New labour codes: How reforms became a good word

In a recent November 21 post on X, economist Jason Furman, a key economic advisor during Barack Obama’s presidency, pointed to how some geo-politically relevant economies were doing relative to their pre-Covid trends. The US, European Area and Russia are holding onto a steady if flat trajectory and China’s line is falling away. All of them are below the trend line. Only India broke through in 2023 and in data relevant to 2025 Q3 shows a rising growth curve. The temptation to wait for just a little more good news means there might never be a perfect time to minimize the political risk in implementing a major reform. But the current moment is as good as it can get.

To understand the politics behind labour reforms, there is a need to go back in time. Soon after his unexpected elevation as Prime Minister in 1991, P V Narasimha Rao turned his attention to the need to de-regulate the economy and free it from Nehruvian-Leftist controls that had been enacted in the pursuit of socialist ideals but ended up choking productivity and breeding corruption. A physically frail man with an exceptional intellect, Rao began by considering the need to reform labour laws in the light of evidence that restrictions on hiring and firing employees were not achieving stated objectives.

Rather than protecting workers, rules encouraged unions to adopt gun barrel bargaining tactics irrespective of the productivity of an enterprise. Owners adopted underhand means to beat the law by maintaining manipulated work force records and preferring interminable litigation following a “lock down” rather than settling with workers. At the time, any mention of easing hire and fire rules was akin to heresy and likely to become a matter of political contestation. The influence of socialist thinking on policy could be disregarded by a Prime Minister or a chief minister only at risk of personal peril.

Lurking in the wings was Arjun Singh, a politician schooled in the patronage-dispensing tradition of Congress politics. Singh had reluctantly acquiesced to Rao’s candidature and continued to believe that as a politician with greater experience of electoral politics who could claim a “base” he was more suited to be PM. Having been given the human resource development portfolio – the ministry became synonymous as a parking slot for dissidents and challengers – Singh nursed his ambitions and waited for an opportune moment to strike while all along presenting himself as a loyalist of the Gandhi family.

Arjun Singh’s challenge

His rebellion against Rao is remembered in the context of his resignation from the Cabinet over the demolition of the Babri Masjid on December 2, 1992, – though he quit only two years later – but his initial salvos targeted economic reforms. He began by writing to Rao expressing reservations about reports that the government was considering altering labour laws and considering significant changes to Congress’s economic policies. Rao was quick to realize that behind an apparent plea to discuss policy lay a calculated bid to open an ideological battle front and, typical of his ways, ignored the letters.

Singh went on write many more letters to Rao and as the Ram Janmabhoomi-Babri Masjid confrontation became more heated he found the “communalism” issue to be a more emotive tack to oppose Rao’s leadership. Yet, given the influence of trade union leaders on the working of the party in earlier years, labour reforms was pretty much a no-go area. Even when Rao in the company of Manmohan Singh took bold and path breaking measures to hack away at India’s notorious license-permit raj, the preferred approach was to strike by “stealth” and constantly avow that new policies are not a repudiation of the Nehruvian model of a socialist, controlled economy.

Parliament passes labour reform Bills

Even as various sectors of the economy were opened to the private sector and foreign investment, changing labour laws remained tricky business. Modi 1.0 bit the bullet by beginning widespread consultations in 2014 bolstered by a single-party majority in Parliament. Nonetheless it was during the Modi 2.0 tenure in September, 2020, that Parliament passed three bills – Industrial Relations Code, Code on Occupational Safety, Health and Working Conditions and the Social Security Code – that consolidated laws and added definitions relating to gig workers and set out new terms for contracts of “fixed term employees.” The Code on Wages had been passed by Parliament earlier in 2019 and the four codes looked to substantially overhaul labour relations and rights for 50 crore organized and unorganized workers.

It took five years more for provisions of the four codes to be “notified” or become effective. It was an extraordinary delay on part of a government that has shown the resolve to push through politically and economically difficult decisions such as abrogation of Article 370 in relation of Jammu & Kashmir (followed by making the two regions union territories) and implementation of the Goods and Service tax (GST). The problem was that Covid struck the world in 2019, surfacing first in Wuhan in China at year-end, and then rapidly becoming a global Pandemic. Prime Minister Narendra Modi announced a nation-wide lockdown beginning March 24. 2020. On September 1, 2020, the GDP figures released by ministry of statistics revealed a contraction of 24% for the first quarter (April-June) of FY 21. In the months that followed the economy did reverse its falling graph but remained anemic.

There was worse to come. As India raced to develop vaccines against Covid, the country was ravaged by the deadly second wave of infections caused by the Delta variation of the virus. The earlier decision to significantly lower corporate tax rates in September, 2019 was also affected by the pandemic. Covid ensured economic activity remained tepid and caution was the byword for businesses. Thereafter, as the economy began a long road to recovery, the government held its hand out of concern that new administrative measures and compliances might prove to be a distraction and a burden as Indian corporates work their way back to health.

End of a long wait

The jury is out on whether the codes could have been implemented in the second part of Modi 2.0 as the Bharatiya Janata Party continued to have a single-party majority in Lok Sabha. But as Modi 3.0 took office calls to accelerate economic reforms became more urgent. Complaints about red tape and redundant regulation mounted, particularly in non-financial areas, as these factors were seen to be retarding growth. In his 2025 Independence Day speech Modi took the first major step to rejuvenate the economy by announcing plans to change to GST rates that would reduce prices and tax anomalies.

The four labour codes are the key to make the buoyancy in the economy more permanent. The need for internal reforms might have become more urgent in the wake of United States President Donald Trump imposing a 25% basic tariff followed by another 25% penal rate on India for buying Russian oil. The confidence to make the codes operational would have been boosted by the National Democratic Alliance’s morale-boosting win in the Bihar assembly election. There might have been no better moment to move ahead of the codes just as a section of economists were despairing if this would be done.