Tricky labor reset — balancing business interests with worker welfare

This report is from this week’s CNBC’s “Inside India” newsletter which brings you timely, insightful news and market commentary on the emerging powerhouse. Subscribe here.

The big story

India lives in contradictions — think landing a spacecraft on moon but not getting basic infrastructure right, or being the world’s fastest growing economy that has millions struggling to make ends meet. The country’s labor market is yet another area emblematic of that paradox.

While big businesses have bemoaned rigid labor market laws in the country, several startups have fast become unicorns, making use of the flexibility that came with employing vast armies of gig workers, many of whom have no employment protection or social welfare.

Last Friday, when the Indian government announced labor reforms, consolidating 29 separate labor laws into four comprehensive codes, it attempted to address these incongruities — balancing business interests with employee welfare.

The implementation of labor codes is the second big reform from the Indian government in less than 90 days, as it strives to boost an economy facing headwinds from U.S. tariffs.

The goods and services tax rationalization in September sought to boost domestic consumption and the labor reform is expected to catalyze industrialization and attract more investments.

Prime Minister Narendra Modi in a post on X hailed the measures, saying the new codes “will build a future-ready ecosystem that protects the rights of workers and strengthens India’s economic growth.”

The reform is important for India as it addresses the problem of labor rigidity due to which “firms find it expensive to grow,” unable to benefit from economies of scale, HSBC said in a note on Wednesday.

India aims to be a developed country, with a $10 trillion economy, by 2047. To achieve that target, it needs to ramp up industrial production and attract investments from local and foreign companies. The country’s complex web of labor laws have been a key hurdle to realizing those goals.

“Global companies would like to expand domestic manufacturing in India and sourcing from India,” said Richard Rossow, senior advisor and chair, India and Emerging Asia Economics, at the Center for Strategic and International Studies. But for that to happen, companies need to see policy reforms including easing of “rigid labor laws,” Rossow said.

India-based policy think tank Observer Research Foundation has called the labor code changes “the biggest structural reform in India” since the country liberalized its economy in 1991.

The recent GST reform impacted 12 million enterprises while the labor codes potentially engage 63 million enterprises, of which only 1 million are in the formal sector, ORF said. “The compliance leap from informal to formal will now be easier, as the ease of maintaining registers and filling forms reduces the tyranny of a…