India’s Economic Survey 2025–26 has presented an optimistic outlook on the impact of the country’s new labour codes, describing them as reforms with the potential to transform the labour market.

According to the Survey, the labour codes could:

• Increase formal employment from 60.4 percent to 75.5 percent
• Generate around 77 lakh new jobs
• Reduce unemployment levels
• Boost female labour force participation
• Contribute nearly 1.25 percent to India’s GDP by 2029–30

These projections are based on the assumption that simplified regulations and compliance requirements for businesses will encourage firms to expand formal employment.

Draft Labour Rules Released in December 2025

The government released draft central rules for the new labour codes in December 2025, marking a significant step toward implementing the reforms.

India’s labour reform programme consolidates numerous older labour laws into four major labour codes:

• Code on Wages
• Industrial Relations Code
• Social Security Code
• Occupational Safety, Health and Working Conditions Code

The goal of these reforms is to simplify labour regulations, reduce compliance complexity and improve the ease of doing business.

Formalisation Seen as Key Economic Driver

The Economic Survey argues that increasing the share of formal employment could strengthen India’s economic growth.

Formal jobs generally provide:

• Stable wages
• Social security benefits
• Legal employment protections

Higher levels of formalisation could also expand the tax base and improve labour productivity, both of which are considered important for sustained economic development.

The government believes that simpler compliance rules will encourage companies to register workers formally rather than rely on informal labour.

Informal Sector Still Dominates Workforce

Despite these expectations, India’s labour market continues to be heavily dominated by informal employment.

More than 80 percent of workers in India are part of the informal sector, according to recent estimates.

These workers typically lack:

• Formal contracts
• Job security
• Social security benefits such as pensions or insurance

Because many informal workers operate outside official regulatory systems, they remain outside the protection of most labour regulations.

Concerns About Growing Informality

Some economists and labour experts have raised concerns that the scale of informality in India is actually increasing rather than shrinking.

They argue that giving companies greater flexibility in hiring and firing may encourage firms to rely more heavily on temporary and contract workers instead of permanent employees.

Evidence from recent years suggests this trend may already be underway.

Decline in Direct Factory Employment

Data from the manufacturing sector indicates that direct factory employment has declined significantly over the past decade.

Between 2011 and 2023, the share of direct employees in factories dropped from 61 percent to 47 percent.

At the same time, contract workers have expanded rapidly, accounting for around 42 percent of the factory workforce.

This shift reflects a broader trend where companies increasingly prefer outsourced or contract labour arrangements.

Changes in Public Sector Employment

Similar patterns are visible even in the public sector, which traditionally offered more stable employment.

According to the Public Enterprises Survey 2025, regular employment in central public sector enterprises declined by about 30,000 workers in 2024 alone.

Many of these positions were replaced by casual or contract workers, reflecting a growing shift toward more flexible employment models.

This suggests that even the organised sector is experiencing structural changes in employment patterns.

Debate Over Impact of Labour Codes

The new labour codes have therefore become the subject of an ongoing debate among policymakers, economists and labour organisations.

Supporters argue that the reforms will:

• Reduce bureaucratic hurdles for businesses
• Encourage investment and expansion
• Improve employment opportunities

Critics, however, worry that loosening regulatory definitions and protections may make it easier for firms to avoid long term employment relationships.

This could potentially weaken job security for workers, even if overall employment numbers increase.

Female Labour Participation Expectations

One of the key goals highlighted in the Economic Survey is increasing female labour force participation.

India has historically faced challenges in this area, with female workforce participation rates lower than many comparable economies.

The Survey suggests that labour reforms could help address barriers by:

• Simplifying employment regulations
• Improving workplace conditions
• Expanding formal employment opportunities

Higher female participation could significantly boost economic productivity and household incomes.

Long Term Impact on Economic Growth

The Economic Survey estimates that successful implementation of the labour codes could contribute around 1.25 percent to India’s GDP by 2029–30.

This projection reflects expected gains from:

• Greater workforce participation
• Higher productivity
• Increased formalisation of businesses

However, the actual impact will depend on how firms, workers and governments adapt to the new regulatory framework.

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