Rising Contractualisation in India’s Manufacturing Sector

GS3 – Indian Economy

Context:

The Annual Survey of Industries 2022–23 reports that 40.7% of India’s manufacturing workforce is employed on a contractual basis, reflecting rising informalisation within formal enterprises.

Trends and Data
  • Rising Informalisation:
    • The proportion of contract workers has doubled from 20% in 1999 to 40.7% in 2023.
  • Productivity Implications:
    • Firms with higher dependence on contract labour (CLI firms) report 31% lower productivity compared to those employing regular staff.
    • Capital-intensive CLI units show productivity gains, but labour-intensive ones face losses.
  • Legal Gaps:
    • The Industrial Disputes Act, 1947, largely excludes contract workers from protections like dispute resolution and fair dismissal, worsening their vulnerability.
Factors Driving Contractualisation
  • Operational Flexibility:
    • Enables firms to hire skilled or unskilled workers as per fluctuating demand.
  • Shock Absorption:
    • Helps firms quickly scale operations without overburdening their permanent staff base.
  • Cost Efficiency:
    • Contractual hiring allows firms to cut costs by ~25%, mainly by avoiding parity in pay and benefits.
  • Outsourcing Loopholes:
    • Third-party contractors act as buffers, letting employers bypass obligations under labour laws.
Concerns and Challenges
  • Income Disparity:
    • Contract workers earn significantly less than regular employees for similar tasks, with wider wage gaps in large firms.
  • Reduced Bargaining Power:
    • Fragmented and temporary workforce lacks union representation, making them prone to exploitation.
  • Quality and Turnover Issues:
    • Contractors often prioritise cost over quality, leading to skill dilution.
    • High attrition rates deter firms from investing in the training of contract workers.
Reform Measures Needed
  • Labour Code Amendment:
    • Revise the Industrial Relations (IR) Code, 2020 to bring contract workers within the ambit of legal protection and dispute mechanisms.
  • Fixed-Term Incentives:
    • Introduce EPF-linked incentives to promote more stable fixed-term contracts with basic social security.
  • Revival of PMRPY:
    • Reintroduce and strengthen the Pradhan Mantri Rojgar Protsahan Yojana (PMRPY) to encourage regularisation of informal labour.
  • Skill Development Access:
    • Facilitate subsidised training and skilling for contract labourers through platforms like NAPS (National Apprenticeship Promotion Scheme) and cluster-based programs.
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