The Grand Bargain India Needs, Fixing a Dysfunctional Labour Regime to Boost Job Growth

The Grand Bargain India Needs, Fixing a Dysfunctional Labour Regime to Boost Job Growth

A series of worker protests in North India amid the rollout of the new labour codes has drawn attention to India’s lopsided labour regime once again. India’s labour regime offers very little protection to the vast majority of the country’s workforce that is employed in the unorganised sector. It seemingly offers very generous protection to those employed in the organised sector. Yet, enforcement of labour laws remains patchy, given the limited resources of the State.

This is not a new problem. India’s labour regime has been disjointed right from the start. The new labour codes address only a small part of the problem. What India needs, the analysis argues, is a grand bargain between citizens, firms, and the State — one that protects worker rights and eliminates regulatory micro-management at the same time.

This article examines the historical evolution of India’s labour regime, the organised-unorganised divide, the perverse consequences of the 1970s-era retrenchment laws, the impact on manufacturing, and the reforms needed to build a rational, fair labour regime for a growing democracy.

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Part I: Historical Origins – A Disjointed Regime from the Start

In the early part of the 20th century, both British administrators and Congress politicians struggled to reconcile the competing demands of a heterogeneous workforce and a diverse group of employers. A compromise was reached only at the fag end of the British Raj, when major employer groups and trade unions agreed to a contributory model of sickness insurance (involving paid sickness leave and medical benefits) for industrial workers.

Soon after Independence, the Employees State Insurance Corporation (ESIC) and the Employees Provident Fund Organisation (EPFO) were set up to offer sickness insurance and retirement planning benefits to workers in the organised sector. Workers in the unorganised sector remained outside the social safety net.

The analysis, drawing on political scientist Louise Tillin’s book Making India Work, notes that there were several attempts to devise a broader safety net centred around a universal employment insurance scheme. But they all ended in failure.

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Part II: The 1970s Turning Point – When Things Got Worse

The labour regime took a turn for the worse in the 1970s. Following industrial unrest, the Indian State made retrenchment more difficult than before, in a bid to appease trade unions. At the same time, employers were encouraged to hire more contractual workers, who could be fired more easily. The labour department was systematically starved of funds, weakening its ability to enforce labour laws.

The liberalisation of the economy in 1991 accelerated these trends. If the labour regime differed for organised and unorganised workers earlier, now it differed for workers within the organised sector. A hierarchy emerged:

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Part III: Regulatory Arbitrage – How Businesses Survived

The analysis makes a crucial observation about how large employers adapted to this dysfunctional regime:

“Most large employers in the country had to rely on regulatory arbitrage to survive and grow. Legal and compliance cells were set up specifically to deal with India’s byzantine labour laws, and find workarounds. Contractual workers were hired en masse to bypass the rigid rules governing the employment of regular workers. For small and medium enterprises, bribes to labour officials became part of the usual cost of doing business.”

The system did not protect workers. It created a parallel economy of evasion, where the law was so rigid that compliance was impossible, and so enforcement was selective and corrupt.

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Part IV: The Manufacturing Fallout – An Economic and Geopolitical Liability

This dysfunctional labour regime has hit India’s manufacturing sector the hardest. The analysis notes:

“Manufacturing’s share in the workforce and its share in the national output have stagnated for several decades. India’s weak industrial base is not just an economic liability. It is also a geopolitical constraint in a world of growing conflicts.”

Countries like Vietnam, Bangladesh, and Indonesia have gained manufacturing share at India’s expense precisely because their labour regimes offer a clearer, more predictable, and more flexible framework.

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Part V: The New Labour Codes – A Small Step

The new labour codes address only a small part of the problem. They simplify multiple overlapping legislation into a set of four well-organised codes. They offer greater flexibility to employers and recognise new kinds of work (such as platform or gig work).

The analysis is clear: “Yet, the basic structure of the existing labour regime stands.”

Large factories still need to take government permission to lay off workers (only the threshold has been raised). Contract workers are still prohibited in core activities (a provision that has been routinely flouted and is almost impossible to enforce in the modern workplace). Social security benefits still remain unequal across different categories of workers.

