Why in the News?

India’s manufacturing sector is facing renewed scrutiny due to the rising contractualisation of labour, which has grown from 20% in 1999-2000 to 40.7% in 2022-23, according to the Annual Survey of Industries. 

What drives the rise of contract labour in formal manufacturing?

• Cost Minimization: Employers hire contract workers to reduce wage bills and avoid social security contributions. Eg: In large firms, contract workers often earn up to 31% less than regular employees.
• Bypassing Labour Laws: Contracting allows firms to circumvent regulations under the Industrial Disputes Act, 1947, such as rules on retrenchment and notice period.  
• Operational Flexibility: Firms use contract labour to scale up or down quickly with demand without long-term obligations. Eg: Seasonal industries like textiles use short-term contract workers during peak export periods.
• Third-Party Shielding: Outsourcing through contractors protects the principal employer from legal accountability for employment terms. Eg: Automobile assembly lines often outsource non-core work to manpower agencies.
• Sector-Wide Trend Across Sizes: The rise in contract labour is not limited to small firms; it extends to large and capital-intensive industries. Eg: Between 2000 and 2022, contract labour share doubled from 20% to 40.7% across all industries.

Why does contract labour hurt long-term productivity?

• Low Skill Development: Contract workers are rarely given training or upskilling opportunities, limiting their efficiency and innovation. Eg: In India’s electronics manufacturing sector, companies like Dixon Technologies rely heavily on contract labour, leading to a shortage of skilled technicians for precision assembly.
• High Attrition and Turnover: Contract workers frequently change jobs due to lack of job security, resulting in loss of institutional knowledge. Eg: In food processing units in Punjab, annual turnover among contract workers exceeds 70%, disrupting workflow continuity.
• Reduced Worker Motivation: Absence of benefits like promotion, pension, or medical cover leads to low morale and reduced effort. Eg: In government-run power plants, studies have shown that contract workers contribute less to maintenance efficiency than permanent staff, affecting overall plant performance.
• Weak Industrial Relations: Contract workers are often excluded from grievance redressal mechanisms or unions, increasing workplace tensions and risking disruptions. Eg: Maruti Suzuki’s Manesar plant witnessed violent unrest in 2012, partly attributed to discontent between permanent and contract workers.
• Quality Compromise and Rework: Contract workers may lack the ownership mindset, resulting in errors and product rework, which lowers productivity. Eg: In garment export hubs like Tiruppur, repeated quality rejections from overseas buyers have been traced to inconsistent output from untrained contract labour.
• Wage and cost gaps act as a disincentive
  • Unequal pay for equal work: Contract workers often earn much less than permanent workers for doing the same job, violating fairness.
    Eg: In PSUs like ONGC, contract workers earn up to 50% less than permanent employees for the same technical work.
  • Avoidance of social security: Employers save costs by not contributing to Provident Fund, gratuity, or health benefits, increasing worker insecurity.
    Eg: A CAG audit of private thermal power plants found 30–40% labour cost savings due to evasion of statutory benefits.

What are the existing policy?

• Contract Labour (Regulation and Abolition) Act, 1970: This law aims to regulate the employment of contract labour in certain establishments and abolish it in specific cases where work is perennial in nature. However, enforcement is weak, and many employers bypass provisions through sub-contracting.
• Code on Occupational Safety, Health and Working Conditions (OSH Code), 2020: Consolidates 13 labour laws, including those related to health, safety, and working conditions of workers (including contract labour). It mandates registration of establishments and welfare facilities, but monitoring and implementation remain inconsistent.
• Fixed Term Employment (FTE) provision under the Industrial Relations Code, 2020: Legalises short-term employment contracts with a provision for equal pay for equal work. But in practice, social security benefits and job security are often denied to such workers.

Way forward: 

• Ensure Universal Social Protection: Extend mandatory social security coverage (e.g., ESIC, EPF) to all contract and gig workers, with portable benefits and employer accountability, regardless of tenure or contract type.
• Improve Legal Enforcement and Transparency: Strengthen labour law enforcement through digital compliance portals, randomised inspections, and public disclosure of contract employment data to prevent misuse and promote accountability.

Mains PYQ:

[UPSC 2024] Discuss the merits and demerits of the four ‘Labour Codes’ in the context of labour market reforms in India. What has been the progress so far in this regard?

Linkage: The article talks about the “labour code on industrial relations” introduced in 2020 which is related to the demand of the question. This code, awaiting implementation, aims to provide greater flexibility in hiring and firing by allowing firms to directly hire non-regular workers on fixed-term contracts without third-party contractors. However, it also seeks to curb exploitation by mandating basic statutory employment benefits.

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