UPSC DAW Mains Answer Writing 30th July 2025

UPSC DAW Mains Answer Writing 30th July 2025

Question

Contractualization in India’s formal manufacturing sector is often driven more by cost avoidance than genuine labour flexibility. Critically examine its impact on productivity and suggest measures to promote formalisation without undermining labour rights. (15 marks, 250 words) 

Model Answer

Introduction:  

  • In recent decades, India’s formal manufacturing sector has seen a sharp rise in contractualisation, where firms increasingly rely on contract workers. As per Annual Survey of Industries (ASI) 2022–23, contract labour now constitutes over 40.7% of the formal manufacturing workforce, up from 20% in 1999–2000. While intended to offer labour flexibility, studies suggest that the practice is often used primarily for cost reduction and regulatory evasion, undermining productivity and job quality in the long term.  

 Impact of Contractualization on Productivity: 

  • Lower Labour Productivity in Contract-Labour-Intensive (CLI) Firms:  

  • ASI-based longitudinal studies (1999–2019) show that CLI firms have 31% lower labour productivity than Regular-Labour-Intensive (RLI) firms. 

  • The gap is higher in small enterprises (<100 workers): 36%, indicating a correlation between informality and inefficiency. (Source: Institute for Human Development, 2023) 

  • High Turnover and Skill Attrition: 

  • Short-term contracts and third-party hiring discourage on-the-job training and investment in skill development, leading to a transient, less efficient workforce. 

  • This undermines long-term productivity, particularly in labour-intensive sectors such as textiles, leather, and food processing. 

  • Principal-Agent Problem and Moral Hazard: 

  • Third-party contractors may prioritize cost-cutting over skill-matching or compliance, leading to shirking and lower output quality. (ILO World Employment and Social Outlook, 2021) 

  • Cost Arbitrage, Not Competitiveness: 

  • The average daily cost per contract worker is 24% lower than for regular workers (ASI 2018–19), with some industries showing gaps as high as 85%. 

  • Such practices reflect exploitative cost arbitrage, not genuine efficiency. 

  • Exception – Capital and Skill-Intensive Sectors: 

  • In high-skill CLI firms, productivity was 5% higher, and in large capital-intensive CLI enterprises, it was 17% higher. 

  • These account for only 20% of formal manufacturing, indicating limited gains from contractualisation. (Source: ASI and NITI Aayog 2023)  

Why Cost Avoidance Drives Contractualisation: 

  • Regulatory Evasion: 

  • Contract workers are not protected under key provisions of the Industrial Disputes Act, 1947, and are excluded from most social security schemes. 

  • Weak Enforcement of Labour Laws: 

  • Despite existing protections under Contract Labour (Regulation and Abolition) Act, 1970, weak enforcement leads to systemic exploitation and lower compliance costs. 

  • Absence of Skill-Based Hiring Norms: 

  • Unlike OECD countries, India lacks incentives or mandates to ensure skill certification or contract tenure stability. 

 Policy Measures to Promote Formalisation without Undermining Labour Rights: 

  • Implement Labour Codes with Safeguards: 

  • The Industrial Relations Code, 2020 allows fixed-term contracts directly without intermediaries. 

  • It must be implemented with statutory benefits and clear tenure norms to prevent disguised informalisation. 

  • Incentivise Longer-Term Contracts: 

  • Offer social security contribution rebates or tax benefits for firms offering fixed-term contracts of 1 year or more, ensuring workforce stability. 

  • Revive and Expand PMRPY: 

  • The Pradhan Mantri Rojgar Protsahan Yojana (PMRPY), which subsidized EPF/EPS contributions, benefited 1.2 crore workers before being discontinued in 2022. 

  • Its revival could boost formal employment generation, especially among MSMEs. 

  • Strengthen Skill-Linked Employment: 

  • Tie employment incentives to NSQF-certified skills, using platforms like Skill India Mission and PMKVY for demand-driven skilling. 

  • As per NITI Aayog’s Strategy for New India @75, linking skills to formal employment is essential for productivity growth. 

  • Improve Labour Law Enforcement and Data Transparency: 

  • Use Digital Labour Platforms (e-Shram, EPFO-UMANG) to monitor contract workforce size, benefits coverage, and job churn. 

  • Strengthen labour inspection through smart audit tools, as suggested by ILO's India Decent Work Country Programme (2023–27). 

 Conclusion:  

  • While contractual labour can offer operational flexibility, its indiscriminate use for cost-cutting has eroded productivity, skill accumulation, and job quality in India’s formal manufacturing sector. A balanced approach, one that encourages formalisation through longer-term fixed contracts, labour law reform, and skilling, is essential for fostering sustainable industrial growth and protecting worker dignity.