The blaze started early on Sunday when more than a hundred workers were sleeping in the four-storey building in a residential part of Delhi.

The factory, which made school bags and toys according to Indian media, was packed with combustible materials such as paper, plastic and cardboard, causing it to burn for hours before being brought under control.

"We have arrested the owner and a manager of the factory where the fire broke out and initiated an investigation which is going to be completed soon," Mandeep Singh Randhawa, Delhi police spokesman, told Reuters.

Most workers employed at the unit used to live in the factory itself, cooking meals there.

The Indian Express quoted one of the victims who had telephoned a neighbour in his home town in central India saying he was trapped and going to die soon and that he should take care of his family.

Fire engines had struggled to access the congested lane where the building was located, witnesses said.

Frequent raids by civic authorities to enforce building codes, fire safety measures and evacuation procedures have failed to curb violations in the rapidly expanding city of 20 million people.

Delhi Chief Minister Arvind Kejriwal announced compensation of one million rupees ($A20,600) for the families of those killed.

On Monday morning, more fire engines were dispatched to the factory to douse a small fire caused by burning waste.

Australian Associated Press