The FY27 Union Budget may mark a decisive shift towards labour-intensive growth, MSMEs and a fight against the middle-income trap
In Delhi’s power corridors, one question is quietly shaping the FY27 Union Budget: How can India turn impressive GDP numbers into real jobs for millions of young people entering the workforce every year? The Centre’s emerging answer is to double down on labour-intensive sectors right after rolling out the four labour codes, signalling that job creation is no longer a side effect of growth but a central goal of policy.
Why this shift now? Because the old model—of celebrating capital-intensive, high-tech industries while hoping jobs would trickle down—has left too many youth under-employed or in precarious informal work. The new thinking is that sectors like textiles, leather and footwear, gems and jewellery, and handicrafts, backed by stronger labour protections, can act as giant sponges for employment if given the right policy push.
Is this just rhetoric or is money actually moving? Recent budgets tell their own story. The textiles ministry’s allocation for centrally sponsored schemes jumped 69% year-on-year to ₹4,659 crore to boost production and build mega textile parks, the MSME ministry got 34% more at ₹22,899 crore, and the labour and employment ministry saw an 82% leap to ₹31,820.8 crore.
What does such a surge indicate? It suggests that labour-facing sectors are no longer budget footnotes but priority fronts, and the FY27 budget is likely to deepen that bet with fresh schemes and expansions targeted at small and medium enterprises that hire heavily per unit of capital. Side by side, allocations to health and education also rose sharply, because policy makers increasingly see a direct link between human capital and the ability to sustain labour-intensive growth.
How do the newly notified labour codes change this story? By replacing 29 scattered laws with four unified codes on wages, industrial relations, social security and occupational safety, the government aims to simplify a regime long viewed as confusing and adversarial. What does that mean for workers and MSMEs in practice? Workers gain statutory minimum wages across sectors, mandatory appointment letters, timely payments, and, crucially, universal social security that finally brings gig workers into the fold.
Employers, especially smaller firms, get more predictability and simpler compliance, reducing the fear that formalisation will trigger a regulatory avalanche. The hope is that when rules are clearer and protections stronger, more enterprises will shift from the shadows to the formal economy, creating stable jobs instead of fragile, informal arrangements.
Yet, one structural puzzle looms large: why does India have so many tiny firms and a few giants, but so few mid-sized companies? Data from the Central Board of Direct Taxes shows that in assessment year 2023–24, only 669 partnerships and 4,357 companies reported incomes in the ₹25–50 crore range. What does this reveal? It points to a “missing middle” where enterprises struggle to grow beyond a small scale and never quite become strong, resilient employers.
This is striking in a country with 73 million unincorporated, non-agricultural enterprises in the informal sector. The Centre’s emerging strategy is to use the FY27 budget to nurture a layer of robust mid-sized firms that stand between the street-side shop and the corporate giant, serving as a bridge that can pull workers from low-productivity informal jobs into higher-productivity, formal employment.
Why is this so urgent from a macroeconomic lens? Because India sits at a delicate point in its development journey. With per capita income of about 2,700 US dollars, it is firmly in the lower-middle-income bracket, where many countries in Latin America and elsewhere have stalled in the past. What is the fear? That India could grow respectably but not fast or inclusively enough to escape the middle-income trap, where wages rise just enough to erode low-cost advantages, but productivity and skills do not climb high enough to compete with advanced economies.
To avoid this, policy makers argue that over the next 10–15 years India must combine heavy investments in health, education and skilling with aggressive support for labour-absorbing sectors, ensuring that growth is not confined to a narrow, capital-rich elite.
Can the budget still rely on demand-side boosters like tax cuts or rate reductions? Economists such as Rumki Majumdar of Deloitte India believe that space is limited after income tax and GST cuts and a 125 basis points reduction in the policy rate. So what remains on the table? Supply-side measures: building MSME ecosystems in tier-I and tier-II cities, ensuring better physical, social and digital infrastructure, easing access to energy and credit, and improving logistics and last-mile connectivity so that small firms can scale.
At the same time, as Rishi Shah of Grant Thornton Bharat stresses, treating spending on primary healthcare, foundational learning and skilling as high-return economic investments—not just social obligations—can raise labour-force participation and productivity while reducing future welfare burdens. If the FY27 budget knits these strands together—stronger labour codes, sharper MSME support, and smarter human capital spending—it may not just talk about jobs, but structurally tilt India’s growth model towards work that is formal, productive and widely shared.
