Automation vs jobs: Could India’s labour reforms push small firms towards capital-intensive production?

India’s labour reforms aim to improve worker protection while giving businesses greater flexibility, but economists warn that the transition could have an unintended impact on smaller, labour-intensive firms. Speaking at the Business Today's IndiaAt100 event on Friday, former Labour Secretary Sumita Dawra said the labour codes should not be seen as either pro-worker or pro-industry. “The labour codes, the rationale, the intention... are very much for labour welfare, for promoting competitiveness of industry,” she said.

Dawra highlighted provisions providing universal minimum wages, broader social security, better workplace safety and improved working conditions. At the same time, she said businesses would benefit from “single registration, single Pan-India license, and the single return,” replacing multiple registrations and returns.

According to Dawra, compliance costs could fall while employers gain flexibility to increase or reduce their workforce depending on market demand and seasonal conditions.

Automation risk

Economist Abheek Barua agreed that labour-intensive industries remain important despite the global shift towards automation. “Given our large labor surplus and the excess supply of labour, I think there is still a role for labor-intensive sectors,” he said, specifically mentioning garments and toys.

Barua argued that India needs to ensure the “effective cost of labour, productivity adjusted, is low enough to keep automation at bay.”

He also questioned whether existing incentives sufficiently support labour-intensive production, noting that sectors such as automobiles and electronics tend to be more capital- and technology-intensive.

His bigger concern is the impact of payroll restructuring on smaller firms. “The really smaller labor-intensive units... might just be pushed into a little more of capital intensity, which could mean automation,” Barua said.

He also flagged the impact of payroll restructuring under the labour codes. Smaller labour-intensive units, which may traditionally have operated with lower basic salaries, could face greater pressure to restructure remuneration. That, in turn, could make automation relatively more attractive.