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Friday, 19 August 2016 05:10
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Govt needs to be careful while hiking minimum wage

 

If it wasn’t bad enough that Delhi chief minister Arvind Kejriwal’s 50% hike in minimum wages could trigger similar moves across other states—that’s what happened when he subsidised electricity usage to certain consumer segments—it appears the central government is planning even higher hikes.In the case of agriculture, for instance as FE’s lead story reports today, it is proposed that wages of unskilled workers be raised by 65%; for highly-skilled workers in the construction sector, the hike is likely to be a bit lower at 63%.At a time when the government is trying to promote Make-in-India and hoping to take advantage of the damage done to China’s competitiveness by a sharp hike in wages there, hiking minimum wages is the surest way of ensuring it does not happen—if wages have to rise, this has to be countered by a hike in productivity which is not possible in the short-term. It is precisely because India’s wage-to-productivity equation is not rising as fast as in countries like Vietnam and Bangladesh that they are faring better on the exports front—in the post-MFA period, India’s apparel exports rose just 3.7% a year versus 18% for Vietnam, 15.7% for Bangladesh and a healthy 6.9% for China which already had a very large export base by 2005.

This, as the World Bank pointed out some months ago, was because India’s wages were quite high (hourly wages in India were $1.06 in 2012 vs $0.51 in Bangladesh), its productivity lower (India is ranked #6 in a buyer perception survey versus 3 for Vietnam), lead times poorer (India is ranked #6 versus 2 for Vietnam), and poor presence in synthetic fibres compounded by high import tariffs on them. Hiking minimum wages will not only mean India’s exports will suffer further, it will also result in greater imports since, in a globalised world, you can’t be competitive locally unless you are globally competitive.

There are also other potential worry areas that the government needs to keep in mind. While the hike in salaries will promote more informalisation of employment with employers trying to find ways to beat the wage hike, the fact that around 30% or more of salaries gets seconded by way of payments to EPFO and ESI will only make it worse. Since the ESI currently applies only to those earning under R15,000 per month, this means the ESI cutoff levels will have to be hiked—this will not make much of a difference to the number of people ESI will cover assuming everyone’s salaries rise in the same manner. In the case of EPFO, however, the implications are far more serious. Right now, no matter what your salary, pension payments are based on the highest salary being R15,000 per month. Once this in increased and the pension outgo rises, this could have serious repercussions since, with increasing longevity, pension payments have to be made for longer periods—while that may not make a big difference today since there are far more people contributing than those retiring, the long-term implications need to be studied carefully.

 

 

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