Chief Minister Arvind Kejriwal announced on Monday, 15th August, a nearly 50% increase in minimum wages for the Capital’s workforce, underscoring his government’s push for economic parity in a growing rich-poor divide.
The Aam Aadmi Party (AAP) government’s proposal is to raise the minimum wage of an unskilled person from Rs 9,568 to Rs 14,052. Besides, wages for semi-skilled and skilled people will increase from Rs 10,582 to Rs 15,471 and from Rs 11,622 to 17,033 respectively.
There are a number of reasons why this increase in minimum wages is a bad idea despite the good intentions of the Delhi government.
For starters, the current wage rate in the national capital for an unskilled worker is Rs 9,568, which is higher than the neighbouring states of Haryana (Rs 7,600), Uttar Pradesh (Rs 7,108) and Rajasthan (Rs 5,226). Even before the wage hike, it is clear that the wage of an unskilled worker in Delhi is almost the same as of a skilled worker in Haryana and is more than that of a skilled worker in UP or Rajasthan. 
It needs to be mentioned that the minimum wage in Delhi is already 35 per cent higher than in neighbouring Uttar Pradesh and 72 per cent higher than in adjoining Haryana.
India’s, and Delhi’s, main advantage in manufacturing is “cheap labour” if such a wage hike is implemented in the capital, where the minimum wage is already very high when compared to rest of North India, then there will be a mass exodus of Industries from the capital to neighbouring states of Haryana and Uttar Pradesh. The hike will force the small and medium industries to be more innovative and use technology, automation, for work, the final result will be reduced jobs because of increased salaries and greater use of automation in the capital. Any sane government which has a long term vision will see that such a move will greatly harm Delhi’s, already not so good, economic prospects in the long run.
The main argument presented by the AAP government that this move will reduce the income inequality in the national capital is total lie, since Delhi mostly relies on medium and small scale enterprises, as most of the big industries have shifted to states such as Haryana, Uttar Pradesh and Rajasthan because of lack of land and an already expensive work force, the remaining big industries Delhi has, will simply relocate to the neighbouring states of Haryana and Uttar Pradesh and the main causality of all this “minimum wage saga” will be the Small and Medium industries.
Let’s look at some statistics to show why it is not a good idea to radically increase the minimum wage in Delhi by such a massive proportion.
“During 2012-13, average annual Index of Industrial Production (IIP) was 115.94, which decreased to 102.29 in 2013-14. There is a decline in the IIP of 11.77 per cent in 2013-14 over the previous year,” clearly such a decline should encourage the AAP government to actually focus on growth of Industries in Delhi, which will lead to increased employment, rather than making their life difficult by announcing such colossal wage hikes.
According to the Delhi Economic Survey (2014-15) “The estimated employment, as depicted in the above table, though indicated improvement in the absolute numbers, it is not keeping in pace with the growth of factories. To elaborate it further, it is observed that the per factory employment during 2013 remained at the same level as that of 2012 i.e. average 46 persons employed in each factory.”
According to the Delhi Economic Survey (2014-15) “It may be observed that the number of registered factories in Delhi increased by 23.76% from 3198 in 2007-08 to 3958 in 2012-13. During the same period, total capital increased by 156% from ` 7164 crore to ` 18356 crore. The number of employees decreased to the level from 1.28 lakh in 2007-08 to 1.19 lakh in 2012-13. However, a downward growth is visible in total capital employed in 2012-13 over that of 2011-12.”
Unemployment figures in Delhi are also not very encouraging, as the scourge of Unemployment continues to rise. Naturally, in such turbulent times where Unemployment is worldwide problem the Delhi government will do every possible thing in its power to increase the job creation in the national capital. But, instead of laying down red carpet for the Industry and making things easier for Industries to stimulate Industrial growth the Delhi government has decided to hike the already “high” minimum wage in the capital and cripple Delhi’s Industrial base and in that process push all the people who are joining the workforce every year towards an uncertain future.
It’s not only the Industry which will be harmed by this hike, the existing workers in the work force ,the unskilled workers, of which there are many, entering the workforce each year and the “common people”, Ironically, will be greatly harmed by this hike.
For example, a factory owner won’t keep a skilled worker at a mandated Rs 17,033 per month if the efforts of that skilled worker in the factory generates Rs 13,000 worth of added revenue per month. Over the course of the year, a factory that employs such a worker would lose Rs 48,396, so instead, it would either hire an Informal worker or simply automate that job. The wage hike will force many workers in the formal sector to be pushed into the informal sector.
The wage hike will hurt the unskilled workers entering the workforce the most, as most of these workers are from poor families and have little to no education background or skills which they can leverage to get a decent job. As the minimum wage for unskilled workers goes up, Businesses are discouraged from hiring unskilled workers as the cost of skilling them for the job goes up resulting in unskilled workers not being able to find a job which provides them with the skills necessary to move up the employment ladder and get a better job. In short, such a colossal hike in minimum wage will destroy the first step of the employment staircase that provides the skills and experience workers need to reach the next step, and to continue moving towards a better life.
One of the basic lessons of economics is that when the price of something goes up, people buy less of it, so, if the price of food or clothing rises, as it will inevitably, you can expect consumers to reduce their demand for those goods. Upper middle class and the rich can afford to pay top dollar, but the middle class and the less fortunate sections of society will have to cut down on their consumption of goods and services if they have to survive in this era.
There is opposition to the new wage hike within the AAP too as the party’s trade wing has demanded that the government reconsider its decision.
“We represent Delhi’s 15 lakh traders and industrialists. The step (to increase minimum wages) will harm Delhi’s trade and industry in the long run. Wages are already high in the Capital and if they are increased further, trade and industry might seek a shift to neighbouring States,” said Brijesh Goel, convenor, AAP Trade Wing.
If the Kejriwal government is really concerned about the welfare of workers in Delhi then it needs to come up with a comprehensive policy on this matter and not just merely take populist decisions which only benefit a select section of society and harm everyone else.