Adopt Formalisation to Power Productivity Growth
Why in News?
India’s formal manufacturing sector is increasingly dependent on contract labour, raising concerns over job quality, wage gaps, and productivity stagnation.
1. Rising Contractualisation
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Share of contract workers doubled: 20% (1999-2000) → 40.7% (2022-23).
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Informalisation within the formal sector is growing, eroding worker welfare & productivity.
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Cost-driven hiring:
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In 2018–19, contract workers earned 14.47% less than regular employees (wage gap in large enterprises: 31%).
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Employer labour costs for contract workers: 24% lower on average; in some industries, 78–85% lower.
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Legal gap: Contract workers excluded from Industrial Disputes Act, 1947 – no protection against arbitrary dismissal.
2. Impact on Productivity (ASI Data – MoSPI)
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Principal-agent problems: High turnover & limited skill investments.
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Labour productivity:
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Contract labour-intensive (CLI) firms: 31% lower productivity than regular labour-intensive (RLI) firms.
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Gap highest in small firms (<100 workers): 36%, followed by medium (23%).
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In labour-intensive industries, gap widens to 42% (even after controls).
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Exception: High-skill/capital-intensive large CLI firms show 5–20% productivity gains, but form only 20% of the sector.
3. Policy Response
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Industrial Relations Code (2020):
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Allows fixed-term hiring without contractors.
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Seeks to mandate statutory benefits, but unions fear accelerated informalisation.
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Recommendations:
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Encourage longer-term contracts through social security concessions & skilling incentives.
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Revive PMRPY (2016–2022):
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Govt bore 12% EPF/EPS contribution.
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1+ crore jobs benefitted; revival could reduce contract labour misuse.
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PM Rozgar Protsahan Yojana (PMRPY)
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Implemented by: Ministry of Labour & Employment (Aug 2016 – Mar 2022).
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Purpose: Incentivising employers for generating new employment by paying 12% EPF/EPS for eligible employees (wages < ₹15,000).
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Impact: Expanded employment base, improved social security access for workers.
UPSC Tip:
In Demographic Dividend (D.D.) questions for Prelims & Mains, cite ASI data on productivity gaps to argue for reduced contractualisation & deeper formalisation of labour markets.
Way Forward
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Formalisation-first approach: Extend EPF/EPS incentives, revive PMRPY-like schemes.
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Skill-linked contracts: Mandate skill training for contract workers.
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Strengthen worker protection: Amend laws for security & benefits even for fixed-term hires.
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Targeted productivity support: Identify high-productivity sectors for contract hiring and incentivise formal employment.
Conclusion
India’s labour market dualism—growing contractualisation within the formal sector—is undermining productivity, worker welfare, and long-term growth potential. Formalisation through incentive-driven hiring, stronger legal safeguards, and skilling is vital to transform India’s demographic dividend into a productivity dividend.
