Why in news?
A recent study of Annual Survey of Industries data from 1999–2019 revealed that contract labour in India’s formal manufacturing sector has risen from 20% to over 40%. The trend is driven largely by employers seeking to avoid labour costs and regulations, and it has serious implications for productivity growth.
Core issue
Contract labour allows firms to hire workers through third‑party contractors on short‑term contracts. This can provide flexibility for seasonal businesses but in India it is often used to circumvent labour laws. The study found that contractual workers, on average, earn about 14% less than regular employees, with wage gaps reaching 31% in large firms. Productivity in contract‑labour‑intensive enterprises is 31–42% lower than in firms employing permanent workers because frequent staff turnover discourages training and innovation.
Structural problems
- Misaligned incentives: Contractors have little stake in long‑term outcomes, leading to a principal–agent problem where neither the firm nor the contractor invests in workers’ skills.
- Erosion of work discipline: Short‑term contracts reduce accountability, resulting in lower quality and moral hazard.
- Bypassing protections: Contract labour is used to sidestep the Industrial Disputes Act and deny workers benefits like provident fund, health insurance or maternity leave.
- Weak enforcement: Labour inspections are infrequent, particularly in micro and small enterprises, allowing employers to violate norms without penalty.
Policy challenges
- Slow implementation of labour codes: The Industrial Relations Code 2020 aims to formalise fixed‑term employment and reduce reliance on contractors, but most states have not notified rules.
- Unregulated job expansion: Without proper safeguards, the new labour codes could entrench insecure work if employers use fixed‑term contracts solely to cut costs.
- Discontinuation of incentives: Schemes like the Pradhan Mantri Rojgar Protsahan Yojana, which subsidised EPF contributions to encourage formal hiring, were withdrawn prematurely.
- Union resistance: Worker organisations fear that flexible hiring will weaken bargaining power, leading to political hurdles in passing reforms.
Recommendations
- Implement labour codes with care: Ensure that fixed‑term contracts include basic benefits and that contract workers are not permanently kept off rolls.
- Encourage stable employment: Offer tax or social‑security incentives to firms that retain workers for longer durations and link participation in government procurement to fair labour practices.
- Revive and reform incentives: Reintroduce schemes like PMRPY with stricter accountability so that employers receive support only when creating regular jobs.
- Link formalisation to skilling: Provide subsidised training and certification programmes (such as those under Skill India) only to firms employing workers on formal contracts.
- Monitor excessive contractualisation: Set thresholds for contract labour usage and trigger audits or penalties when these are exceeded, especially in low‑skill industries.
In the long term, an economy built on cheap, insecure labour undermines innovation and growth. Sustainable productivity gains require genuine formalisation, investment in workers and a balance between flexibility and security.