Context

• The growing trend of contractualisation in India’s formal manufacturing sector has raised serious concerns about productivity, labour rights, and job quality. This editorial explores how over-reliance on contract labour for cost-cutting, rather than skill flexibility, is counterproductive and demands a policy shift towards formalisation

Background

• Share of contract labour in formal manufacturing rose from 20% in 1999- 2000 to 40.7% in 2022-23, per Annual Survey of Industries (ASI).
• Informalisation within formal sectors is seen as a cost-cutting measure rather than a strategy for skill enhancement or flexibility.
• Plant-level ASI data shows misuse of contract labour harms productivity, necessitating a push for formalisation.

Pradhan Mantri Rojgar Protsahan Yojana (PMRPY)

• Implementing by: Ministry of Labour and Employment. 
• Objective: To incentivise employers for generating new employment. 
• Government Contribution: The Central Government pays the employer's EPF contribution (12%) for new employees earning up to 15,000/month. 
• Duration of Benefit: Contribution is paid for 3 years for each eligible new employee.
• Eligibility Cut-off: Employees registered under the scheme up to 31st March 2019 will receive benefits up to 31st March 2022. 

Key Benefits

• Encourages employers to expand their workforce. - 
• Helps create formal jobs for workers in the organized sector. - 
• Provides new workers access to social security benefits. - 
• Facilitates the transition of informal workers into the formal employment system. 

Challenges Highlighted

• Legal Exclusion: Contract workers are hired through third-party contractors and are excluded from protections under the Industrial Disputes Act, 1947.
• Wage Disparities: 2018-19 data shows contract workers earn 14.47% less than regular workers on average. Disparities are most severe in large firms (31% lower), followed by medium (23%) and small (12%) firms.
• Exploitation in Labour Costs: Labour costs for contract workers are 24% lower than regular workers; some industries show cost gaps as high as 78-85%.
• Productivity Losses: Productivity gap is worst in small firms (<100 workers) at 36%, and labourintensive enterprises at 42%.
• Principal-Agent Problem: Third-party contracts often misalign long-term goals, leading to low training, high turnover, and worker shirking.
• Skilled vs Unskilled Divide: CLI enterprises with high-skill roles see 20% productivity gain (in large firms), but these represent only 20% of the sector. The remaining 80% suffer from low productivity due to contract-driven employment instability. 

Way Forward

• Encourage Long-Term FTCs: Offer concessions on social security contributions or subsidised skilling for firms adopting longer contracts.
• Revive Pradhan Mantri Rojgar Protsahan Yojana: Reinstate and expand this scheme to reduce the incentive for excessive contractualisation.
• Balance Flexibility with Stability: Design policies that enable hiring ease without compromising job security or training investment.
• Sector-Specific Regulation: Targeted oversight for labour-intensive and small/medium enterprises to curb cost-cutting misuse of contract labour.