Minimum Wage

The issue of minimum wage has been much in the news recently, especially after the exchange of letters between the Prime Minister and Mrs. Gandhi, in her capacity as Chairperson, NAC. The central issue right is the violation of minimum wage act in NREGA by the State – a situation with far reaching Constitutional and legal repercussions. However this has been variously trivialized as a purely fiscal issue thus lending itself to braindead response from some quarters. A short note.

PS. For those interested – will add additional background material on this issue from the documents that were circulated as part of the two day wage policy meeting in Delhi. Also brief notes from the meeting.

Labour Ministry’s Report on Employment and Unemployment Survey (2009-2010) notes, “Despite impressive economic growth over the years, the situation on employment front leaves much to be desired”. There is high overall unemployment (9.4%) with 10.1% unemployment in the rural sector and 7.3% in urban areas. Underemployment, which will be much higher, has not been calculated. High urban unemployment is notable because as per this report, only 26% of the population is urban – it is thus likely that the unemployment rate will grow with increasing urbanization as per government policies.

As per International Labour Organization’s (ILO) Global Wage Report 2008-09, “the connection between wages and productivity is stronger in countries where collective bargaining covers more than 30 per cent of employees”.  In India though, 93% of the workforce is in the unorganized sector – with the annual rate of growth of employment less than the growth rate of workforce, and high existing unemployment rate, the size of the informal sector will continue to grow – inevitably increasing deflationary pressure on unorganized labour’s wages.

In this context, the need for a coherent national wage policy that addresses issues of a rational minimum wage, its enforcement and other social security measures for the unorganized sector is obvious. Unfortunately the unorganized worker has seen a continuous erosion of rights in the progression from the ideals of the Constitution to legislation to implementation and enforcement. The Constitution directed the State to secure a living wage, which was reduced by subsequent legislation to a minimum wage and now steadily negated by an apathetic State to a starvation wage.

Minimum Wage

As per the Constitution (Article 43), “The State shall endeavour to secure, by suitable legislation or economic organisation or in any other way, to all workers, agricultural, industrial or otherwise, work, a living wage, conditions of work ensuring a decent standard of life […]”

The Minimum Wage Act, 1948 (Section 12.1) states “Where in respect of any scheduled employment a notification under section 5 is in force the employer shall pay to every employee engaged in a scheduled employment under him wages at a rate not less than the minimum rate of wages fixed by such notification for that class of employees in that employment without any deductions [..]”.

As per Section 4(1), the minimum rates of wages fixed or revised by the appropriate authority (Central or State Government) for the scheduled employments shall take into account the following:

  1. a basic rate of wages and a special allowance at a rate to be adjusted at intervals with the variation in the cost of living index number applicable to such workers; or
  2. a basic rate of wages with or without the cost of living allowance, and the cash value of the concessions in respect of supplies of essential commodities at concessional rates, where so authorised; or
  3. an all inclusive rate allowing for the basic rate, the cost of living allowance and the cash value of the concessions, if any

The 15th Indian Labour Conference (1957) defined the following norms to calculate minimum wage:

  1. 3 consumption units for one earner.
  2. Minimum food requirements of 2700 calories per average Indian adult.
  3. Clothing requirements of 72 yards per annum per family
  4. Rent corresponding to the minimum area provided for under Government’s Industrial Housing Scheme.
  5. Fuel, lighting and other miscellaneous items of expenditure to constitute 20% of the total Minimum Wages

These norms were further enhanced by the Supreme Court in its judgment in the case of Reptakos Brett and Co. Vs. its workmen (1991) by an additional 25% of the total minimum wage for education, medical requirement, minimum recreation including festivals/ceremonies and provision for old age, marriage etc

However in complete disregard of the above, the daily minimum wage today in most states hovers around Rs 100, with Nagaland even lower at Rs 80 and Delhi highest at Rs 203[i] (annexed). As per calculations done by NTUI, the daily minimum wage today, as per norms fixed in the 15th ILC, is Rs 260 in rural areas and Rs 347 in urban areas (not including rent).

