In recent decades, India’s formal manufacturing sector has witnessed a significant negative change in its employment structure. 

• According to the Annual Surveys of Industries (ASI), the share of contract labour in the manufacturing workforce doubled from 20% in 1999-2000 to 40.7% in 2022-23, cutting across all industries.
• The study, based on plant-level ASI longitudinal data (1999-2000 to 2018-19) at an all-India level, reveals that contractualisation is detrimental to productivity when misused, highlighting the need to promote formalisation to sustain long-term productivity growth.

Perceived Benefits of Contractualisation

• Flexibility: Companies utilise contract workers to manage fluctuating demand.
  • When large orders arrive, more workers can be rapidly hired; conversely, they can be easily removed when demand decreases. This provides an agile approach to workforce management.
• Lower Costs: Companies believe that hiring contract workers reduces their overall expenditure. 
  • These workers are often not bound by the same labour laws or social security obligations as permanent employees, they are excluded from core labour laws under the Industrial Disputes Act 1947, leading to lower costs for bonuses, medical treatment, and Provident Fund (PF) contributions.
  • Consequently their bargaining power remains weak, leaving them vulnerable to exploitation.
  • Industrial Disputes Act 1947 governs layoff, retrenchments and safeguards against arbitrary dismissals.

Impacts of Excessive Contractualisation

• Significantly Lower Wages and Benefits: Contractual workers receive substantially lower wages compared to permanent workers. 
  • In large factories, this wage gap is typically 14.5%, but can widen to as much as 31% in some cases.
  • The wage payments of contract workers in 2018-19 were 14.47% lower than their regular counterparts.
  • The unfavourable wage differentials against them were more pronounced in large enterprises (31%), followed by medium and small enterprises (23% and 12% respectively).
  • Companies spend 24% less on contract workers overall, considering aspects like bonuses, medical expenses, and PF contributions. This spending gap can be as high as 78% to 85% in certain industries.
  • These workers often lack access to vital benefits such as PF and insurance, and are not protected by many labour laws applicable to permanent employees.
  • The involvement of a third-party contractor (middleman) means the contractor takes a commission, further reducing the wages received by the contract workers.
• Reduced Productivity:
  • The analysis of real net value added per worker, a standard measure of labour productivity, shows that contract labour intensive (CLI) enterprises have on average  31% lower productivity compared to regular  labour-intensive (RLI) enterprises.
  • The labour productivity gap remains higher especially in small formal enterprises with less than 100 workers (36%) followed by medium sized enterprises with 100-300 workers (23%).
  • However, labour productivity was 5% higher in high skill CLI enterprises when compared to their low skill counterparts with the productivity advantage increasing significantly to 20% in large skill CLI enterprises.
  • Similarly, large capital intensive CLI enterprises recorded a  gain of 17% gain in labour productivity.
  • However, such types of enterprises account for only about 20% of the total formal manufacturing.
  • The remaining 80% of the enterprises were adversely affected by contractualisations.
  • Companies may perceive contractual workers as cheaper, but their lower productivity often negates the perceived cost savings.
• Lack of Loyalty and Third-Party Involvement: Contractual workers often demonstrate less loyalty to the principal company for whom they perform work, as their direct employer is typically a third-party contractor.
  • This detachment can result in reduced commitment to tasks, as their primary allegiance is to the contracting firm rather than the company benefiting from their labour.

Policy Imperatives for Fostering Formalisation

• Enable Direct Hiring by Large Firms: The Labour Codes introduced in 2020 aimed to allow large firms to directly hire contract workers, thereby eliminating the need for third-party middlemen.
  • This direct relationship would enable companies to offer slightly better salaries, and the government could then mandate basic benefits, such as PF contributions, for these workers.
  • Full implementation of this reform is crucial, as it has been stalled due to concerns from trade unions.
• Revive Employment Incentive Schemes: Schemes like the Pradhan Mantri Rojgar Protsahan Yojana (PMRPY) must be reactivated.
  • PMRPY subsidised the employer’s 12% contributions to Employees Pension Scheme (EPS) and Employees Provident Fund (EPF).. 
  • This scheme benefited 1 crore employees before its discontinuation in 2022.
  • Reinstating such incentives would reduce the financial burden on companies associated with hiring permanent or formalised contract workers, thereby discouraging an over-reliance on informal contractualisation.
• Provide Targeted Social Security Contribution Relaxation:The government should consider offering targeted relaxations on social security contributions required from employers.
• This measure would alleviate concerns among companies regarding the significantly higher costs of permanent hires, making them less hesitant to formalise employment relationships.

A Strategic Imperative for India’s Future

The current over-reliance on contractualisation in India’s labour market presents a significant impediment to national productivity growth.

• By proactively implementing policies that favour and incentivise formal employment, the government can foster a more skilled, motivated, and ultimately productive workforce.
• This strategic shift is not merely a matter of worker welfare; it is a fundamental imperative for effectively harnessing India’s demographic dividend and ensuring sustained economic development.

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