Adopting Formalisation to Power Productivity Growth in India’s Formal Manufacturing

Contractualisation in India’s Formal Manufacturing: A Negative Trend

• Contract labour in India’s formal manufacturing sector has doubled from 20% in 1999-2000 to 40.7% in 2022-23.

• The shift towards contractualisation is linked more to cost avoidance than genuine labour flexibility or skills.

• Contract workers, hired through third-party contractors, are excluded from core labour laws under the Industrial Disputes Act 1947, making their bargaining power weak.

• Wage payments of contract workers in 2018-19 were 14.47% lower than regular counterparts.

• The average daily labour cost to the employer for contract workers was 24% lower than regular workers.

Impact on Productivity

• Contract workers can bring job-specific skills and serve as a buffer, enabling firms to respond swiftly to market fluctuations.

• Contract labour can suffer from principal-agent problem, leading to moral hazard issues and high labour turnover, discouraging investments in on-the-job training and innovation.

• Contract labour-intensive enterprises have an average of 31% lower labour productivity compared to regular labour-intensive enterprises.

• Labour productivity was 5% higher in high-skill CLI enterprises compared to their low-skill counterparts.

Policy Suggestions

• The central government introduced a labour code on industrial relations in 2020 to provide greater flexibility in hiring and firing.

• Policymakers can incentivise firms to adopt reasonably longer fixed-term contracts by offering concessions in social security contributions or subsidised access to government skilling programmes.

• The Pradhan Mantri Rojgar Protsahan Yojana (PMRPY) in 2016 could incentivise job creation in the formal sector by bearing employer’s contribution to Employees’ Pension Scheme (EPS) and Employees’ Provident Fund (EPF)