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MOSL: ECOSCOPE-Impact of doubling of minimum wages on India’s manufacturing sector

​ECOSCOPE: Impact of doubling of minimum wages on India’s manufacturing sector; Traditional labor-intensive industries to be worst hit

The ‘Code on Wages, 2017’ bill was tabled for discussion in the Indian Parliament during the recently concluded monsoon session. According to various media articles, the government is considering doubling of national minimum wage to INR18,000/month per worker.

In this note, we argue that such revision would hurt the traditional labor-intensive industries significantly, along with their exportability. Also, higher minimum wages may further exacerbate the differential between cost of a unit of labor and a unit of capital, potentially curtailing labour employment growth and dampening the government’s target to create 100m manufacturing jobs. Finally, it may lead to a ‘reverse/adverse shift’ of jobs from the formal to informal sector.

We estimate that average monthly wage is ~INR14,000/worker in India’s organized manufacturing sector. This means that an increase to INR18,000/month per worker will cost at least INR47b to the organized manufacturing sector.

An industry-wise analysis reveals that traditional labor-intensive industries such as ‘tobacco products,’ ‘wearing apparels,’ ‘leather products,’ ‘textiles’ and ‘food products & beverages’ would be worst affected. On the other hand, some capital-intensive industries would be least affected.

Furthermore, the organized manufacturing sector in Bihar (BH), Telangana (TR), Punjab (PB) and Kerala (KL) would be worst affected, while Maharashtra would be least hurt.