That Loosening Protections Could Leave Workers More Precarious Than Before
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 per cent to 75.5 per cent, generate 77 lakh jobs, reduce unemployment, boost female labour force participation, and contribute 1.25 per cent to GDP by 2029-30. These projections assume that simplifying compliance for firms will incentivise formalisation and expand registered employment.
But beneath the confident projections lies a more complex and troubling reality. Over 80 per cent of India’s workers are in the informal sector, and they remain outside most of the labour code protections. The scale of informality is not shrinking; it is increasing. Firms, when given flexibility, tend to respond by shifting away from formal employment. And the new codes, by raising thresholds for protections and expanding fixed-term employment, may accelerate this trend rather than reversing it.
The Shrinking Organised Sector
The data paints a stark picture. Between 2011 and 2023, direct factory employment fell from 61 per cent to 47 per cent of the workforce. Over the same period, contract workers grew to 42 per cent 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, according to the Public Enterprises Survey 2025.
The organised sector, once associated with stable employment, is shrinking in India. This is not a cyclical fluctuation but a structural shift. Firms are finding ways to employ workers without creating permanent employment relationships. They are outsourcing, contracting, and using temporary labour to meet their needs while avoiding the obligations that come with formal employment.
The new labour codes accelerate this shift by loosening regulatory definitions and protections, making it even easier for firms to avoid permanent employment relationships. 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). It increases the contract labour threshold from 20 to 50 workers. It raises the threshold for prior approval for lay-offs from 100 to 300 workers.
Each of these changes makes it easier for firms to operate without the regulatory oversight that was designed to protect workers. A factory with 19 workers and power is no longer a factory under the new definition. It can operate without the safety and health regulations that apply to larger establishments. Contract labour becomes easier to use, and lay-offs become easier to execute.
The Fixed-Term Employment Experiment
The government expects these codes to increase formalisation largely through expanding “fixed-term employment”—letting firms hire on short-term contracts instead of permanent jobs. The logic is that if firms can hire flexibly, they will hire more people, and those people will at least have some form of formal recognition.
But this logic conflates formalisation with job security. Formal employment has historically meant job security, regular wages, social security, and the ability to bargain collectively. Fixed-term employment offers some benefits under the codes—appointment letters and equal gratuity after one year—but it undermines the key feature that distinguishes formal work from precarious work: job security.
A worker on a fixed-term contract knows that their employment will end on a predetermined date. They cannot plan for the long term. They cannot make commitments that require stable income. They are perpetually vulnerable, moving from one short contract to the next, never knowing when the chain will break.
This is not formalisation in any meaningful sense. It is the extension of informal precariousness into the formal sector. It is the erosion of the protections that generations of workers fought to establish.
The Gig Economy Loophole
The codes also address the growing gig economy, but in ways that leave critical questions unanswered. Platform companies are required to contribute 1-2 per cent of annual turnover for gig worker schemes. But the rules on how companies must contribute, benefit levels, coverage, and claim details are all left to be “notified through subsequent schemes.”
This is not regulation; it is regulation deferred. The government collects the contribution, but workers have no clarity on what they will receive, when they will receive it, or how to access it. Like India’s many cess and welfare funds, collection may happen, but utilisation may lag perpetually. Funds accumulate in government accounts while workers continue to struggle.
The reskilling fund for retrenched workers follows the same pattern. Employers must deposit 15 days’ wages per worker. But how to access these funds, who provides training, and what skills are taught are unspecified. The mechanism exists on paper; whether it exists in practice remains to be seen.
The Minimum Wage Question
The Code on Wages creates a National Floor Wage and a National Minimum Wage but offers no clear methodology for setting either or how they will differ. The new rules make space for greater administrative discretion instead of transparent, evidence-based determination.
Defenders of flexible labour markets often argue that minimum wages destroy jobs. The logic is straightforward: if you force employers to pay more than market rates, they will hire fewer workers. This argument has intuitive appeal and has been used for decades to resist minimum wage increases.
But decades of empirical research have shown that the job loss predictions consistently fail to materialise. Studies by economists like Arindrajit Dube and others have demonstrated that moderate minimum wage increases do not reduce employment. Higher wages reduce turnover costs for firms, as workers are less likely to leave when paid decently. And when low-paid workers get raises, they spend more on food, transport, housing, and goods. This increased consumption boosts aggregate demand, creating jobs in other sectors.