Note: The fact that essentials like fuel, lighting, education, medical treatment are estimated to be only ~45% of food expense assumes that these are heavily subsidized by the State – an obviously incorrect assumption, especially in light of current neoliberal policies. Further these guidelines do not account for transportation costs, which are significant and increasing given current migration patterns.

Fixing a minimum wage below the norms prescribed by the 15th ILC is not an oversight but a calculated exercise. The Second National Commission on Labour Report notes, “Wage Boards after the Second Pay Commission (1957-59) have not found it possible to fix the need-based minimum wages recommended by the Indian Labour Conference (1957). The Report of the Committee, set up by the first National Commission on Labour, on the Functioning of the System of Wage Boards (cited in the Report of NCL, 1969) found it infeasible because the need-based minimum would be beyond the capacity of the industry to pay and might result in the transference of the burden to the consumer”. Subsequently the Sub-committee ‘D’ of the Standing Committee of Labour Ministers (1981) diluted the norms prescribed in the 15th ILC recommending, “the level of minimum wage should not be below the poverty line”, and further diluted by The Report of the Committee of Secretaries of States (1981) which reduced per day caloric requirements to 2400 calories in rural areas and 2100 calories in urban areas

However even these low statutory wages are not being paid. As per simulations from household data in the ILO report, “Extending The Coverage of Minimum Wages in India”, at least up 73 million workers (out of 173 million waged workers) received “wages below the national minimum wage floor of Rs. 66 per day in 2004-05. This includes more than half of all casual workers (58.6 million earners) and another one-fourth of all salaried workers (or 14.5 million workers). Unsurprisingly, female workers and those residing in rural areas are more likely to earn below minimum wages”. The report adds, “these high proportions may result from a variety of reasons, but presumably include a large number of workers in “schedules” that are not-covered by the minimum wage legislation (note: this study uses NSSO employment and expenditure survey data from 2004-2005, before the implementation of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), which has had a large impact on actualizing minimum wages for the unorganized worker).

Minimum wage inadequate for minimum needs and the widespread prevalence of payment below minimum wage is an outcome of both lacunae in the legislation and poor enforcement. As highlighted above, the Minimum Wage Act does not define the method of calculation of minimum wage, thus allowing arbitrary fixation by Central and state governments. Further, respective governments are only advised to revise wage rates after a period not exceeding five years, which too is optional. The Act also doesn’t mandate inflation indexation. Indexation was recommended only in the Labour Ministers’ Conference (1988) and the variable dearness allowance (VDA) linked to CPI. Only 26 states/UTs incorporate VDA as a component of minimum wage. Further, the Act covers only those employments listed in the two schedules, thus leaving a whole raft of employments not notified (e.g., domestic workers) outside the protection of the legislation. Finally enforcement is strictly top-down through labour inspectors with no mechanism for bottoms-up reporting to enforce compliance. This year’s Labour Ministry’s report notes that 66% workers are employed in enterprises having less than 10 workers and 44% are employed in seasonal or ad-hoc enterprises. Given the dispersed and casual nature of employment, it is obvious that top-down enforcement (even if sincere) is very difficult. This has obvious policy implications such as the need for market level intervention through employment guarantee programs, and aggregated delivery of social security benefits.

Minimum Wage and the MGNREGA

While enforcing compliance with the Minimum Wage Act is difficult, the MGNREGA (until recently) has been remarkably effective in actualizing minimum wages for the unorganized worker. The Mahatma Gandhi National Rural Employment Guarantee Act entitles each rural family up to 100 days of unskilled work at minimum wage. The introduction of the Act increased worker bargaining power even on non-NREGA works thus raising extremely depressed wage rates to prevailing minimum wage rates across the country. By reducing distress migration, the MGNREGA also helped reduce deflationary pressure on wage rates in urban areas due to surplus labour. Thus experience with NREGA demonstrates the value of employment guarantee programs in the implementation of minimum wages.

However the gains from the MGNREGA are not just being squandered away, they are in fact being reversed. In January, 2009, the Government of India issued a notification under Section 6(1) of the MGNREGA, which delinked MGNREGA wages from the Minimum Wage Act freezing MGNREGA wages at the prevailing state minimum wage or up to Rs 100 per day. Today, MGNREGA wages in at least 19 states are less than the prevailing state minimum wage, thus hitting the worker not just in real economic terms, but de facto capping market wages to below minimum wage.

