Don’t price labour out of the market
Delhi chief minister Arvind Kejriwal has announced the Cabinet will clear a 50 per cent hike in minimum wages next week. Union labour minister Bandaru Dattatreya has said a social security scheme to provide a medical cover for domestic workers will be tried out as a pilot in Delhi and Hyderabad.And, in his Independence Day address, prime minister Narendra Modi spoke glowingly of how his 26-week maternity benefits will make life easier for women—this makes India’s maternity benefits one of the highest in the world, especially in comparison with 14 weeks in China.
Hiking wages/benefits for workers is, in principle, a good thing but can boomerang very badly if not matched with productivity which is not possible in the short run. All that happens, then, is that workers get priced out of the market. In an open world, for instance, higher wages/benefits in India—in comparison with a China, a Bangladesh or a Vietnam, for instance—would result in India’s exports becoming less competitive and, to the extent India doesn’t block imports, it means Indian markets will get flooded with imports. At some point, sooner rather than later, India’s political class needs to start thinking of the consequences of their actions.
Dattatreya’s plans are more curious for two reasons. For one, compulsory medical insurance to be paid by employers will bring the dreaded inspector-raj into the lives of all those employing domestic workers.Two, given how finance minister Arun Jaitley has spoken of how EPFO/ESI had hostages instead of clients, why is Dattatreya plumping for ESI which overcharges and under-delivers? A study by TV Mohandas Pai and Rajesh K Moorti found ESI’s payout is so low, it had reserves of Rs 36,800 crore in FY14—these rose to Rs 42,800 crore in FY15—and is now utilising that money to build unrelated projects like medical colleges at an expense of Rs 12,600 crore.While the pressure from trade uni ons may prevent the government from going ahead with the reforms it had planned, the least it can do is to not make things worse. Especially since, in the case of the prime minister, he is way behind creating the number of jobs India needs, not just to take care of new entrants to the labour force but also those required to get people out from the less productive agriculture sector.