Authors: Nikhila Menon, Yokohama and Xavier Estupiñan, ILO

On 2 August 2019 the Indian parliament passed the Code on Wages Bill. This historic bill, which has received presidential assent and is now an Act, will ensure statutory protection for Minimum Wages of approximately 500 million workers belonging to both the organised and unorganised sectors.

India’s Ministry of Labour and Employment has proposed four labour codes covering wages, industrial relations, social security and occupational health and safety. These labour codes aim to simplify, rationalise and amalgamate more than 30 labour laws as per the recommendations of the second National Commission on Labour. The Code on Wages will be the first of the four labour codes to become an act in India.

The Act will subsume four major labour legislations and will simplify and standardise the definitions of terms like ‘worker’, ‘wages’ and ‘contract labour’ adopted in these four acts. It is a move towards reducing the amount of litigation that arises from the ambiguity of definitions across these labour acts.

Most notably the Act expands Minimum wages to all categories of workers in both organised and unorganised sectors. The minimum wage was previously confined to scheduled employment. By enacting the code, minimum wages become the right of every worker in the country and it is a step towards inclusive growth.

The Act proposes a ‘floor level’ wage that will ensure workers are paid wages that allow for minimum living standards. State governments will need to set minimum wages at par or above the floor wage set by the central government.

The floor wage will be reviewed and revised every five years through tripartite consultation including stakeholders from state governments. But the wage review should ideally be done at least every three years to reflect the cost of living and economic conditions.

The proposed Code on Wages will also take into account the aspects of skill categories and the geographic differences in costs of living. Owing to the variety of scheduled employment across different states there are more than 2000 minimum wages. The number of minimum wages can be reduced substantially by categorising minimum wages according to skill categories and areas. This will help overcome the implementation issues arising due to the multiplicity of rates.

The regional differences in costs of living and economic development can be reflected at the state level. The Chinese and Russian minimum wage systems have provincial wage rates on a similar pattern. These provincial wage rates are simultaneously situated within the overarching national wage policy and balance the needs of the workers and economic factors depending on geographic locations and economic factors within the country.

India’s new legislation on minimum wages is in tune with the provisions of the International Labor Organization’s (ILO) Minimum Wage Fixing Convention, 1970. The convention encourages countries to establish a system of minimum wages that extends to all groups of wage earners whose terms of employment would be appropriate. The core principle of the Convention is full consultation for setting the minimum wage and a balanced approach is key in determining the appropriate level. In 2012, at the 44th session of the Indian Labour Conference, a broad consensus recommended that all wage workers be covered by the law to help India ratify this ILO Convention.

The adherence to the minimum wage legislation in the organised and unorganised segments will require innovative use of IT-enabled services for digital payments and monitoring of wages. While some aspects of digital payments are envisaged in the Act, generating awareness and punitive measures for non-adherence to the code will be critical in enforcing minimum wages, especially in the unorganised sector.

In 2012, 39 per cent of male casual workers and 56 per cent of female casual workers in rural areas as well as 28 per cent of male casual workers and 59 per cent of female casual workers in urban areas received wages below the national floor-level minimum wage. This reflects the extent of non-compliance of minimum wages in India. Monitoring non-compliance through the use of periodic surveys and the participation of employers and worker representatives to address the problems of enforcement will be crucial in increasing the effectiveness of minimum wage policy.

At the macro level, the Act aims to correct systemic inequalities that emerge in an economy in which a vast majority of workers are in the informal economy. While studies on the impact of minimum wage legislations on employment and inflation are inconclusive, minimum wages will have a lighthouse effect and will act as a benchmark for effective wage bargaining for workers in the informal economy. The Code on Wages could have a remarkable impact on sustenance wages and in reducing wage inequalities in India.

Nikhila Menon is an economist based in Yokohama, Japan, and a former Director at the Ministry of Finance, India.

Xavier Estupiñan is Wage Specialist at the International Labour Organization Decent Work Technical Support Team for South Asia and Country Office for India.

The views expressed in the article are those of the authors and do not reflect the position of the Indian Ministry of Finance or any other organisation.