Employment-protection thresholds were not part of the original IDA, 1947. The key intervention came through the insertion of Chapter V-B in 1976, during the Emergency, when firms employing 300 or more workers were required to obtain government permission before layoffs or closures. Contemporary research and labour-historical analysis link the amendment to heightened industrial unrest and mass displacement during the mid-1970s.
In 1982, the threshold was lowered to 100 workers, significantly expanding state oversight over downsizing. For over four decades, this 100-worker benchmark shaped corporate behaviour. Several industry studies—notably by the World Bank (2007 Doing Business analysis) and subsequent Indian academic research—argued that firms clustered just below the threshold to avoid regulatory compliance burdens. Critics of this view countered that empirical evidence of “threshold bunching” was uneven and often sector-specific.
Over the past decade, States including Rajasthan (2014), Madhya Pradesh (2015), Jharkhand (2016), Haryana (2016), Andhra Pradesh, and Assam amended their IDA provisions to raise the threshold to 300 workers. Because labour is on the Concurrent List, these State-level experiments preceded national consolidation under the IRC.
The IRC now standardises what had become a patchwork reform trend.
Scale of Impact: How Many Workers Are Affected?
According to data from the Periodic Labour Force Survey (PLFS) and ASI, India’s organised manufacturing sector employs roughly 10–12 million workers, but only a fraction work in units employing more than 300 workers. Estimates suggest that nearly 70–80% of registered factories fall below the 300-worker mark. The reform therefore directly affects a large share of mid-sized enterprises, though it does not touch very small firms (which were already exempt) or very large factories (which remain covered).
The question is whether this flexibility will stimulate expansion—or accelerate labour substitution.
AI, Automation, and the Labour Substitution Pressure
The reform arrives amid rapid advances in automation. A McKinsey Global Institute (2017, updated 2023) assessment estimated that up to 30% of tasks in India could be automated by 2030, particularly in manufacturing, retail, and financial services. The International Labour Organization (ILO) has similarly warned that middle-skill occupations are increasingly exposed to AI-enabled task replacement.
In India’s services-heavy growth model, this matters. The IRC expands the definition of “worker” to include sales promotion employees, working journalists, and supervisory personnel earning up to ₹18,000 per month. However, managerial employees and supervisory staff above this wage threshold remain excluded. This effectively leaves a large part of the formal IT, financial services, and digital platform workforce outside job-security provisions tied to Chapter V-B style safeguards.
Given that AI-driven displacement is likely to occur first in supervisory analytics, process management, and routine cognitive functions, critics argue that raising the downsizing threshold at this juncture may increase vulnerability for precisely those segments undergoing structural change.
Manufacturing vs Services: Is the IRC Targeting the Wrong Shock Zone?
The most under-examined feature of the IRC reform is structural: it applies primarily to industrial establishments, at a time when the most automation-exposed segments of India’s workforce are increasingly in services and white-collar sectors.
According to the Annual Survey of Industries (ASI), India’s organised manufacturing sector employs approximately 10–12 million workers. By contrast, India’s IT-BPM industry alone employs over 5.4 million workers (NASSCOM Strategic Review 2023), while the broader organised services workforce is far larger.
Automation risk is uneven. A McKinsey Global Institute (2023 update) estimated that up to 45% of tasks in financial services and 30–40% in professional services could be automated using currently available technologies. Generative AI models are particularly capable of replacing supervisory analytics, coding assistance, content review, and customer support roles.
Yet these workers often fall outside IRC job-security protections because:
- Many are classified as managerial or supervisory employees earning above ₹18,000 per month.
- Employment arrangements may be contractual or gig-based.
- Services establishments are not uniformly covered under “industrial establishment” definitions.
This creates a policy asymmetry:
The IRC eases downsizing constraints in mid-sized factories, while the sectors most exposed to AI-driven displacement may not have been meaningfully protected under either the old IDA or the new IRC.
In effect, the reform modifies exit barriers in a segment where automation pressure is steady but not explosive, while leaving ambiguity in sectors where displacement may be faster and more skill-intensive.
This misalignment does not invalidate the reform—but it raises the question of whether labour regulation is structurally aligned with the geography of technological disruption.
