[op-ed snap] The minimum wage solution


From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Minimum wage & Inequalities


The government made two recent announcements to mitigate the economic crisis. 


  • One is a new indexation of NREGA wages to increase rural incomes. 
  • Second is a reduction in the corporate tax rate.

Indexation of wages

  • Prices of commodities increase each year.
  • So it’s important to accurately estimate how much NREGA labourers should earn in 2020 if she earned ₹179 (national daily average NREGA wage) in 2019.
  • This needs a good index to benchmark and revises the wages. 
  • The index must be based on the main items of consumption for rural households
  • NREGA daily wages are to be indexed with an updated inflation index called the Consumer Price Index-Rural (CPI-R) instead of the older Consumer Price Index-Agricultural Labourers(CPI-AL). 
  • The calculation of CPI-AL involved more food items in the consumption basket. Calculation of CPI-R involves more non-food items such as healthcare and education. 
  • CPI-R better reflects the rural consumption basket compared to CPI-AL.

Challenge with the indexation

  • This new indexation will have a sizeable impact on the increase in rural incomes only if the base NREGA wages are high. 
  • If we assume a 10% increase in wages due to the new indexation, then NREGA wages in Kerala at ₹271 per day would become ₹298. If NREGA wages were equal to the State minimum wages, the wages in Kerala would increase from ₹490 to about ₹540. 
  • A substantial increase in NREGA wages and subsequent indexation with CPI-R would be meaningful for the workers and the economy. 

Minimum wages

  • Barring three States/UTs, NREGA wages are still lower than the State minimum wages in violation of the law.
  • Minimum wages are neither a dole nor an act of charity. They are  arrived at by calculating the minimal nutritional requirement and basic needs of an individual. 
  • The Fair Wages Committee of the Ministry of Labour noted in a report that a “living wage” should also include education, healthcare and insurance besides the bare essentials. 
  • In Sanjit Roy v. State of Rajasthan (1983), the Supreme Court held that paying less than minimum wages is akin to “forced labour”
  • In Workmen v. Management of Raptakos Brett (1991), it said that the aforementioned provisions must be added to arrive at a moral “living wage” to ensure basic dignity of life. 
  • The current daily NREGA wages are just a quarter of the minimum daily living wage of ₹692 as outlined in the 7th Pay Commission.
  • The last annual NREGA budget is ₹60,000 crore. The budget allocation for NREGA gets exhausted by October of each financial year, leading to delays in payment of wages. These are all legal violations.
  • In circumstances of unsustainable wages, the poor would be forced to become part of the migrant labour force. 

Corporate tax cuts & Inequalities

  • The current corporate tax cut will only widen economic inequality
  • According to the Oxfam Inequality Report 2018, in one year, the wealth of the richest 1% in India grew by ₹20.91 lakh crore, which is equivalent to the 2017-18 Budget. 
  • According to estimates by CRISIL, due to the recent tax cut, 1,000 companies would have annual savings of around ₹37,000 crore
  • According to a 2015 IMF report, “if the income share of the top 20% increases, then GDP growth actually declines over the medium term, while an increase in the income share of the bottom 20% is associated with higher GDP growth.

Challenges if not matched with rural needs

  •  Corporate tax cuts and lower interest rates would give corporations some liquidity, it is unlikely that rural demand will increase.
  • Without a substantial increase in NREGA wages, the wages would barely match inflation levels leading to wage stagnation in real terms. 

Way ahead

  • It is economically prudent to substantially increase the budget for public programmes such as NREGA.  This would lead to higher disposable income for the poor and have positive multiplier effects in the economy.
  • Jean Dreze and Amartya Sen’s poignant imagery of India having pockets of California in a sea of sub-Saharan Africa is still eerily true.
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