Sachin Kumar Arora: The revised labour code may be partially offset by long-term productivity gains

As India rolls out sweeping labour reforms, the textile and textile machinery sector is bracing for structural shifts in costs, compliance and competitiveness. In this interview, Sachin Kumar Arora, Executive Director, TMMA speaks with Divya Shetty, on how revised wage and social-security provisions could reshape manufacturing economics, accelerate automation and skill development, and test the readiness of MSMEs as the industry navigates the next phase of regulatory and operational transformation.

How do you expect the revised wage and social-security provisions to influence industry’s overall cost of manufacturing in the next 12–18 months?

The revised wage and social-security provisions are expected to increase the Indian textile industry’s overall cost of manufacturing in the next 12–18 months, primarily due to higher statutory payouts and expanded coverage, but this may be partially offset by long-term productivity gains and simplified compliance.

Factors increasing manufacturing costs

• Universal minimum wage: The introduction of a national floor wage will raise payroll costs, particularly in traditionally low-wage textile clusters, ensuring a basic income threshold for all workers.

• Expanded definition of wages: A broader definition of “wages” (at least 50 per cent` of total remuneration) for calculating provident fund (PF) and gratuity contributions will increase the base for these statutory payouts, directly impacting employer costs.

• Broader social security coverage: The Social Security Code expands PF and Employee State Insurance (ESI) coverage to smaller units, which were previously often exempt. This brings thousands of informal textile workshops under the formal social security net, imposing new administrative and financial burdens.

• Equal benefits for fixed-term employees: Fixed-term employees must now receive the same wages and social security benefits as permanent workers, including pro-rata gratuity after just one year of service, neutralising previous cost advantages of this flexible employment model.

• Mandatory overtime pay: Mandatory payment of double the ordinary rate for overtime work will benefit workers in export-oriented units with high production demands but increase costs for employers during peak seasons.

• Welfare and safety costs: New requirements for improved workplace facilities, mandatory annual health check-ups for workers over 40, and enhanced safety standards for women on night shifts will add to operational expenses.

Potential offsetting factors

• Simplified compliance: The consolidation of 29 laws into four codes and the introduction of single registration, return, and license systems are intended to reduce the administrative and compliance burden, especially for MSMEs.

• Operational flexibility: Provisions like fixed-term employment offer manufacturers greater flexibility to adjust workforce strength according to seasonal demand, which can help optimise labour deployment.

• Increased productivity: The enhanced worker welfare, safety standards, and formalisation of employment (e.g., mandatory appointment letters) are expected to improve worker morale, health, and productivity in the long term, potentially offsetting some initial cost increases.

In the immediate 12-18 months, the textile and textile machinery industry will likely experience an initial rise in manufacturing costs as companies adjust compensation structures and absorb new social security obligations, with MSMEs facing the most significant transition challenges.

Do you foresee the new labour codes prompting greater investment in automation, skill development, or process optimisation on the factory floor?

Yes, the new labour codes are expected to prompt greater investment across automation, skill development, and process optimisation on the factory floor as the Indian textile industry adapts to higher labour costs and the need for global competitiveness.

Drivers for investment

• Increased labour costs: The new codes introduce a universal minimum wage and expand social security, which will raise the overall cost of manual labour. This makes the capital investment in machines with lower operating costs a more financially viable long-term strategy.

• Need for productivity and efficiency: To offset the rising labour costs and remain competitive in global markets, manufacturers need to boost efficiency and speed up production. Automation and process optimisation directly address these needs.

• Simplified compliance: The single registration and return system, along with an “inspector-cum-facilitator” model, reduces the regulatory burden, allowing companies to focus resources on operational improvements like technology adoption.

• Global sourcing demands: Global buyers are increasingly focused on responsible supply chains and higher labour standards. Adopting advanced technology helps meet these standards, strengthening India’s position as a reliable sourcing hub.

Areas of expected investment

• Automation: Investment in advanced machinery is anticipated to reduce reliance on manual, repetitive tasks.

• Robotics: For tasks like material handling, quality control, and garment finishing.

• Automated systems: Superior looms, knitting machines, automated dyeing and printing systems, and computer-aided design/manufacturing (CAD/CAM) will see increased adoption.

• Skill development: As automation replaces manual labour, a significant skills gap will emerge. The industry will need to invest in upskilling and reskilling the workforce to operate and maintain automated systems. The codes even mention a specific “Skill Development and Re-Skilling Fund”.

• Process optimisation:The drive for efficiency will lead to the adoption of process improvements and digital technologies such as the Internet of Things (IoT) and RFID for inventory and supply chain management. This optimises resource use and reduces waste, leading to better sustainability and lower operational expenses.

In what areas do you expect productivity improvements to offset the rise in compliance and wage costs?

Productivity improvements in the Indian textile industry are expected to offset rising compliance and wage costs in several key areas by improving efficiency, consistency, and operational flexibility.

How prepared are small and mid-sized units to adapt to the modified compliance framework?

Small and mid-sized textile units in India face a mixed landscape of simplified procedures but significant transitional challenges in adapting to the new labour codes. Their preparation is varied, with many struggling with the administrative and financial demands of formalisation.

Readiness and challenges

• Varying levels of awareness: Awareness and preparedness vary widely. While larger MSMEs and those in organised clusters may have dedicated HR/legal teams, many smaller, informal units (which make up a large portion of the industry) lack the resources or knowledge to navigate the new regulatory landscape.

• Administrative burden: Many small units operate with informal work cultures and minimal paperwork. The new requirement for comprehensive documentation, mandatory appointment letters, and detailed records of wages and benefits poses a significant administrative challenge.

• Financial impact: MSMEs with tight profit margins are concerned about the immediate rise in operational costs due to the broader definition of “wages” for PF/gratuity calculations and the new universal minimum wage floor. The expansion of social security (PF and ESI) coverage to even 1-10 worker units brings thousands of previously exempt workshops under the formal net, adding new financial burdens.

• State-level delays and inconsistencies: Labour is a concurrent subject, requiring state governments to frame their own rules under the central codes. Delays in this process across various states create confusion and hinder uniform compliance for businesses operating across multiple regions.

Factors aiding adaptation

Despite the challenges, several aspects of the codes are designed to help MSMEs adapt:

• Simplified compliance: The consolidation of 29 laws into four codes, along with provisions for a single registration, single license, and single return, aims to drastically reduce red tape and improve the “ease of doing business”.

• Higher thresholds: The increase in the applicability threshold for Standing Orders and government approval for lay-offs/closures (from 100 to 300 workers) provides greater operational flexibility for many mid-sized units.

• Facilitative inspection system: The shift from traditional inspectors to “inspector-cum-facilitators” and the use of a randomised, web-based inspection system is intended to promote a more cooperative regulatory environment and reduce harassment.

• Digital tools and support: The government’s push for digital processes and platforms (like the e-Shram portal for worker databases) offers tools that, once adopted, can help streamline compliance for smaller firms. Industry bodies are also organising workshops to build capacity and help MSMEs develop action plans for implementation.

In summary, while the framework is designed to be MSME-friendly in the long run, the current preparation level of many small units is low, and the immediate transition will likely be demanding, requiring significant effort in awareness, capacity building, and financial management.