Context:

• India’s new labour codes represent a major step toward strengthening financial inclusion and social security for workers.
• By consolidating fragmented labour laws, they aim to modernise labour governance and embed income protection, long-term safeguards, and social security into employment.
• Despite opposition and strike calls from some trade unions, the reforms seek to address historic exclusions and integrate millions of workers into formal financial and welfare systems, ensuring more equitable sharing of economic growth.
• This article highlights how India’s labour codes redefine wages, expand social security, and embed financial inclusion within employment.

Reforming the Wage Definition: Expanding Social Security

• Mandatory 50% Wage Threshold
  • A key reform under the labour codes is the revised definition of “wage.”
  • Employers must now ensure that wages (basic pay, dearness allowance, and retaining allowance) form at least 50% of total remuneration.
  • Earlier, many establishments kept this share as low as 30–35% to reduce social security contributions.
  • The new threshold increases contributions to Provident Fund (PF), pension, and gratuity, strengthening long-term financial security for workers.
• Gratuity for Fixed-Term Employees
  • Fixed-term employees are now eligible for gratuity after one year of service, reflecting modern labour market realities.
  • Previously, such workers often exited without terminal financial benefits despite productive contributions.
  • Extending gratuity coverage converts short-term employment into a tool for asset creation and income stability.
• Enhancing Financial Inclusion
  • PF, pension, and gratuity now function not merely as retirement benefits but as instruments of financial inclusion.
  • They enable workers to accumulate savings, manage life-cycle risks, and cushion income shocks during job transitions.
• Corporate Cost vs Worker Security
  • The reforms increase financial liabilities for large corporations with sizeable workforces and fixed-term employment.
  • However, these higher outflows directly translate into improved worker income security, stronger purchasing power, and broader social security coverage.
• Broader Economic Impact
  • Enhanced social security benefits contribute to:
    • Increased household consumption
    • Higher savings
    • Reduced vulnerability
  • The reform thus promotes fairer value distribution between capital and labour, reinforcing dignity and long-term stability in employment relations.

Macroeconomic Impact: Labour Codes and Inclusive Growth

• Expanding Social Security Coverage
  • The labour codes extend financial inclusion beyond organised workers to gig, platform, and unorganised workers.
  • For the first time, these groups are formally recognised under labour law, enabling access to insurance, provident fund mechanisms, and welfare schemes.
  • Portability of benefits across States and jobs is particularly crucial for migrant and informal workers historically excluded from stable financial systems.
• Strengthening Income Security
  • The Code on Wages introduces a universal wage definition, mandates statutory minimum wages, limits arbitrary deductions, and ensures timely payments.
  • These provisions stabilise incomes and enhance workers’ participation in the formal economy.
• Boost to Consumption and Savings
  • Redistribution of income toward workers increases purchasing power, encouraging higher consumption and improved savings behaviour.
  • Unlike shareholder income, worker income largely circulates within the domestic economy, supporting demand-led growth.
• Inclusive and Shock-Resilient Growth
  • By expanding social security and income protection, the labour codes reduce economic vulnerability and strengthen financial stability.
  • They serve as instruments of inclusive growth, reinforcing social cohesion and resilience against economic shocks.

Labour Law Reform: Modernisation Amid Opposition

• Outdated and Fragmented Legacy Framework
  • India’s earlier labour laws had become fragmented and outdated, ill-suited to a rapidly evolving labour market.
  • Consolidating them into four labour codes simplifies compliance, enhances transparency, and creates a more predictable regulatory environment for both workers and employers.
• Opposition and Implementation Concerns
  • While trade unions have raised concerns and called strikes, blanket opposition often overlooks the pro-worker provisions embedded in the codes.
  • Legitimate implementation challenges exist, but resistance driven by rhetoric risks obscuring tangible welfare gains.
• Structural Shift Toward Financial Inclusion
  • The labour codes represent more than regulatory restructuring.
  • By extending gratuity, broadening social security coverage, and closing legal exclusions, they promote financial inclusion and gradually redistribute economic value toward labour.
• Aligning Growth with Social Justice
  • By strengthening income security and financial dignity, the reforms aim to align economic growth with social justice.
  • Their long-term success will depend on effective implementation that ensures every worker benefits from India’s growth trajectory.