India's contract labour surge carries risks for jobs and the economy

The latest Annual Survey of Industries 2023-24 points to a worrying trend — the rise of contractualisation. Contract workers now account for 42 per cent of the workforce engaged in the organised manufacturing sector. This is the highest since 1997-98, when their share was only 16 per cent. In fact, contractualisation has risen by nearly 8 percentage points in the last 10 years, while the share of workers directly employed by factories has displayed a consistent declining trend. For a country like India, which must rely on labour-intensive manufacturing, rising contractualisation signals deterioration in the quality of employment being generated. 

Contract workers are typically not directly employed by factories but are hired through third-party agencies. Evidence suggests that Indian firms have traditionally faced rigid labour laws and strong employment-protection provisions, making it difficult to adjust the workforce based on demand conditions. To circumvent these restrictions, firms increasingly depend on contractual arrangements, which offer them greater flexibility in workforce management and reduce costs associated with benefits and job security. A striking aspect of this trend is wide interstate variations. In 2022-23, it was observed that 68.6 per cent of the industrial workforce in Bihar is contract labour, whereas Kerala reports only 23.8 per cent. 

Thus, uneven regulatory enforcement and different industrial practices across states add another layer of complexity to the challenge. There is also a clear rural-urban divide in that the share of contractual workers employed with factories located in rural areas is likely to be higher than that of contract workers in factories in  urban centres . Economist Arvind Subramanian and others have, for example, shown how firms adopt “multi-plant” strategies to stay nimble and diversify risks emanating from regulations, including labour laws. This fragmentation prevents workers from organising effectively, keeping collective bargaining weak and wage demands low. However, as a result, firms in India are not able to attain scale, which affects productivity and competitiveness. This is one of the reasons India has not been able to take advantage of its labour abundance and has underperformed in terms of exporting labour-intensive goods. Even capital-intensive industries, which typically require skilled workers, are also witnessing higher contract-worker intensity than labour-intensive sectors, undermining the argument that contractualisation serves only low-skill or temporary needs. Instead, it points to a systemic shift towards precarious employment practices aimed at cost-cutting and power asymmetry. 

These trends are concerning since contract workers do not enjoy the same employment benefits as regular workers. These include no job security, limited or no insurance, and no paid leave. The result is an increasingly fragile workforce that bears the brunt of economic shocks, with little recourse. In this context, operationalising the four labour codes without delay remains critical. They promise streamlined regulation, improved working conditions, and greater stability for contractual and gig workers. By making labour markets more inclusive and secure, they can help arrest the deteriorating quality even in the formal sector. In terms of broader macroeconomic outcomes, deterioration in labour-market conditions, even in the formal sector, will have implications for overall demand. India needs a balance between flexibility in the labour market and employment conditions.