Contract labour is harming productivity in formal manufacturing sector

Source: The post Contract labour is harming productivity in formal manufacturing sector has been created, based on the article “Adopt formalisation to power productivity growth” published in “The Hindu” on 30th July 2025

UPSC Syllabus Topic: GS Paper 3 – Employment

Context: India’s formal manufacturing sector has seen a steep rise in the use of contract labour. While intended to boost flexibility, this shift has raised concerns about worker exploitation and reduced productivity. A study based on ASI data (1999–2000 to 2018–19) examines the negative impacts of contractualisation.

Rising Contractualisation in Formal Manufacturing

1. Sharp Increase Across Industries: The share of contract workers grew from 20% in 1999–2000 to 40.7% in 2022–23, spanning all industries. This reflects a wider trend of informalisation within the formal sector.
2. Driven by Cost-Cutting, Not Flexibility: Firms claim contractualisation helps with flexible hiring and access to skilled workers. However, findings show cost avoidance is the key motive, not genuine skill demand.
3. Lack of Legal Safeguards: Contract workers, mostly hired through third parties, are excluded from protections under the Industrial Disputes Act, leaving them vulnerable to arbitrary dismissals and retrenchment.

Wage Inequality and Exploitation

1. Lower Wages Across Enterprise Types: In 2018–19, contract workers earned 14.47% less than regular workers. The wage gap was 31% in large, 23% in medium, and 12% in small enterprises.
2. Deep Labour Cost Gaps: Employers paid 24% less daily to contract workers. In nine industries, costs were less than 50% of those for regular workers. In some, the gap reached 78% to 85%, showing severe exploitation.
3. Weak Bargaining Power: With limited legal support, contract workers have low bargaining power, making them more prone to wage suppressionand job insecurity.

Impact on Labour Productivity

1. Lower Productivity in CLI Enterprises: Contract labour-intensive (CLI) firms had 31% lower productivity than regular labour-intensive (RLI) firms. The gap was 36% in small, 23% in medium, and 42% in labour-intensive enterprises.
2. Lack of Workforce Stability: Short-term contracts cause high turnover and discourage training and innovation, weakening long-term productivity.
3. Misaligned Incentives: Third-party hiring leads to principal-agent issues, increasing chances of shirking and inefficiency due to conflicting interests.
4. Limited Gains in High-Skill Firms: Only 20% of CLI enterprises, mainly large high-skill or capital-intensive, saw productivity gains of 5% to 20%. Most others suffered productivity losses.

Policy Measures and Recommendations

1. Pending Labour Code Implementation: The 2020 Industrial Relations Code allows direct fixed-term hiring with benefits. Labour unions fear it may still promote informalisation and job insecurity.
2. Encouraging Longer Contracts: Policymakers can promote stable jobs by offering incentives in social security contributions or access to skilling schemes.
3. Revive PMRPY Scheme: The PMRPY, which supported over 1 crore employees until 2022, could be revived to promote formalisation and curb misuse of contract labour.

Question for practice:

Examine the impact of rising contractualisation on worker welfare and productivity in India’s formal manufacturing sector.