The Narendra Modi government’s amendment of the labour rules to employ more workers on contract may give more flexibility to companies, but the process of substituting contract workers for regular employees has been going on for years. As the accompanying Chart 1 shows, contract workers now make up more than a third of all workers employed in the formal manufacturing sector.

Data from the Annual Survey of Industries (ASI) on employment in organized manufacturing shows that contract labour has become increasingly important. In 1997-98, the ASI data shows that directly employed workers were five times the number of those employed through contractors. By 2014-15, the latest year for which data is available, regular workers in manufacturing were only 1.8 times those employed through contractors.

Looked at another way, in the 17 years between 1997-98 and 2014-15, the compound annual growth rate (CAGR) of directly employed workers was a piffling 0.55%. In stark contrast, the CAGR of contract workers over the same period was 6.79%.

In fact, the number of regular employees in organized manufacturing fell sharply between 1997-98 and 2003-04, as Indian industry shed excess manpower and employed the latest technology, which was mostly labour-saving, in order to become competitive. Indeed, the CAGR in direct employment in the 10 years between 2004-05 and 2014-15 is a more respectable 3.67%. But that growth pales in comparison to the 8.08% CAGR in contract labour in these years.

In the manufacture of motor vehicles, for example, workers employed as contract labour are now 45.9% of total workers employed. In 1997-98, contract labour was 10.9% of total workers directly employed.

In the manufacture of beverages, tobacco products, coke and refined petroleum products, “other non-metallic mineral products" and in “repair and installation of machinery and equipment", contract labour is more than the number of directly employed workers. Even in capital-intensive sectors such as the manufacture of basic metals, contract labour was 46.5% of total workers employed. Chart 2 has the details.

The new rules assure pay parity for contract workers. However, a study by A.K. Panigrahi of the Central Statistics Office said that, in 2012-13, “it is clearly observed that contract workers are getting 60% less wage than that of the direct workers".

The study also said that most industrialized states had a higher proportion of contract workers in organized manufacturing.

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