Business Signal: Investment Climate and Firm Growth
From a policy standpoint, the threshold revision aligns with long-standing industry demands for labour-market flexibility. The government has consistently argued that rigid exit barriers discourage firms from scaling and deter foreign direct investment (FDI) in labour-intensive sectors.
India’s manufacturing contribution to GDP has hovered around 15–17%, well below the 25% target under successive industrial policy ambitions. Policymakers have linked labour reform to competitiveness under Production-Linked Incentive (PLI) schemes in electronics, textiles, and automotive sectors. Raising the threshold to 300 workers is therefore widely interpreted as part of a broader investment signalling strategy.
The reform also attempts to avoid an explicitly anti-labour stance. Larger establishments (300+ workers) remain subject to prior approval requirements, preserving the symbolic architecture of employment protection.
Global Comparisons: How Do Other Emerging Economies Regulate Downsizing?
India’s move to raise the layoff permission threshold to 300 workers under the Industrial Relations Code (IRC), 2020, is neither uniquely liberal nor unusually restrictive when placed in global context. The design question internationally is not whether firms can retrench workers—but how costly and procedurally complex that retrenchment is.
According to the OECD Employment Protection Legislation (EPL) Index, countries such as France and Spain historically imposed prior administrative scrutiny for collective dismissals but relied heavily on compensation frameworks rather than blanket pre-approval. In contrast, emerging economies have experimented with hybrid models.
Brazil, under its Consolidation of Labour Laws (CLT), does not require government permission for collective layoffs but mandates structured negotiation with unions and imposes high severance and social security costs. After the 2017 Brazilian labour reforms, dismissal procedures were simplified, but redundancy compensation remains substantial.
Indonesia’s 2020 Omnibus Law sharply liberalised dismissal procedures, reducing mandatory severance payouts that had previously been among the highest in Asia (up to 32 months’ wages in some cases). The reform was explicitly justified as a competitiveness measure to attract investment away from Vietnam and Thailand.
Vietnam, frequently cited as a manufacturing competitor to India, does not require prior government approval for most redundancies but mandates employer consultation with trade unions and compensation obligations based on tenure.
The World Bank’s Doing Business 2020 (Employing Workers dataset)—before its discontinuation—showed that India’s pre-reform redundancy rules were procedurally more restrictive than those in several Southeast Asian economies, though not as rigid as some continental European regimes.
The key comparative insight is this:
- Most economies rely less on permission-based regimes and more on cost-based or consultation-based systems.
- India’s IRC retains a permission requirement—but now limits it to establishments employing 300+ workers.
Thus, India is not abolishing labour protection; it is narrowing the scope of administrative oversight. Whether that improves competitiveness depends less on the threshold itself and more on enforcement predictability, judicial timelines, and severance structures.
Worker Re-Skilling Fund: Cushion or Token?
One of the balancing provisions within the IRC is the creation of a Worker Re-Skilling Fund, requiring employers to contribute an amount equivalent to 15 days’ last-drawn wages per retrenched worker. The stated objective is to facilitate upskilling and redeployment.
The practical adequacy of this provision remains debated. For a worker earning ₹20,000 per month, this translates to roughly ₹10,000. For a worker earning ₹30,000 per month, approximately ₹15,000.
The question is adequacy.
Under OECD norms, severance compensation for collective redundancies often ranges from one to three months’ wages, depending on tenure. In countries such as South Korea and Germany, structured retraining subsidies are often state-supported and integrated with unemployment insurance systems.
India does not yet have universal unemployment insurance. The Employee State Insurance (ESI) unemployment allowance (“Atal Beemit Vyakti Kalyan Yojana”) provides limited, temporary wage support, but coverage is narrow relative to total organised employment.
Training costs also matter. According to NSDC and Skill India programme cost structures, short-term certification courses in digital or technical domains can range from ₹15,000 to ₹50,000, depending on complexity and duration.
A ₹10,000–₹15,000 fund contribution may therefore cover only a fraction of meaningful reskilling pathways—unless leveraged with public funding.
