Opinion Bridging the ‘missing middle’: How the new Labour Codes can transform enterprise growth in India
They move India closer to a labour market that is organised around clarity, efficiency and competitiveness rather than inherited complexity. For firms looking to expand and for workers seeking predictable conditions, that shift creates a more confident and more functional economic landscape
The Codes move India closer to a labour market that is organised around clarity, efficiency and competitiveness rather than inherited complexity. (File Photo) 
India’s new Labour Codes replace a patchwork of statutes that had accumulated without design or coordination. Earlier, firms navigated 29 separate laws that defined wages, working conditions, and employment categories in inconsistent ways. The consolidation into four Codes brings a degree of order that the system had lacked for decades. Some of the immediate changes are straightforward: Uniform definitions across states, written appointment letters for all workers, clearer rules for timely wage payments, recognition of gig and platform workers, updated health and safety standards, and a simplified national compliance structure. These shifts close obvious gaps. However, the deeper significance of the Codes lies not in the individual clauses themselves, but in how they reshape the operating environment for firms and entrepreneurs.
The earlier regulatory regime often acted like a tax on scale. Ambiguous definitions, overlapping thresholds, and state-level variations created uncertainty that firms had to price into every decision. Entrepreneurs planning to expand operations frequently found that entering a new state meant relearning compliance from scratch. Ambiguity became a deterrent. In many sectors, especially manufacturing and logistics, firms deliberately stayed small to avoid triggering additional obligations. This produced the classic “missing middle” problem economists often highlight: Too few mid-sized enterprises and too many firms that never grow beyond a small, informal footprint. The new Codes address this structural issue by creating a more predictable set of rules. With uniform definitions and a single system of registration and returns, expansion no longer requires renegotiating the regulatory landscape every time a firm crosses state borders.
This improvement directly strengthens the ease of doing business. A country’s regulatory quality is not measured only by headline reforms but by the everyday predictability of the rules. When firms understand their obligations without extensive legal interpretation, compliance becomes routine. That predictability shapes investment decisions more than incentives or subsidies ever can. Entrepreneurs respond strongly to environments where the risk of accidental non-compliance is low. By reducing that risk, the Codes enhance the overall business climate’s credibility.
From an economic perspective, the shift also alters incentives in favour of formal employment. Appointment letters, clearer wage obligations, and harmonised categories reduce the grey zones that previously allowed informal employment relationships to persist. Formalisation raises productivity over time. Workers with documented contracts and predictable pay cycles tend to remain longer, develop skills more consistently, and invest in their own mobility. Firms, in turn, benefit from lower turnover and better workforce planning. These changes improve labour-market efficiency, not through coercion, but through a more organised institutional environment.
The recognition of gig and platform workers also fits into this logic. India’s labour market has evolved more rapidly than its laws. A significant share of urban services now operates through platform-mediated work, which did not fit existing legal categories. By acknowledging these workers and opening pathways to social protection, the Codes reduce the disconnect between the structure of work and the structure of regulation. This brings India in line with the direction many OECD economies are moving in. A labour market that recognises new forms of work is better equipped to sustain innovation.
Women’s participation also benefits from this realignment. Restrictions on night work had long prevented women from accessing a wider range of roles. Allowing participation with proper safety arrangements creates a more inclusive labour supply. Economies that sustain high female labour-force participation tend to be more resilient, more diversified, and more productive.
The Codes also reflect standard economic insights about transaction costs. When the cost of understanding or complying with rules is high, firms rationally underinvest. They avoid hiring, delay expansion, and sometimes shift activity away from formal channels. Lowering transaction costs through clearer rules and simpler procedures unlocks latent growth by reducing the shadow tax that uncertainty imposes. The new compliance architecture operates on this principle. A single licence, a single national return, and streamlined registration reduce administrative friction, which is often more damaging than taxation in shaping business behaviour.
The broader lesson from economics is that institutions matter. Labour regulation is part of a country’s institutional infrastructure. When it is fragmented, opaque, or unevenly enforced, firms behave cautiously, sometimes defensively. When it is coherent and predictable, they behave more ambitiously. The Labour Codes signal a shift towards institutional coherence. They reduce interpretive fog, realign incentives, and lower avoidable frictions. None of these changes guarantees faster growth on its own, but together they create conditions in which growth is easier to realise.
The reform still depends on strong implementation. States must align rules, digital systems must function smoothly, and inspectors must enforce without improvisation. The design gives India a cleaner, more contemporary labour framework, but only consistent administration will allow the benefits to fully emerge.
Even with these caveats, the Codes represent a meaningful rebalancing. They modernise the regulatory foundation, support formalisation, reduce uncertainty, and strengthen the environment in which entrepreneurs operate. They move India closer to a labour market that is organised around clarity, efficiency, and competitiveness rather than inherited complexity. For firms looking to expand and for workers seeking predictable conditions, that shift creates a more confident and more functional economic landscape. Under the leadership of Prime Minister Narendra Modi, these Labour Codes mark a significant step towards building a Viksit Bharat 2047, laying the institutional foundation for a prosperous, inclusive, and competitive economy that empowers both workers and entrepreneurs alike.
The writer is part-time member, EAC-PM, and a professor of Finance. Views are personal
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