Sanctity of The Minimum Wage Act

Supreme Court in three separate rulings, has held that non payment of minimum wages is tantamount to ‘forced labour’ prohibited under Article 23 of the Constitution. The Supreme Court holds that ‘forced labour’ may arise in several ways, including “compulsion arising from hunger and poverty, want and destitution”. In Sanjit Roy Vs. State of Rajasthan (1983), the Supreme Court held that the Exemption Act in so far as it excluded the applicability of the Minimum Wages Act 1948 to the workmen employed in famine relief work is “clearly violative” of Article 23. Thus even public works ostensibly initiated by the government for the sole purpose of providing employment are subject to the Minimum Wage Act.

Drawing on the Supreme Court rulings, Andhra High Court set aside the Government of India (GoI) notification mandating that prevailing state minimum wage be paid. This has been underscored in the legal opinion provided by Additional Solicitor General, Ms. Indira Jaising, to the Central Employment Guarantee Council (CEGC) Working Group on Wages where she made it clear that using Section 6(1) to allow a payment of less than minimum wage in MGNREGA works will amount to forced labour. 15 eminent jurists and lawyers of India too have asked Government of India to immediately revoke its unconstitutional notification and ensure that minimum wages are paid to all workers in India.

Three Chief Ministers (Rajasthan, Andhra Pradesh and Kerala) have written to the Prime Minister requesting the Ministry of Rural Development’s (MoRD) compliance with the Minimum Wage Act, followed by a letter from the Chairperson, NAC and UPA, to the Prime Minister calling his attention to find urgent resolution of this matter. Finally, the Labour Ministry too has reiterated its “fundamental objection” to Section 6(1), warning that using Section 6(1) to allow payment of less than prevailing state minimum wage will not stand legal scrutiny.

However despite this overwhelming legal and political consensus, both the GoI and the Government of Andhra Pradesh continue to be in contempt of the Andhra Pradesh High Court (July 2009) citing fiscal concerns. In fact in his response to the Chairperson, NAC regarding violation of minimum wages in NREGA, the PM has asserted that the wage rate under NREGA is independent of the provisions of the Minimum Wages Act, a statement that runs counter of the established Constitutional, legal and political opinion

Fiscal Prudence and Corporations

The rationale for fixation of low minimum wage is the need to “balance” minimum needs of the worker with the “capacity to pay” of the employer. Government’s defense of its illegal and unconstitutional delinking of NREGA wages from the Minimum Wages Act is also economic – the need for budgetary predictability and reduction of its fiscal deficit.

However despite overriding fiscal concerns, corporate taxation in India remains one of lowest in the world. For instance, central government corporate income tax in the United State is 35%; UK is 28%; Australia is 30%; France is 34%; Japan is 30%[ii]

In India, the effective tax rate for the private sector is only 21.56%. For corporations with profit before tax greater than Rs 500 crores, the effective tax rate is 22.05% (effective tax rate is generally lower with increasing pre-tax profit). Further the revenue foregone (through subsidies) in 2009-2010 is Rs 502,229 crores up from Rs 414,099 crores the previous year, and a whopping 80% of the aggregate tax collection of the year[iii]. The statement notes, “the amount of revenue foregone continues to increase year after year. As a percentage of aggregate tax collection, revenue foregone remains high and shows an increasing trend as far as Corporate Income-tax is considered for the financial year 2008-09. In case of indirect taxes the trend shows a significant increase for the financial year 2009-10 due to reduction in customs and excise duties. Therefore, to reverse this trend an expansion in the tax base is called for”. (emphasis added)

(Even here it is telling that the Finance Ministry seeks to expand the tax base (to tax the smallest companies but not raise the lowest effective tax rate for the largest companies)).

