Reform or entitlement?

Minimum wage Bill could be counter-productive

The Union Cabinet has cleared a new code that will govern minimum permissible wages in India. The Bill has yet to be debated and cleared in Parliament, but aside from some reforms to provident fund payments and to apprenticeship, it is the primary change that the Narendra Modi-led government has approved so far to central labour laws. It consolidates four existing pieces of legislation governing the payment of wages and rationalisation of labour codes are under process, according to the labour ministry, to social security, industrial relations and working conditions. 

The reform and rationalisation of central labour laws is an important project and it is unfortunate that this is taking as long as it has. It is, however, even more important to get it right. Labour laws, as they stand, are one of the greatest restrictions on the growth of the manufacturing and formal sector, and thus on the creation of stable and well-paying jobs in India. This has been understood for a long time, and so it is welcome that the government has moved on this subject, however delayed its action might be.

There are, however, concerns about the code as it stands. For one, it is far from clear whether it reduces the degree to which an “inspector raj” reigns in the manufacturing sector. The point of labour law reform is to make regulation less intrusive and more effective. The government has yet to make a convincing case that these changes to minimum wage regulation will do precisely that. Further, any changes to labour laws should take into account the fact that the government has an abysmal record when it comes to implementing such regulations, and that the larger and more expansive the regulations’ ambitions, the more counter-productive they have turned out to be. Regulations that seek to protect formal employment have resulted only in the decrease of the number of such jobs. 

Does the new code replicate such mistakes? It appears that it does exactly that. For one, it expands the reach of minimum wage regulation to non-formal jobs. The scope for intervention in business by government inspectors has thus been vastly increased. Further, it is well understood that minimum wage legislation can frequently reduce the number of jobs on offer. This means that any such legislation has to be carefully designed with a view to local and sectoral conditions. This code does not do that either — it assumes a single national floor for wages. A single minimum wage for a country as diverse as India, with so many variations to costs of living, will undoubtedly distort the labour market much more than is wise. 

While it is good news that the government is finally getting to reforming central labour laws — which should have been its priority on day one — it is also unfortunate that the code does not seem to satisfy the basic conditions required to sufficiently improve the current problems in the labour market. As it stands, this looks less like labour law reform and more like another entitlement — one that will prove, like many before it, to be counter-productive.