November 21, 2025, marks a defining moment for Indian economy. For a predominantly labour-intensive economy, characterised by the presence of a large informal sector, implementation of new labour codes can usher a paradigm shift as powerful as GST reforms or even the liberalisation itself.
The Government of India is guided by the vision of Viksit Bharat @2047 of the Prime Minister. Labour codes lay the foundation for a protected, future-ready workforce and resilient industries, boosting employment and driving labour reforms for Aatmanirbhar Bharat.
Indian employment scenario has taken a major boost in the recent years. As per the Periodic Labour Force Survey (PLFS) Annual Report 2023–2024, the hitherto stagnant labour force participation rate (LFPR) for persons of age 15 years and above has reached 60.1 per cent during July 2023-June 2024 riding on the remarkable jump in the female LFPR which is now pegged at 41.7 per cent. There is also a rise in employment, with a net addition of 16.83 crore jobs over six years (2017-18 to 2023-24) coupled with unemployment rate (UR) at 3.2 per cent.
The same period is also marked by the significant rise in the number of registered MSMEs. Udyam Registration Portal for online, voluntary registration of MSMEs was launched on July 1, 2020, with the revised definition of MSME, based on dual criteria of investment and turnover. The PAN based registration created an entitlement for MSMEs to facilitate access to the schemes run my ministry of MSME and other Central ministries and departments. Recognising the presence of large number of informal micro enterprises, the Udyam Assist Platform (UAP) was launched on January 11, 2023, to onboard those enterprises which are below the GST threshold. As on November 29, 2025, more than 7.22 crore MSME registered on the URN and UAP, together, with self-reported employment of around 32 crores. With 99 per cent micro-enterprises, the MSME sector is characterised by the traits of informality. It has been a consistent endeavour of the government to address this informality gap by facilitating access to MSMEs to formal credit and finance, domestic and international markets and help them adopt newer technologies while upskilling the workforce through industrial training thereby positioning the MSMEs in the global value chain.
Labour Codes and Formalisation Gap: Informality has been a defining character of Indian economy. The informal or unorganized sector as they are loosely addressed interchangeably can be defined as informality of the enterprise on one hand and type and character of employment on the other hand. The unincorporated non-agricultural sector with total estimate of 7.34 crore establishment, reported by ASUSE survey 2023-24 draws a parallel with the informality captured under Udyam Registration framework.
The adoption of new age labour codes has to be seen in this two-way context of addressing the informality and enhancing productivity of the MSME ecosystem.
There is no denying that despite being the largest employment provider in the non-farm sector, most MSMEs are not necessarily the preferred employers for they don’t offer well defined employment conditions. Labour codes change this scenario with provisions like universal minimum wages, compulsory employment letter and timely wages. This directly serves for the formalisation at enterprise level. At the same time, MSMEs in particular can be most benefitted by recognition of fixed term employment as formal engagement which gives them flexibility to employ as per their need without burdening them with unproductive overhead cost. It promotes direct hiring over contractual one.
Reducing the Cost of Compliance: The government, in the recent years, has been working on focused and targeted interventions towards deregulation and reducing the cost of compliance. The labour codes completely align with this agenda. Multiplicity of laws leads to difficulty in compliance. It also necessitates multiplicity of authorities in different labour laws leading to complexity and difficulty in enforcement. Labour codes provide for simplified registration and licensing and compliance framework through single registration, single licence, and single return. This is no less than a masterstroke compared to a century old plethora of labour laws requiring dozens of registrations, licenses and returns for small and big enterprises alike. The simplification, harmonisation and rationalisation of regulatory framework through compounding and decriminalisation is particularly gratifying for MSMEs who, more often than not are victims of incapacity to comply. The digital architecture put in place is also encouraging and provides for transparency and sustainability.
Forward-looking Reforms: The artificial floor-level thresholds have been done away with in Code on Wages and Enterprises below the mandatory threshold have been encouraged to participate in social security of their workers. The majority of MSME registered on Udyam Registration Portal are below the EPFO and ESIC threshold. Hence the immediate concern of everyone feeling the pinch of additional wage bill is largely unfounded. Yet, the expansion of ESIC to all over India and the encouraging stance of labour codes for blow threshold enterprises to join the social security regime is a call for responsible employer culture. Additionally, with the upward revision of threshold for lay-off/retrenchment/closure in industrial relations code, every perverse incentive to remain small has been thus nullified in the labour codes. A direct hire including through FTE is more attuned to the organisational goals and can also encourage employer to be more amenable to invest in her capacity development and training thereby increasing the overall productivity of the ecosystem. The immediately apparent cost of gratuity and other social security benefits for FTE can be offset by the reduced cost of contractual hiring including the saving on GST.
The labour codes are a big shout out to the growing women workforce in India. A majority of the informal micro enterprises registered on Udyam Assist Platform comprise women. These women, largely work alone in a barely supporting ecosystem. The employment conditions in the formal set up have so far been unfavourably tilted. The codes provide for a decisive course correction through specific provisions related to employment agreement while correcting the gender balance in fundamental concepts of definition of family, provision for creche and rest rooms and supporting the specific entitlements for maternity benefit and work life balance.
Way Forward: Reforms in labour laws are an ongoing process. The government continuously works to modernise and streamline the legislative framework in line with the evolving economic and industrial landscape of the country. Labour codes are forward looking reforms that aim to modernising the regulatory framework and align it with today’s economic realities and technological advancements.
Seen from both short-term and long-term lens the reforms have the potential to be a win-win proposition for employee and employer alike. Having said that, it is also to recognise the limited capacity of majority of MSMEs to comprehend the repercussions of these codes. The ministry of labour and employment is engaging with stakeholders’ consultation including with MSMEs. It is important to have continuous dialogue to dispel any doubts and misgivings about the provisions in the labour codes, and develop tools such as FAQs, illustrative digital and AI enabled tools that can help MSMEs traverse through the new provisions. MSMEs particularly will require handholding to navigate through technical issues like restructuring of wages, terms of FTE, and new compliance framework. The ministry of MSME is coordinating with the labour ministry in reaching out to MSMEs through its field offices. The MSME associations can be partners in this endeavour.
The labour codes are testimony of India’s commitment to foster a modern labour ecosystem that empowers both workers and industry thus paving the way for inclusive and sustainable progress. These reforms are set to change the way MSMEs operate and in process benefit MSMEs the most.
