By Dr. Gyan Pathak
India is transitioning from old labour laws to new labour code regime. Union Government expects the new labour codes will be fully implemented from April 1, 2026, that is from the beginning of the new financial year 2026-27. The impact is very difficult to assess on account of lack of current reliable data. However, analysts says that the new rules and definitions who lead to lopside development of MSME sector in the country, while majority of workers will be pushed out from MSME sector to informal sector.
Nevertheless, the union government press note published in the PIB website says, “The Labour Codes collectively represent one of the most significant reforms in India’s labour governance framework. By simplifying compliance, encouraging digital processes, promoting voluntary adherence, and expanding social security, the Codes create a balanced environment where MSMEs can grow more easily while workers benefit from fair wages, dignity, and protection. India’s MSME ecosystem will strengthen under these new Codes, aligning with the principles of “Sabka Saath, Sabka Vikas” and contributing to the vision of Viksit Bharat by 2047 and ensuring that the benefits of development reach every worker and entrepreneur.”
Government is still pushing the stale data in public domain obviously to mislead the people and make them believe the government’s claim. Let us take for example the actual number of MSMEs in India. In 2015-16,India had an estimated 63.39 million (6.34 crore) Micro, Small, and Medium Enterprises (MSMEs), with over 99% being micro-enterprises, predominantly in rural areas and engaged in manufacturing, trade, and other services, according to the 73rd NSSO Survey.
After 2015-16, many things happened, which included shutting down of millions of MSMEs after demonetisation in November 2016. Then definition of MSMEs were changed in 2020-21 during COVID-19 outbreak as part of Atmanirbhar Bharat schemes. The new limits were Micro: Investment<Rs 1 Cr, Turnover <Rs 5 Cr; Small: Investment<Rs 10 Cr, Turnover <Rs 50 Cr; and Medium: Investment<Rs 50 Cr, Turnover <Rs 250 Cr. At that time the existing level of Micro was investment greater <Rs25 lakh for manufacturing and <Rs10 lakh for services; Small – investment <Rs5 crore and <Rs2 crore; and Medium Investment<Rs10 crore and <Rs 5 crore for manufacturing and services respectively. The current definition is Micro not more than Rs2.5 crore investment and not more than Rs10 crore turnover. These figures for Small units are Rs25 crore and Rs100 crore; and for Medium Rs125 crore and Rs500 crore. However, the government go on giving the same number of MSMEs in the country.
The new PIB release said that the Micro, Small and Medium Enterprises (MSME) sector is the backbone of India’s economy, accounting for a substantial 30.1% of the country’s GDP, 35.4% of manufacturing output, and 45.73% of overall exports. The sector provides employment to nearly 28 crore people across 6.5 crore units. This scale, reach, and diversity make it one of the most crucial engines of development and economic resilience. This data is stale and does not reflect the current ground realities.
Therefore, the likely impact of the new labour codes is almost impossible to assess. Only this can be said that with the change in definition and applicability of the rules will render many MSMEs out of its fold and push them in the informal sector, because the labour codes will not be applicable on them.
Though the PIB release said that there were 6.5 crore MSMEs, there were only 5.7 crore MSMEs registered by June 2025. The data mismatch can be seen. The new definition of MSMEs and the applicability of the new rules for the sector are bound to impact this sector.
The government claimed that Labour Code will streamline factory licensing and faster approvals. The threshold to obtain a factory license has been increased: From 10 to 20 workers (with power), and from 20 to 40 workers (without power). In means that factories employing less than 20 workers (with power) and 40 workers (without power) will not need license at all, which means they the Labour Codes for MSMEs will not be applicable for them. Since 99 per cent of units are in this category, majority of them will go out of this sector and just will become informal units.
A 30-day time limit has been prescribed for granting permission for construction or expansion of a factory, with the provision for deemed permission. This provision will lead to unregulated and lopside development of the MSME sector. The site appraisal committee must give its recommendations for the initial location or expansion of factories involving hazardous processes within 30 days. This will facilitate quicker setup and expansion of MSME factories by cutting approval delays. The overall approval timeline has been reduced from 90 days to 30 days.
Simplified rule for contract labour is bound to worsen the quality of job also. The threshold for applicability of the provisions relating to contract labour license has been increased from 20 to 50 workers. Now, contractors employing fewer than 50 workers do not need a license.
The other provisions impacting quality of job is the higher thresholds for operational flexibility. The threshold for lay-off, retrenchment, and closure has increased to 300 workers. This allows smaller industrial establishments employing fewer than 300 workers to restructure operations based on their requirements without needing complex government approvals. The threshold for applicability of Standing Orders has increased from 100 to 300 or more workers. Establishments with fewer than 300 workers are now exempt from the requirement of certification of standing orders.
India will shift to Inspector-cum-facilitator model, which means actions against the MSMEs for violation of laws will not be stringent if any. In most of the castes this will lead to malpractices. As for labour, protection of their rights will be weakened. Government says that these changes will promote more harmonious environment, which will turn out to be essentially exploitative. Many violations of laws including the laws related to labour and employment has been decriminalised, which will make workers totally on the mercy of the employers. Government claims, “These provisions make the law less punitive and more compliance-oriented. Employers can avoid prolonged litigation by paying the prescribed penalty, enabling quicker resolution of issues. The provisions lower compliance risk for small firms, promote voluntary compliance, reduce fear of prosecution, and make enforcement more facilitative for MSMEs.” (IPA Service)
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