Tthe contract labour (regulation and abolition) act 1970 seeks to protect the interest of workers employed on contract. on the one hand, it seeks to provide contract workers minimum wages through licensing of contractors and by holding principal employers accountable for enforcement of the law. on the other hand, it empowers state and central governments to prohibit the conduct of certain kinds of work through contract labour. the concerned government can issue a notification in the official gazette to prohibit employment of contract labour in any process, operation or other work. the central government has abolished contract labour practices in a number of jobs in different industries and has issued 36 notifications so far in this regard. once a type of occupation is determined to be outside the ambit of contract labour, two issues arise: one, the future of the workers who have so far been employed on contract; and two, the options before the principal employer for getting the work done. while the act does not make it mandatory for the principal employer to hire on a permanent basis all the workers who had been employed on contract before contract labour was abolished in that occupation, several court rulings have made such absorption of the contract labour mandatory. in particular, the 1996 supreme court ruling in the air india statutory corporation ltd and others vs united labour union and others case said that the principal employer has an obligation to absorb all contract labour who are retrenched as a result of issuance of a notification under section 10 (1) of the act prohibiting contract labour. the consequence of the act has been to restrict employment growth and depress productivity. the effect of other pieces of labour legislation such as the industrial disputes act has been to make it practically impossible for enterprises to shed labour once hired. when the contract labour act, as interpreted by the supreme court, makes it mandatory to hire hands who cannot be laid off subsequently even if economic conditions warrant such retrenchment, large enterprises find it risky to outsource various types of work to contractors. instead, they do the work in-house in a capital-intensive manner that reduces employment. in practice, the contract labour law covers only a small organised segment of the labour force. the cost of restricting employment growth and reducing productivity of capital more than outweighs the benefit to a small proportion of the workforce. hence the need to amend the law. the constitution bench of the supreme court overruled, with prospective effect, the 1996 ruling in the air india case and declared that there is no automatic obligation on the principal employer to absorb all the contract labour working on its behalf, in the event of the government prohibiting the type of contract labour engaged by it. this spared sail the killing burden of absorbing close on 12,000 workers. sail is free to redeploy its existing workforce to carry out the work in which contract labour has been prohibited. the ruling would encourage other employers also to outsource more and more kinds of work, as the risk of having to absorb contract labour has disappeared. it has not. once a particular kind of activity has been barred for contract labour, such activity cannot be outsourced by an enterprise. this might not be much of a problem for a company with existing excess manpower but calls for fresh recruitment by a company that already runs a lean operation in terms of manpower. this restricts factor market flexibility, impedes efficiency and reduces employment. it is still necessary, therefore, to amend the law to facilitate outsourcing of activities without any restriction and to make appointments on contract. the finance minister should deliver on his budget promise to do away with differentiation between core and non-core activities and to protect the labour engaged in outsourced activities in terms of health, safety, welfare and social security.