Context

• In recent decades, India’s formal manufacturing sector has experienced a profound shift in its employment structure, marked by a significant rise in contract labour.
• Data from the Annual Surveys of Industries (ASI) shows that the share of contract labour in manufacturing employment doubled from 20% in 1999-2000 to 40.7% in 2022-23, cutting across various industries.
• This growing trend towards informalisation within the formal sector has raised considerable concerns regarding its implications for worker welfare and productivity growth.

Plight of Contract Workers

• Employment Outside Core Labour Protections
  • The rise of contract labour is often rationalised as a means to enhance operational flexibility by allowing firms to access specialised skills and adjust labour force size according to market needs.
  • However, evidence suggests that cost avoidance, rather than true labour flexibility or skill acquisition, is the predominant driver behind this trend.
  • Contract workers are usually hired through third-party contractors and remain outside core labour protections under the Industrial Disputes Act 1947.
  • Their exclusion from laws governing layoffs, retrenchments, and protection from arbitrary dismissals severely weakens their bargaining power, leaving them vulnerable to exploitation.
• Wage Disparities
  • This exploitation is reflected in wage disparities: in 2018-19, contract workers earned 14.47% less than regular workers on average.
  • Large enterprises exhibited the greatest wage gaps at 31%, followed by medium (23%) and small enterprises (12%).
  • Employer cost savings are even more striking, the average daily labour cost for contract workers was 24% lower than for regular workers.
  • In certain industries, the labour cost for contract workers was less than 50% that of regular staff, with gaps as high as 78-85% indicating deep exploitation levels.

Impact of Contract Labour on Productivity

• Workforce Stability
  • Contract labour can contribute beneficially by bringing job-specific expertise and offering firms a buffer to rapidly respond to market fluctuations.
  • Nevertheless, when contractualization is mediated through third-party agencies on short-term contracts, it can create principal-agent problems.
  • Contracting firms may misalign incentives with subcontractors, increasing risks of shirking and reducing workforce stability.
• Overall Low Productivity
  • High labour turnover and insecurity discourage investment in on-the-job training and innovation, crucial factors for sustained productivity growth.
  • The study’s analysis reveals that contract labour-intensive (CLI) enterprises show 31% lower labour productivity compared to regular labour-intensive (RLI) enterprises on average.
  • This disparity is more pronounced in smaller firms with fewer than 100 workers (36%) and medium-sized firms (23%), and is the worst in labour-intensive industries (42%).
  • These gaps persist even after controlling for other firm and regional factors, underscoring the detrimental productivity effects of contractualization primarily driven by cost-cutting and regulation circumvention.
  • However, a small subset of enterprises, approximately 20% of formal manufacturing, demonstrate productivity gains from contractualization.
  • High-skill CLI enterprises enjoy a 5% productivity advantage over their low-skill counterparts, rising to 20% in large high-skill firms.
  • Similarly, large capital-intensive CLI firms show a 17% productivity gain.
  • Despite these exceptions, the overwhelming majority of firms experience adverse outcomes due to excessive reliance on contract labour.

Policy Recommendations

• Timely Implementation of Industrial Relations Code
  • In response to these challenges, the Indian government introduced the Industrial Relations Code in 2020.
  • The code aims to grant firms greater flexibility through direct fixed-term contracts with non-regular workers, eliminating third-party intermediaries, while ensuring baseline statutory benefits to reduce worker exploitation.
  • However, implementation delays and union apprehensions highlight risks that increased hiring flexibility might accelerate informalisation and degrade job quality further.
• Incentivise Firms for Long-Terms Contracts
  • To reconcile flexibility with security, policymakers should incentivise firms to adopt longer fixed-term contracts by offering social security contribution discounts or subsidised access to government skilling programmes.
  • This would improve workforce stability, skill formation, and allay labour union concerns about precarious employment proliferation.
• Resurrecting Initiatives Like the Pradhan Mantri Rojgar Protsahan Yojana (PMRPY)
  • These initiatives encouraged formal job creation by subsidising employer contributions to pension and provident funds, could significantly curb contract labour misuse and promote formalisation.
  • Despite benefiting over one crore workers, the PMRPY was discontinued in March 2022.
  • Reviving it could be pivotal in strengthening secure employment in manufacturing.

Conclusion

• While contractualization may offer operational flexibility and skill-access advantages in some high-skill or capital-intensive enterprises, for most firms, especially small, medium, and labour-intensive ones, it results in exploitation and inefficiency.
• Addressing these issues demands a balanced regulatory approach that safeguards worker rights, incentivises formalisation, and fosters skill development, thereby ensuring the sector’s sustainable growth and equitable employment landscape.