The quote was made in the following context:
It is a pity that Caste even today has its defenders. The defences are many. It is defended on the ground that the Caste System is but another name for division of labour and if division of labour is a necessary feature of every civilized society, then it is argued that there is nothing wrong in the Caste System. Now the first thing that is to be urged against this view is that the Caste System is not merely division of labour. It is also a division of labourers. Civilized society undoubtedly needs division of labour. But in no civilized society is division of labour accompanied by this unnatural division of labourers into watertight compartments. The Caste System is not merely a division of labourers which is quite different from division of labour—it is a hierarchy in which the divisions of labourers are graded one above the other. In no other country is the division of labour accompanied by this gradation of labourers.
(From his book, The Annihilation of Caste.)