The new labour laws have raised the threshold for mandatory government approval for lay-offs from 100 to 300 workers. A report by Ambit Capital argues that this single reform could determine whether India is finally going to overcome its ‘missing middle’ problem or slide deeper into a cycle of casualisation.
Scaling opportunity: Will firms finally grow beyond 100 workers?
Ambit notes that the old threshold effectively discouraged mid-sized firms from hiring permanent workers, pushing them to cap their workforce below 100 to avoid higher compliance costs.
The new 300-worker limit, as per the report, reduces this regulatory drag and “encourages firms previously constrained by regulation to grow bigger.” Potential beneficiaries include labour-intensive and mid-scale sectors such as food products, electricals, non-metals and mining industries where firms historically limited their size to escape onerous labour rules.
The report cites empirical evidence that earlier state-level easings of the 100-worker threshold (between 2014 and 2017) led to an increase in industrial employment across both regular and contract workers, signalling that regulatory flexibility can directly unlock job creation.
Yet, scaling is not merely a question of headcount. Ambit highlights how manufacturing competitiveness has long been held back by 41 labour laws and over 69,000 compliances, factors that shaped India’s disproportionately small factory ecosystem.
Flexibility trade-off: The Ambit Capital perspective
The report is careful to frame the reform as a double-edged sword. Ambit outlines two equally plausible scenarios. The first scenario is where greater flexibility encourages scaling and formal hiring, which will lead to stable jobs and higher productivity. The second scenario would be that firms leverage flexibility to downsize without oversight, increasing job insecurity, job losses or further rise of contractual labour.
Ambit stresses that contractualisation has already surged, from 20% of the formal manufacturing workforce in FY00 to 42% in FY24, as firms used contract labour to bypass stringent laws applicable to regular workers.
Even in labour-intensive sectors such as food products, textiles, tobacco and paper, where employment stagnated for a decade, manufacturers have been leaning toward capital deepening and contractual labour rather than permanent hiring.
The report concludes bluntly that contractualisation “is unlikely to decline” under the new Codes. Firms, Ambit argues, will continue favouring flexible arrangements, especially as compliance obligations shift from contractors to principal employers.
Ambit on flexibility with costs attached
A major feature of the new labour architecture is the formal recognition of Fixed-Term Employment (FTE).
The Ambit report notes that FTEs must receive wage and benefit parity with permanent workers, including gratuity after just one year of service.
This, the report says, provides companies flexibility for project or seasonal work—while simultaneously raising operational costs. If firms increasingly use FTEs to substitute permanent roles, payroll rigidity will rise without the long-term stability associated with regular employment.
At present, FTEs account for only 2% of the workforce in establishments with 10 or more employees across nine sectors, suggesting that immediate provisioning costs may be moderate. But Ambit warns that over time, widespread substitution of permanent roles with FTEs could impose substantially higher labour outlays.
Moreover, mandatory parity in wages, benefits, and gratuity creates a structural tension: companies gain flexibility in hiring and separation, but not in compensation design. In a tight-margin manufacturing environment, this could influence whether FTEs become an alternative pathway to formalisation—or yet another conduit to short-term, cyclical employment cycles.