By Anjani Kumar, Senior Journalist
India’s complex labor laws burden MSMEs, with 40 million enterprises struggling to scale due to compliance costs and restrictive regulations, despite government reforms.
India’s 40 million Micro, Small, and Medium Enterprises (MSMEs), employing 12.3 crore people, are the backbone of the economy, contributing 30% to GDP. Yet, outdated labor laws, requiring multiple registrations and hefty fines for non-compliance, choke their growth, forcing small businesses to divert resources from innovation to legal navigation.
India’s Labor Force and MSME Role
India’s labor force, estimated at 60.1 crore in 2023–24 per the Periodic Labour Force Survey (PLFS), is the second-largest globally, with 44.5% in agriculture, 25.7% in services, and 11.7% in industry. MSMEs, numbering 40.7 million as per the 2024 MSME Annual Report, employ 12.3 crore workers, accounting for 20.5% of total employment. They contribute 30% to GDP and 45% to exports, driving growth in urban and rural areas.
Contrary to the original document’s claim, India has stringent child labor laws. The Child Labour (Prohibition and Regulation) Amendment Act, 2016, bans employment of children under 14 in all occupations, with exceptions for family enterprises, and prohibits adolescents (14–18) from hazardous work. Non-compliance incurs fines up to Rs. 50,000 and imprisonment.
Challenges Posed by Labor Laws
India’s labor laws, governed by over 40 central and state regulations, create a complex compliance landscape for MSMEs. The Industrial Disputes Act, 1947, requires firms with 100+ employees to seek government approval for layoffs or closures, a process often delayed by bureaucracy. This discourages MSMEs from scaling beyond 99 workers, limiting productivity. The Factories Act, 1948, and Shops and Establishments Acts mandate multiple registers, with non-maintenance leading to fines up to Rs. 1 lakh or criminal proceedings against directors.
MSMEs face 14+ regulatory inspections, requiring specialized compliance teams that small firms can’t afford. For example, maintaining records under the Minimum Wages Act, 1948, and Employees’ Provident Fund Act, 1952, involves monthly filings and remittances, with errors triggering penalties. The original document’s claim of 24 crore MSME employees is incorrect; the correct figure is 12.3 crore.
Impact on Key Sectors
The garment industry, employing 1.2 crore workers, struggles to compete with Bangladesh and Vietnam due to rigid labor laws. India’s apparel exports fell from $16.2 billion in FY22-23 to $14.5 billion in FY23-24, partly due to compliance costs. The automotive components sector, with 50 lakh jobs, faces similar hurdles, as small units lack resources to navigate regulations, hindering global competitiveness.
Government Initiatives and Labor Reforms
The government has introduced schemes to support MSMEs, including the Credit Linked Capital Subsidy Scheme (up to 15% subsidy), Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE), and the Prime Minister’s Employment Generation Programme (PMEGP), benefiting 8.5 lakh units in FY23-24. States like Tamil Nadu offer 25% capital subsidies, while Karnataka’s SIDBI schemes provide export financing.
To simplify labor laws, the government consolidated 29 central laws into four Labor Codes in 2019–2020: the Code on Wages, Industrial Relations Code, Social Security Code, and Occupational Safety, Health and Working Conditions Code. As of May 2025, these codes are partially implemented in 24 states, with full rollout delayed due to state-level variations and union protests. The codes aim to reduce compliance burdens by introducing single-window clearances and digital filings, but MSMEs still face challenges adapting to new systems.
Technological Solutions for Compliance
An effective governance, risk, and compliance (GRC) system is critical for MSMEs. Technology platforms like Tally and Zoho Books automate payroll, provident fund, and tax filings, reducing errors. Recent court rulings, such as a 2024 Delhi High Court verdict, hold principal employers liable for third-party contractor non-compliance, emphasizing the need for robust monitoring. Digital tools can help MSMEs track compliance, avoiding fines that averaged Rs. 2.5 lakh per violation in FY23-24.
Innovative Labor Practices
MSMEs are pioneering flexible work models like gig work, part-time employment, and paternity leave, with 15% adopting such practices in 2024. However, labor laws lag, offering little clarity on gig worker rights, leading to disputes. The Social Security Code, 2020, proposes benefits for gig workers, but implementation remains incomplete.
Expectations from Government
To empower MSMEs, the government should:
Simplify Compliance: Streamline registrations into a single digital portal, as piloted in Gujarat’s GIDC clusters.
Enhance Flexibility: Raise the layoff approval threshold to 300 employees, as proposed in the Industrial Relations Code.
Boost Skill Development: Expand the Skill India Mission to train 1 crore MSME workers by 2027.
Increase Financial Access: Extend CGTMSE coverage to 80% of MSME loans, up from 50%.
Promote Technology: Subsidize compliance software for MSMEs, as done in Maharashtra’s MSME Tech Upgradation Scheme.
References
[1] Periodic Labour Force Survey (PLFS), 2023–24, Ministry of Statistics and Programme Implementation, 2024.
[2] Ministry of MSME, “Annual Report 2023–24,” 2024.
[3] Child Labour (Prohibition and Regulation) Amendment Act, 2016, Government of India.
[4] Industrial Disputes Act, 1947, Government of India.
[5] Ministry of Textiles, “Apparel Export Data FY23-24,” 2024.
[6] Auto Component Manufacturers Association of India, “Sector Report 2024,” 2024.
[7] Ministry of MSME, “Credit Guarantee Scheme Progress,” 2024.
[8] Ministry of Labour and Employment, “Labor Codes Implementation Update,” 2025.
[9] Delhi High Court, “Principal Employer Liability Ruling,” 2024.
[10] NASSCOM, “MSME Digital Adoption Report,” 2024.
[11] Gujarat Industrial Development Corporation, “Single-Window Clearance Pilot,” 2024.
[12] Skill India Mission, “Training Targets 2024–27,” 2024.
[13] Maharashtra MSME Tech Upgradation Scheme, “Annual Report 2024,” 2024.
