THE issue of factor market reforms — in particular, land and labour — has been at the heart of policy debates in India for decades. In its first term, the NDA government had taken a stab at land reform. On Friday, it pushed ahead with the equally contentious labour market reform, notifying the implementation of the four labour codes, five years after they were passed by Parliament. The new codes, which replace 29 existing laws, seek to modernise labour market regulations, ease compliance burden, widen the security net for workers, including for gig and platform workers, and encourage formalisation. They also seek to boost female labour force participation and bring fixed-term employees on parity with permanent employees. This marks a welcome transition to a simpler and more predictable framework.
The complex web of labour regulations that existed till now has imposed huge costs on businesses and the wider economy. Regulations which have to do with firm size, for instance, have tended to limit the emergence of large firms, especially in labour intensive manufacturing sectors. With firms disincentivised to expand and hire more workers, it has led to too few firms scaling up — as per a study by ICRIER, a majority of firms in the manufacturing sector have less than 10 workers. This has had implications for manufacturing and formal job creation. The compliance costs of onerous regulations have also led to firms operating in the informal sector. Workers have thus remained trapped in low-productivity jobs. Alongside, the growing capital intensity of production — the India Employment Report 2024 noted that “the production process has increasingly become capital-intensive and labour-saving” — is at odds with a labour abundant economy. The reforms being carried out now should help address some of these issues.