In labour markets where employers often have substantial power to set wages below competitive levels, minimum wages actually improve efficiency by reducing employer exploitation. They ensure that workers receive a fair share of the value they create, rather than having it captured by employers with market power.
The Inspector-Cum-Facilitator Contradiction
The rebranding of labour inspectors as “Inspector-cum-Facilitators” might sound progressive. The idea is that inspectors should help employers comply with regulations rather than simply punish violations. This approach has been tried in other contexts and can work when combined with strong enforcement mechanisms.
But the Indian implementation raises serious concerns. 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 becomes a rational business decision.
This is particularly damaging in the informal sector. In the absence of unions, labour courts, or workers’ awareness of their rights, labour inspectors could have been the only channel for redressal. Converting them to facilitators eliminates even this minimal accountability. Workers who are underpaid or exploited have nowhere to turn.
The Structural Profitability of Informality
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. It is that informality is structurally profitable. Firms that operate outside the formal system can avoid taxes, evade labour protections, and externalise costs onto workers and society.
While technology is automating routine jobs, the new platform jobs it is creating are bypassing employment relationships entirely. Gig workers are not employees; they are “partners” or “independent contractors.” They have no job security, no social security, and no collective bargaining rights. The platform economy is not creating formal employment; it is creating a new form of informal work mediated by apps.
The optimistic projections of the Economic Survey rest on assumptions that contradict many 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 not create better jobs if firms respond by replacing permanent workers with contract workers.
The Numbers May Come, But at What Cost?
The projections may eventually materialise—higher formalisation percentages, more registered workers, increased GDP contribution. But these numbers will measure changes in how firms account for workers, not improvements in how workers actually live.
A worker on a fixed-term contract is counted as formal, but they have no job security. A worker whose factory falls below the new threshold is no longer protected by safety regulations, but they are still counted in formal employment statistics. A gig worker with contributions to a welfare fund they cannot access is formally recognised, but their daily life remains precarious.
The labour codes represent a choice: to prioritise flexibility over security, to privilege employer convenience over worker protection, to measure success by accounting changes rather than lived experience. Whether that choice delivers the promised benefits remains to be seen. But the early signs are not encouraging.
Q&A: Unpacking India’s New Labour Codes
Q1: What are the key projections for the new labour codes?
A: The Economic Survey 2025-26 projects that the new labour codes will increase formalisation from 60.4% to 75.5%, generate 77 lakh new 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.
Q2: What evidence suggests that the organised sector is shrinking rather than growing?
A: Between 2011 and 2023, direct factory employment fell from 61% to 47% of the workforce, while contract workers grew to 42%. 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 new codes raise thresholds for protections—the definition of “factory” increases from 10 to 20 workers (with power), contract labour threshold rises from 20 to 50 workers, and lay-off approval threshold increases from 100 to 300 workers—making it easier to avoid permanent employment relationships.
Q3: What is “fixed-term employment” and why is it controversial?
A: Fixed-term employment allows firms to hire on short-term contracts instead of permanent jobs. It offers some benefits under the codes (appointment letters, equal gratuity after one year) but undermines job security—the key feature distinguishing formal from precarious work. Workers on fixed-term contracts know their employment will end on a predetermined date, cannot plan long-term, and remain perpetually vulnerable. Critics argue this extends informal precariousness into the formal sector rather than creating genuine formalisation.
Q4: How do the codes address the gig economy, and what concerns remain?
A: Platform companies must contribute 1-2% of annual turnover for gig worker schemes. However, rules on contribution methods, benefit levels, coverage, and claim details are left to be “notified through subsequent schemes.” Critics worry this mirrors India’s history of welfare funds where collection occurs but utilisation lags. Similarly, a reskilling fund for retrenched workers requires employers to deposit 15 days’ wages per worker, but access mechanisms, training providers, and curriculum are unspecified—creating a scheme that exists on paper but may not function in practice.
Q5: What is the “Inspector-cum-Facilitator” concept, and why is it problematic?
A: Labour inspectors have been rebranded as “Inspector-cum-Facilitators” to help employers comply rather than simply punish violations. However, the codes also allow employers to compound serious violations like wage theft by paying prescribed fines. If penalties are lower than compliance costs, breaking the law becomes rational. In the informal sector, where unions, labour courts, and worker awareness are absent, labour inspectors were often the only channel for redressal. Converting them to facilitators eliminates even this minimal accountability, weakening enforcement precisely where it is most needed.
