The Aam Aadmi Party government on Wednesday cleared a significant 46% hike in minimum wages for workers in Delhi.

An unskilled labour will now be entitled to a minimum wage of Rs 14,052, up from Rs 9,568. For semi-skilled labourers, it has been revised from Rs 10,582 to Rs 15,471, while skilled labourers will get Rs 17,033, instead of the present Rs 11,622.

The AAP’s 700-member trade wing had publicly opposed the move, saying it would compel industry to shift from Delhi to neighbouring states to cut costs. Chief minister Arvind Kejriwal, however, stood firm on the proposal, which he had announced on Monday.

Speaking about the proposal, Kejriwal cited the failure of the “trickle down theory”, the idea that giving financial benefits to large businesses and investors will stimulate growth which in turn will enable the working poor to come out of poverty. He said instead a higher wage will mean more money in the pockets of the poor, which will enable them to spend more and this in turn will stimulate trade and industry.

Left out

Economic data bears out Kejriwal's contention that the fruits of high economic growth have largely bypassed Indian workers.

Economists CP Chandrasekhar and Jayati Ghosh have analysed data from the Annual Survey of Industries for the last 30 years. It shows that while profits of firm owners have increased continually, wage payments, as a percentage of value added in organised manufacturing, have fallen. Profits rose from 23% in 1990-'91 to more than 50% in 2010-'11. Wages as a percentage of value added in organised manufacturing fell from 25% in 1990-'91 to 19% in 2000-'01. In 2009-'10, wages accounted for only 11.9%, one of lowest anywhere in the world.

The fact that real wages remained flat or went downwards for two decades during which Indian per capita income nearly tripled shows that despite high aggregate growth, a large section of the population is caught in a low-income or low-wage situation. To this extent, Delhi government's decision to focus on wages as a tool to reduce poverty and contribute to social justice is a welcome decision.

The wage formula used by Delhi

The government revised the wages on the recommendation of a tripartite committee set up in April, constituting representatives of workers, employers and industrialists along with labour officials.

The committee was further divided into two panels that calculated the costs of per capita food intake of 2,700 calories each for a four-member family, as per the formula decided in 1957 at the Indian Labour Conference (an annual event organised by the ministry of labour and employment to decide on workers’ issues), which the Supreme Court had enhanced in the Raptakos Brett Vs Workers’ Union case of 1992.

The members of the two sub-panels surveyed the prices of food items not just in Delhi's industrial areas such as Peeragarhi, Wazipur, Mayapuri, but also the prices of good quality food items in Kendriya Bhandars, the grocery shops run by the central government employees cooperative societies.

To this, they added the prices of cloth (18 yards per person per year) and estimated expenses on house rent, fuel, lighting, health and education, to arrive at the 46% hike.

A race to the bottom

Under the Minimum Wages Act 1948, states can fix minimum wages for 1,679 job categories and the Centre can do so for 48 categories.

However, the norms set in this regard – by the Indian Labour Conference and the Supreme Court – are rarely followed. Instead, the process for calculating minimum wages is arbitrary and lacks a uniform procedure. Often, wages are revised just before elections.

At the central level, a non-binding national minimum wage has existed since 1996. This has to be revised at least once every five years, but that has not been followed. For instance, between 2004 and 2013, it was not revised even once. Citing the consumer price index increase, the central government revised the national minimum wage floor by 10% to Rs 50 per day in 2002, by 107% to Rs 137 a year before the 2014 elections. But even these recommendations were not binding on states.

They can, if they so wish, set the minimum wage even lower, which opens up a race to the bottom among states, which explains the fears of Delhi's traders and business community.

A proposal to amend the Minimum Wage Act to institute a legally binding national minimum wage is pending with the government.

How to ensure a fair minimum wage?

The challenge in setting a fair minimum wage is how to ensure real benefits to low-paid workers while avoiding unnecessary risks to jobs and enterprises. But governments and enterprises too need to recognise that there are limits to the current model of “low route” to capital formation, which leaves workers out of the benefits of economic development.

The Delhi government proposal will be sent to the Lieutenant Governor Najeeb Jung, after which it will be notified. The next challenge for Kejriwal government will be effective enforcement of the new minimum wage norms.

The labour department, like in several states, has a severe shortage of inspectors. To oversee complaints of more than 13,000 factories with licences (over 5 lakh small units operate without licenses in one district alone, say officials), in 2015, the department had 13 inspectors, while the sanctioned strength is 72.

Lack of adequate staff however will not absolve the government from implementing the new wages.