The effectiveness of the Fund will hinge on:
- Integration with State skill missions;
- Whether contributions accumulate centrally or remain firm-specific;
- Whether retrenched workers can access structured re-training pipelines.
Without institutional design clarity, the Fund risks functioning as a symbolic transition payment rather than a labour-market stabiliser.
Contract Labour and Gig Classification: Legal Uncertainty Ahead
The IRC does not decisively resolve the question of employment classification in an era of gig work and third-party contracting. Whether employment-protection provisions apply to contract workers continues to depend on judicially evolved tests.
The Supreme Court’s ruling in Hussainbhai Calicut v. Alath Factory Thozhilali Union (1978) broadened interpretation in favour of workers by emphasising substance over contractual form. Conversely, the more recent Joint Secretary, CBSE v. Raj Kumar Mishra (2025) judgment leaned toward employer autonomy in defining employment relationships.
With India’s gig workforce estimated by NITI Aayog (2022 report) at around 7.7 million workers, projected to rise to 23 million by 2030, statutory ambiguity over classification could generate significant litigation and regulatory uncertainty. Clearer legislative guidance would reduce reliance on case-by-case adjudication.
Flexibility with a Safety Valve?
An overlooked aspect of the debate concerns discretionary mechanisms. States such as Jharkhand and Haryana (2016 amendments) included provisions allowing threshold adjustments to preserve industrial peace. Analysts argue that the IRC could incorporate explicit authority for temporary expansion of employment-protection coverage during periods of mass displacement—mirroring how governments already possess authority to grant exemptions for flexibility.
Such symmetrical discretion—ability to tighten as well as relax—would allow policy responsiveness in the face of AI-driven shocks.
Macroeconomic Stakes: Employment Elasticity and Growth Trade-Offs
At its core, the IRC reform engages a macroeconomic question: does labour flexibility increase employment elasticity?
India’s employment elasticity of growth—measured as the percentage change in employment relative to GDP growth—has declined over decades. Estimates from various academic and government sources place recent elasticity in the range of 0.2 to 0.3, meaning that 1% GDP growth yields only 0.2–0.3% employment growth.
In the early 1990s, elasticity was significantly higher (above 0.4 in some estimates), reflecting labour-intensive industrial expansion. The decline reflects structural shifts toward capital-intensive growth and services-led expansion.
Proponents argue that rigid labour laws suppress scaling and discourage formal job creation. Critics counter that empirical studies—including the influential Besley and Burgess (2004) study on labour regulation and growth—show mixed results when adjusted for later data revisions.
The macroeconomic risk lies in timing. If labour flexibility accelerates automation adoption without commensurate expansion in labour-intensive sectors (textiles, food processing, light manufacturing), employment elasticity could decline further.
Conversely, if mid-sized firms previously constrained at 90–99 workers now expand toward 200–250 workers due to reduced regulatory fear, elasticity could improve.
India’s urban unemployment rate, as per recent PLFS releases, has hovered in the 6–8% range, with youth unemployment significantly higher. In such an environment, labour reform carries macro-stability implications beyond compliance simplification.
The reform’s long-term success will be judged not by ease-of-doing-business rankings, but by whether employment growth outpaces automation-driven displacement over the next five to ten years.
The Structural Trade-Off
The IRC reflects a deliberate recalibration: facilitating firm growth and exit flexibility while retaining symbolic and partial safeguards. The core policy gamble is that greater flexibility will encourage scaling and investment, thereby generating net employment gains.
However, the timing intersects with structural labour-market transition driven by automation. Employment-security provisions historically emerged as crisis-response tools during periods of technological and economic upheaval. The AI era may constitute precisely such a moment.
- Whether the IRC succeeds will depend on four variables:
- Whether firms expand beyond previous employment ceilings;
- Whether automation accelerates labour displacement in mid-sized units;
- How courts interpret employer–employee classifications;
- Whether re-skilling mechanisms become operationally meaningful rather than procedural.
India’s labour reform is no longer simply about easing compliance. It is about managing technological transition in a country where formal employment remains limited and social safety nets are thin. The balance between flexibility and security is therefore not ideological—it is macroeconomic.
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