Myth Of Formalisation: Economic Survey Projections And Governance Challenges In India's Labour Codes

India's new labour codes have been promoted as reforms with the potential to bring major change whose draft rule was issued in December 2025. The Economic Survey 2025–26 presents an optimistic outlook: the codes are expected to raise formalisation from 60.4% to 75.5%, create 77 lakh jobs, lower unemployment, increase female labour force participation, and add 1.25% to GDP by 2029–30. These projections are based on the assumption that simplifying compliance for firms will encourage formalisation and expand registered employment.

However, more than 80% of India's workforce remains in the informal sector and continues to be excluded from most protections under the labour codes. Informality is not declining but growing. When given greater flexibility, firms tend to move away from formal employment. Between 2011 and 2023, direct factory employment dropped from 61% to 47%, while contract workers rose to 42% of the factory workforce. In central public sector enterprises, regular employment fell by 30,000 workers in 2024 alone, replaced by casual and contract labour, according to the Public Enterprises Survey 2025. The organised sector, once linked with stable jobs, is shrinking, and the new codes are accelerating this trend by easing definitions and protections, making it simpler for firms to avoid permanent employment relationships.

The Formalization Paradox

A notable aspect of the codes is that they respond to informality by increasing thresholds for protections. The Occupational Safety, Health and Working Conditions Code raises the definition of a “factory” from 10 to 20 workers (with power) and from 20 to 40 (without power). It also increases the contract labour threshold from 20 to 50 workers and raises the threshold for prior approval for layoffs from 100 to 300 workers. The new regulations also adjust the contract labour threshold, raising it from 20 to 50 workers. Furthermore, the requirement for prior approval before layoffs now kicks in at 300 workers, up from the previous 100. Despite these changes, the government anticipates an increase in formal employment. This is expected to happen primarily by expanding fixed-term employment. This allows companies to bring on workers for short-term contracts rather than offering permanent positions. Historically, formal employment has been associated with job security, regular pay, access to social security, and the possibility of collective bargaining. Although fixed-term employment under the new regulations offers some advantages, such as appointment letters and equal gratuity after a year, it undermines the core element of formal work, which is job security. This change brings it closer to the characteristics of precarious employment. of formal work and job security, making it closer to precarious employment.

Implementation Gaps

The codes require platform companies to contribute 1%–2% of their annual turnover towards schemes for gig workers, but details about contributions, benefits, coverage, and claims are left to be specified later through separate schemes. Similarly, the reskilling fund for retrenched workers mandates employers to deposit 15 days' wages per worker, but does not clarify access mechanisms, training providers, or the nature of skills to be taught. As with many existing cess-based welfare funds in India, funds may be collected without being effectively utilised.

The Code on Wages introduces a National Floor Wage and a National Minimum Wage but does not clearly define how either will be calculated or differentiated, leaving room for administrative discretion. While critics of flexible labour markets argue that minimum wages reduce employment by forcing firms to pay above market rates, extensive empirical evidence shows that such job losses generally do not occur. Higher wages can reduce employee turnover costs for firms, and increased earnings among low-paid workers boost spending on essentials like food, transport, and housing, thereby strengthening overall demand. In labour markets where employers often have the power to suppress wages below competitive levels, minimum wages can improve efficiency by limiting exploitation.

The renaming of labour inspectors as “Inspector-cum-Facilitators” may appear progressive, but it risks weakening enforcement. When inspectors focus on assisting compliance rather than enforcing rules, oversight declines. This is further reinforced by provisions that allow employers to settle serious violations, such as wage theft or unpaid overtime, by paying fines. If penalties are lower than the cost of compliance, breaking the law can become a rational choice for businesses. This is especially harmful in the informal sector, where workers lack unions, legal recourse, or awareness of their rights. In such conditions, labour inspectors could have been a critical channel for redress, and transforming them into facilitators reduces even this limited accountability.

Structural Assumptions

The labour codes do not address the underlying drivers of informality. The issue is not merely that regulations are too complex, but that informality is structurally more profitable for firms. As technology automates routine jobs, the platform-based work it generates often bypasses traditional employment relationships altogether.

The optimistic projections in the Economic Survey rely on assumptions that conflict with existing labour market realities. Increasing flexibility in formal jobs will not lead to genuine formalisation as long as informal arrangements remain cheaper and more advantageous. Lower compliance costs will not necessarily improve job quality if firms respond by replacing permanent workers with contract labour. While the projected numbers such as higher formalisation rates may eventually appear, they are likely to reflect changes in how employment is classified rather than real improvements in workers' living conditions.

Author is law student at Guru Gobind Singh Indraprastha University, Delhi. Views are personal.