India’s Micro, Small, and Medium Enterprises (MSMEs) are poised to benefit significantly from the implementation of the four new Labour Codes, despite concerns about potential cost increases. The codes, seen as the most substantial overhaul of India’s labor laws in decades, are expected to ease the compliance burden on MSMEs, a long-standing demand of the sector.
While the expanded social security net, safety mandates, and increased digitization of human resource management mandated by the Codes could potentially raise employee costs, industry representatives believe the reduced compliance burden will outweigh these expenses. Furthermore, they anticipate long-term benefits for the sector.
Vinod Kumar, President of the India SME Forum, stated that the new Labour Codes address MSMEs’ long-standing demands for simplified compliance. He believes the structurally simpler and more uniform compliance, coupled with stronger wage, social security, and safety obligations, will create a level playing field for well-managed MSMEs. While highly informal units may face an initial adjustment with higher labor costs, they will also benefit from reduced legal and reputational risks.
Parliament approved the Code on Wages in 2019, followed by the other three codes on industrial relations, social security, and occupational safety, health, and working conditions in 2020. These codes will replace 29 Central labor laws, aiming to broaden the social security net for all workers, including those in the gig and platform economy. The codes define gig and platform work and aggregators for the first time.
The new codes will also introduce Aadhaar-linked Universal Account Numbers for easy access to welfare benefits across states, a National Floor Wage, and mandated timely wage payments. Draft rules for the labor codes are expected to be pre-published soon, followed by a 45-day public comment period. Some industry-related provisions may take effect from April 1, 2026.
Some MSME representatives express concern about potential payroll cost increases due to the broader social security net, guaranteed minimum wages, specified working hours, double overtime pay, and paid leave. The Association of Indian Entrepreneurs (AIE) acknowledged the Codes as a significant reform but emphasized the need for clarity, transitional support, and flexible implementation mechanisms from the government to manage the likely increase in operational costs. They warned that sudden regulatory changes could slow down job creation and discourage new entrepreneurs.
However, Suchita Dutta, Executive Director of the Indian Staffing Federation, believes the long-term benefits of reduced compliance will outweigh a potential short-term cost increase of 5-7%. She highlighted the significant indirect costs associated with non-compliance, including court cases, legal notices, delays, and penalties.
The government stated that provisions relating to contract labor will now apply to contractors employing more than 50 workers, up from 20 previously. This will free smaller contractors from excessive regulation and encourage small business growth.
The long-term benefits include greater formalization, improved social security, and paid leave, potentially mitigating the high attrition rates common in MSMEs. Mandatory appointment letters and clear rules on timely wage payments are expected to encourage MSMEs to formalize employment practices.
The consolidation of 29 central laws into four Labour Codes, common definitions, and digital filings are expected to reduce fragmentation, duplication, and interpretational disputes. Single registrations, standardized formats, and an ‘inspector-cum-facilitator’ approach should lower transaction costs and simplify requirements for MSMEs.
Chandrakant Salunkhe, head of the SME Chamber of India, termed the Labour Codes as “industry and MSME friendly,” anticipating a level playing field, greater formalization, and improved worker welfare. He advocated for government support through tax rebates, tax holidays, and wage support.
The AIE emphasized that “real compliance” will depend on state-level guidelines, urging states to adopt a “facilitative, non-punitive approach” during the transition to avoid unintentional non-compliance.