One of the very first lessons taught to medical school graduates, before they get down to the Hippocratic Oath, is “first, do no harm”. In other words, do your best to help but, at any rate, don’t worsen things. This, however, is precisely what the government seems determined to do in area after area. If the economic reforms of the past two decades sought to fix the damages caused by well-meaning policies on interest rate subventions and subsidies, the UPA came up with its flagship employment guarantee scheme which, while providing jobs to millions, appears to have been responsible for creating a scarcity of farm labour — this, anecdotal evidence suggests, may have resulted in increased mechanisation in the farm sector and so created more unemployment than employment created. By seeking to improve the infrastructure provision in India’s education sector, many argue the education Bill will end up driving out low-cost private education providers in the elementary education space. And now, if the labour ministry’s latest proposal gets translated into legislation, this will extend the existing Minimum Wages Act to the entire unorganised sector — right now, this applies only to organised sector jobs. Through a change in one of the sections, the clause which restricts the law to units of a certain size will be dropped. Fines on violators are to be raised from around Rs 500 right now to Rs 10,000 and will include a one-year prison sentence. Whether this will succeed in raising wage levels or corruption is rhetorical, the more serious question is what this will do to employment levels — higher wages, if coupled with higher unemployment levels, don’t necessarily result in greater labour welfare. As labour gets more expensive, one likely end-result is greater substitution of labour by machinery, as is reported to be happening in the agriculture sector already. This, and the inspector-raj that will be unleashed, will surely deal a big blow to the unorganised industrial sector.
There can be little doubt that raising wage levels, especially in a country as poor as India, is desirable, but this cannot be done in isolation from ground realities. Wage rates have to be linked with productivity — if they are not, those units paying the higher wage rates have no option but to close down in the face of competition from more efficient units at home or abroad. This is why India has lost out to the Chinese in the textiles sector despite Chinese wages being higher than India’s; much lower wages in India, despite the lower relative productivity, similarly, is the secret of India’s success in the outsourcing industry. So, if wage rates are to rise, so does productivity and, for that, greater efforts are required in skilling and educating India’s workforce — and, of course, reducing the inefficiencies caused by India’s poor infrastructure. While every working person is entitled to a reasonable minimum wage, any move to raise wage rates to beyond market-clearing levels can only reduce the economy’s competitiveness.