UPSC Syllabus: Gs Paper 3- Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment
Introduction
India’s labour codes represent a major structural reform aimed at expanding financial inclusion, social security, and income protection within employment. By merging fragmented labour laws and embedding long-term financial safeguards, the reforms seek to ensure that economic growth benefits workers more equitably. They attempt to integrate millions of workers into formal systems of protection while modernising labour governance and addressing long-standing exclusions in India’s labour market.
About India’s Labour Codes Reform
- Second-generation labour reforms: Labour reforms were widely demanded after economic liberalisation in 1991, but real legislative action began only in 2017 with the introduction of four labour codes.
- Coverage and consolidation: The codes cover wages, industrial relations, social security, and occupational safety and health by merging 29 existing labour laws into a simplified framework.
- Legislative timeline and notification: Parliament passed the codes in 2019 and 2020, and they were formally notified on 21 November 2025, marking their operational phase.
- Purpose of consolidation: The reform aims to modernise labour governance, improve transparency, and create a predictable regulatory system for workers and employers.
- Addressing outdated legal structures: Earlier labour laws were fragmented and no longer suited to changing labour markets, making consolidation necessary.
Structural Labour Reforms for Strengthening Workers’ Financial Security
- Redefinition of wages for higher social security: Wages must now form at least 50% of total remuneration, increasing PF, pension and gratuity benefits and strengthening long-term financial protection.
- Correction of earlier contribution practices: Many establishments earlier kept wages at 30–35% of remuneration to reduce social security payments; the new rule removes this practice.
- Gratuity for fixed-term employees: Workers on fixed-term contracts now receive gratuity after one year of service, ensuring they do not leave employment without terminal financial benefit.
- Higher financial responsibility for large employers: Expanded gratuity coverage increases financial obligations for large corporations such as TCS, Infosys, HCLTech and L&T, where reliance on fixed-term employment is high.
- Expansion of social security to gig and unorganised workers: For the first time, gig, platform and informal workers are formally recognised, enabling access to insurance, PF mechanisms and welfare schemes.
- Portability of social security benefits: Benefits are transferable across States and employment, providing protection to migrant and informal workers who lacked stable coverage earlier.
- Income protection through wage regulation: A universal wage definition, statutory minimum wages, limits on arbitrary deductions and mandatory timely payment strengthen income stability.
- Improved financial inclusion of workers: Expanded social security and stable earnings help workers build savings, manage life-cycle risks and participate more meaningfully in the formal economy.
Macroeconomic and Distributional Impact of Labour Codes
- Redistribution of income towards labour: Higher social security and wage protection shift economic value from capital to workers.
- Stronger purchasing power and consumption: Income security increases workers’ purchasing power and raises domestic consumption.
- Improved savings and financial engagement: Workers show improved savings behaviour and greater engagement with formal financial institutions.
- Demand-led growth through worker income circulation: Worker income largely circulates within the domestic economy, generating demand-led growth.
- Reduction of economic vulnerability: Stronger financial protection reduces vulnerability to economic shocks and supports social stability.
- Labour codes as instruments of inclusive growth: By strengthening workers’ financial base, the reforms function as instruments of inclusive growth.
Conclusion
India labour codes represent a structural shift towards financial inclusion, income security and equitable growth. By expanding social protection and redefining wages, they strengthen workers’ financial dignity. Their real success depends on effective implementation, ensuring benefits reach workers in practice and enabling every worker to participate fully in India’s economic progress, stability and long-term social justice outcomes.
For detailed information on New Labour Codes read this article here
Question for practice:
Evaluate how India’s labour codes strengthen workers’ financial security and promote inclusive economic growth through social security expansion and wage reforms.
Source: The Hindu
