Employment by contract: Contractualisation is affecting employment quality

Despite witnessing years of rapid economic growth, India has seen modest employment creation in its formal manufacturing sector. The latest Annual Survey of Industries (ASI) data reflects an increasing trend of contractualisation. Between 2001-02 and 2022-23, the absolute number of workers in India’s formal manufacturing sector more than doubled, increasing from 5.96 million to 14.61 million. However, during the same period, the share of workers directly employed by factories went down, while contract workers’ share increased from 21.8 per cent to 40.7 per cent. Contractual workers are not directly employed by firms but are hired on a contractual basis, often through third-party agencies. The ASI data also exhibits large inter-state variations. In Bihar, 68.6 per cent of its industrial workforce is employed as contract labour, while the corresponding share for Kerala is only 23.8 per cent.

 

Indian firms’ increasing reliance on contract workers for factory units could be attributed to various factors, including the need for greater flexibility, getting around rigid employment and labour laws, cost considerations, and the evolving nature of employment practices in the industrial sector. A sectoral analysis of contractual workers by various researchers reveals that capital-intensive industries have seen a greater increase in contract-worker intensity over time, although such industries need more skilled workers than labour-intensive ones do. In addition to labour market rigidities and existing wage differentials between contractual and directly hired workers, firms hire more contract workers to keep in check the bargaining power and wage demands of unionised regular workers.

 

Contract workers do not get the same employment benefits and protections as regular workers, such as job security, insurance, and paid leave, thereby rendering their employment status volatile and precarious. They also do not possess enough collective bargaining power to organise themselves and engage in collective action. Recent research by economist Arvind Subramanian and others shows in an effort to counter frequent disruptions in manufacturing activities, firms are not only hiring more contract labourers but are increasingly choosing to distribute their workforce across multiple factories — or “multi-plants” — rather than scale up a single plant. Having multiple plants with fewer workers and recourse to contract labour endow firms with greater flexibility to respond to sudden economic or political shocks.

 

Contractualisation is increasing in other non-farm sectors as well, including trade, transport, health, and education. Results from the Quarterly Employment Survey, released by the Labour Bureau, showed the share of contractual employees in the nine major non-farm sectors of the economy more than doubled to 18.44 per cent in the second quarter of 2022-23 from 8.3 per cent in the second quarter of 2021-22. Contractualisation has become pervasive not just in the private sector but is also increasing in public-sector establishments. This is cause for concern because it reflects deterioration in the quality of jobs being generated. It is hoped that implementing the four labour codes will improve working conditions and generate more stable employment.