The four labour codes, rolled out by the government last November, mark the first step towards transforming India’s labour market to spur job creation, but the transition will require “coordination and investment from the private sector”, the Budge-eve Economic Survey 2025-26, tabled on Thursday, said.
The codes, which bring sweeping reforms to employment regulations, “aim to strike a balance between flexibility and workers’ rights, focusing on ensuring industry competitiveness while promoting worker welfare”, the economic yearbook said.
The codes, passed by Parliament during 2019-20, have replaced a welter of complex, British-era legislation, kicking off a set of reforms aimed at attracting investment and spurring job creation amid easier rules governing hiring and firing of employees. They also rolled out a new social security framework.
Like in previous editions, the Economic Survey 2025-26 called on the private sector to take advantage of the reforms to boost investment and expand hiring. In a previous survey (2023-24), chief economic advisor V Anantha Nageswaran, the lead author of the annual document, had highlighted capital-intensive investments but comparatively sluggish job creation by the private sector.
Private spending in job-creating assets, such as machinery and equipment, grew only 35% while investment in “sunk costs” towards buildings and dwellings grew 105%. “This is not a healthy mix,” the survey had warned then.
{{/usCountry}}Private spending in job-creating assets, such as machinery and equipment, grew only 35% while investment in “sunk costs” towards buildings and dwellings grew 105%. “This is not a healthy mix,” the survey had warned then.
{{/usCountry}}This year, the survey said the private sector should take advantage of the labour codes to boost employment, a crucial factor for Asia’s third-largest economy. “While the codes offer a unified framework, it is up to the private sector to integrate this framework into daily operations.”
The codes have simplified labour regulations by doing away with multiple laws, which led to “difficulties in compliance and multiplicity of authorities”. While regulations protect workers from exploitation, overly rigid policies reduce investment, employment, productivity, the survey said. Complex labour laws also hinder the formal economy by creating incentives for the informal sector activities, according to the survey.
States with flexible labour rules showed significantly higher employment, fixed capital and output compared to those with STIFF regulations, the survey said. The changes now require firms to issue appointment letters to all workers, with the provision of equal benefits (including gratuity after one year) for fixed-term and contract workers, which will help expand the formal sector. A single pan-India registration and license will cut redundancy and compliance requirements, the survey said.
Recommendations in the survey called on the government to cut gaps, such as skill mismatch in the labour market, boost investments in education and health to build strong human capital, while striking an optimistic note on the back of new reforms.
The codes grant statutory recognition to fixed-term employment as a formal work engagement. This, the survey said, would help MSMEs by allowing them to hire workers for seasonal or project-based needs without committing to longer-term hiring and incurring overhead costs. The overall changes can cut India’s unemployment rate, bringing it down to 1.9- 2.9% and generating 7.7 million jobs, the survey said, citing a study by the State Bank of India.
India continues to benefit from the so-called demographic dividend and the country’s large working-age population (age group 15-59) is expected to exceed 980 million in the next decade, the survey said.
A younger population has been a reason for economic optimism for India because it offers a large base for a productive workforce. The country, however, needs to create good jobs soon enough before the majority of the population turns older, analysts say.
“The Economic Survey clearly sees the need for proactive responsiveness by businesses to the labour codes to increase good quality employment. At the same time, it acknowledges that just reforms aren’t enough; a strong focus on education and skills remains the normative pillars for sustainable job creation,” said K Mani, a former faculty at V. V. Giri National Labour Institute, Noida.