For a country that lists “socialist” in its Constitution’s preamble, not only is the government not fulfiling its redistributive responsibility, but by denying its poorest adequate wages (through arbitrary fixation, freezes and lack of implementation and enforcement) to meet even minimum needs, the State is directly subsidizing the richest at the expense of the poorest.

Fiscal Prudence and Public Servants

The 6th Pay Commission report notes, “Average for the years 2004-05 to 2006-07 shows that pay, allowances and pensions including those for Railways comprise 24 percent of revenue receipts”. Despite this, the 6th Pay Commission was notable for its very high pay increase recommendations (all accepted by the government). Its report notes that that the annual gross impact of its recommendations is estimated at Rs 12,561 crores and an additional one time cost of Rs 18,060 due to its retrospective implementation. In addition to this windfall, noting the unabated inflation, dearness allowance for the bureaucracy was raised by ten percent from 35% to 45%. MPs too successfully agitated to raise their own salaries threefold in August 2010 while continuing to enjoy free accommodation in the best localities, travel etc. Contrast this with the successful pushback for a comprehensive food security proposal that was estimated to cost just 1% of the nation’s GDP, despite the fact that India has the largest number of hungry people in the world, and is ranked below even some sub-Saharan countries for child malnutrition.

Income Enhancement For The Poor is A Growth Strategy Not Subsidy

While this expenditure does not need economic justification given the imperatives of equitable growth and our current appalling human development indicators, government intervention to enhance income of the poorest is both good economics and improves social stability.

Increasing income of the lowest paid workers of the country is good for national growth, since this increased income is most likely to be consumed fuelling domestic demand. This is underscored by the ILO Global Wage Report 2009-2010, “Before the [global financial and economic] crisis, some countries were able to maintain household consumption through increased indebtedness [USA], while other countries based their economic growth mainly on exports [China]. This model, however, has proved to be unsustainable. In the future, countries may find it in their interest to base their economic growth on stronger household consumption, and on household consumption that is anchored in earned income rather than based on increasing debt”.

Reducing inequality is also a social imperative. While the Indian government hopes to emulate in part China’s growth trajectory through low-cost manufacturing on the back of cheap migrant labour, China itself has had to contend with growing labour unrest in 2010. Experts attribute this growing labour unrest on changing demographics – shrinking workforce due to family planning and younger second-generation workers more aware of their rights. With the Indian State pushing rapid urbanization in a bid to move people from agriculture, there are initial signs of labor unrest in India as well. Manufacturing centers in National Capital Region of Gurgaon and Noida witnessed violent labor-management disputes in 2010. It is obvious that workers’ rights must be proactively attended to ensure sustainability.

Wage Subsidy

The MGNREGA has been instrumental in raising the severely depressed wages of unorganized workers, an obviously desirable outcome. However, it has been criticized for the same reason on the argument that the higher labour cost has rendered production by small producers (especially small farmers) unviable. There is some validity to this argument – however the genesis of this situation is not “high” labour cost but extremely low productivity of small enterprises, especially in agriculture. The crisis in agriculture has been highlighted by people like P. Sainath, MS Swaminathan and is due to structural reasons (rising input cost, other than labour, shift to cash crops, unavailability of low-interest credit, low yields, lack of irrigation facility, etc). While long-term measures addressing problems ailing the agricultural sector in India would incorporate all of these challenges, the immediate state response should not be at the expense of the poorest workers of the country. A short-term measure thus being mooted is “wage subsidy” to compensate the small and marginal farmer/producer for the wage differential of market wage rates and statutory minimum wage (please contact NTUI for more details on this)

Next Steps

To conclude, there is an urgent need to define the principles for fixation of minimum wage and the method and periodicity for its increase. Further the relationship between the national floor and state minimum wage also needs to be defined. This is especially important in light of the ongoing crisis in NREGA due to Center’s arbitrary freeze in NREGA wage rates, ostensibly to guard against undue increases by state governments. Finally, effective mechanisms for implementation and enforcement of minimum wage need to devised.

[i] Minimum Wage Rates, November 2010; Source: Labour Ministry

[ii] Taxation of Corporate and Capital Income (2010), OECD

[iii] India Budget 2010-2011, Annexure 12 (Table 1, 3, and 12)


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