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Part VI: The Grand Bargain – A Proposal for Rational Labour Reform

The analysis proposes a grand bargain between citizens, firms, and the State. The core principles:

Principle 1: A Minimalist Labour Code

We need a more minimalist labour code that focuses on:

• Workplace safety

• Basic working conditions

• Effective grievance redressals

These norms should apply to all firms, regardless of their size, and to all workers, regardless of the nature of their contracts.

Principle 2: End the Hierarchy of Protection

The unspoken hierarchy in the labour market — with different levels of social protection for organised regular workers, organised contractual workers, gig workers, and unorganised workers — must end.

Principle 3: Universal Unemployment Insurance

Instead of a lopsided social security setup, we need a universal unemployment insurance mechanism. This would serve two purposes:

Principle 4: Transparent, Predictable Minimum Wages

Minimum wages (and annual increments) should be based on a transparent and predictable formula. This would:

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Part VII: Why This Matters – Democracy and Capitalism

The analysis ends with a fundamental argument about the relationship between economic growth and political legitimacy:

“If Indian capitalism has to grow while India remains a democracy, we must build a rational, fair labour regime.”

India cannot become a developed economy (Viksit Bharat by 2047) with a labour regime designed in the 1940s and distorted in the 1970s. The worker protests over the new labour codes are a symptom. The disease is a system that protects few, excludes many, and deters the investment India desperately needs.

The grand bargain is not easy. It requires trade unions to accept that the old model of rigid protections for a shrinking minority is unsustainable. It requires employers to accept that a universal safety net is not a cost but a public good. It requires the State to enforce basic norms equally, not selectively.

But without it, the analysis warns, India’s weak industrial base will remain both an economic liability and a geopolitical constraint.

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5 Questions & Answers (Q&A) for Examinations and Debates

Q1. According to the analysis, what are the key features of India’s “lopsided labour regime,” and how does it treat organised versus unorganised workers differently?

A1. India’s labour regime is described as “lopsided” because it offers very little protection to the vast majority of workers in the unorganised sector while seemingly offering very generous protection to those in the organised sector. However, enforcement remains patchy due to limited state resources.

The analysis notes that over time, a hierarchy emerged even within the organised sector between regular workers (high protection on paper), contractual workers (low protection), and gig workers (very low protection). This disjointed regime originated in the British Raj, was institutionalised after Independence with ESIC and EPFO, and worsened in the 1970s when retrenchment was made more difficult while contractual hiring was encouraged.

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Q2. How did the 1970s-era labour policies create perverse incentives for employers, and what were the consequences?

A2. Following industrial unrest in the 1970s, the Indian State made retrenchment more difficult than before to appease trade unions. At the same time, employers were encouraged to hire more contractual workers who could be fired more easily. The labour department was systematically starved of funds, weakening enforcement.

Consequences for employers:

The analysis concludes that most large employers had to rely on regulatory arbitrage to survive and grow, and that the system created a parallel economy of evasion where the law was so rigid that compliance was impossible and enforcement was selective and corrupt.

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Q3. What impact has the dysfunctional labour regime had on India’s manufacturing sector, and why is this described as both an economic and geopolitical liability?

A3. The analysis states that manufacturing’s share in the workforce and its share in national output have stagnated for several decades.

Economic liability:

Geopolitical liability:

The analysis argues that India’s weak industrial base is “not just an economic liability. It is also a geopolitical constraint in a world of growing conflicts.”

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Q4. What are the limitations of the new labour codes according to the analysis, and what structural problems remain unaddressed?

A4. The new labour codes simplify multiple overlapping legislation into a set of four well-organised codes. They offer greater flexibility to employers and recognise new kinds of work (such as platform or gig work). However, the analysis argues they address only a small part of the problem.

What the codes do:

• Simplify 30+ laws into 4 codes

• Recognise gig and platform work (on paper)

• Raise the threshold for government permission for layoffs

What remains unaddressed:

The analysis concludes that “the basic structure of the existing labour regime stands.”

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Q5. What is the “grand bargain” proposed in the analysis, and what are its four key principles?

A5. The analysis proposes a “grand bargain” between citizens, firms, and the State that protects worker rights and eliminates regulatory micro-management at the same time.

The four key principles:

The core argument: “If Indian capitalism has to grow while India remains a democracy, we must build a rational, fair labour regime.” The current regime deters formal manufacturing, encourages evasion and corruption, and leaves most workers unprotected. A grand bargain would formalise the economy, create jobs, and restore legitimacy to the labour system.