Beyond minimum wages: For equitable growth, India must maximise labour’s share in national income

The suspension of labour laws by many Indian states has once again brought the politically sensitive but economically important issue of labour law reform centre stage. Those opposed to the dilution of labour protections have advanced arguments centred on the paradigm of constitutionality, morality, the directive principles and fundamental rights. However, this line of reasoning fails to address the central rationale being offered for diluting laws: that the current labour regulations are stifling entrepreneurship, hindering job creation and hampering economic growth.

The advocates of “labour reforms” do not deny the legitimacy of guaranteeing minimum wages, congenial working conditions or health and safety requirements. Instead, they claim that industry is being hurt by the inflexibility, corruption and the inspector raj inherent in the over-legislated, over-regulated and over-bureaucratised labour market.

However, the important question around labour rights is largely ignored by both sides: for the economy to grow at its full potential, what should the share of labour income in the aggregate national income be? In other words, how much of annual national income should flow to labour and to capital to make Indian industry more globally competitive and make India an attractive investment destination?

The division of national income between labour and capital is called the functional distribution of income. The labour share of income – the share of national income paid in wages, including benefits, to workers – has declined globally since the early 1990s. Data aggregated by various institutions like Organisation for Economic Cooperation and Development, the International Monetary Fund, the International Labour Organisation and the European Commission suggest that the share of labour compensation in national income in 25 most advanced economies fell from 66% in the early 1990s to roughly 62% to the present day.

A significant difference

India too has witnessed a constant decline in labour income – but there is a big difference. In India, labour’s share in national income is significantly lower than the other G20 economies. The proportion of labour compensation in national income in India has declined from 38.5% in 1981 to 35.4 % in 2013, according to the Wage Report by the International Labour Organisation in 2018.

Low labour income negatively affects macroeconomic aggregates like household consumption and savings, investments, output and demand, all of which are important ingredients for growth. In addition, low labour share makes it impossible for the workers to accumulate wealth, invest in education, skill training, housing or health.

As a result, India has seen the unparalleled concentration of income and wealth (profits, rent and other income from capital) at the top decile and centile (the top 10% and 1% of the population). In the 1980-2015 period, the top 0.1% of earners captured a 12% share of total growth while the bottom 50% got 11%. In the same period, the top 1% received 29% total growth while the middle 40% received 23% of the national income, wrote Lucas Chancel and Thomas Piketty.

At the very top

In the 1990s, the wealth of the richest Indians reported in the Forbes’ India Rich List amounted to less than 2% of national income. As of 2018, the World Wealth Report by Capgemini showed that 759,000 tax residents in India had wealth over $1 million, 4,460 tax residents had wealth over $50 million and 1,790 had more than $100 million in wealth.

According to the Oxfam report of 2020, the combined total wealth of 63 Indian billionaires was higher than the total Union Budget of India for the year 2018-’19, which was Rs 24,42,200 crore.

Between 1993 and 2012, Indian GDP grew at an annual average rate of 7%, which has no doubt reduced poverty to some extent. But what is often overlooked is the fact that since the reforms began, the top 1% have walked away with about 30% of national income.

Besides the question of justice and fairness that such dizzying levels of inequality raise, the question that needs deeper investigation is how the disproportionate share of national income allotted to the top 1% is slowing down India’s growth.

An article of faith

After 2008, Indian growth slowed down and since 2012 India has been in recession. Yet the article of faith both with the previous Congress-led United Progressive Alliance and the current Bharatiya Janata Party-dominated National Democratic Alliance regime has been that greater concessions to capital are imperative for a higher growth rate.

If one analyses Narendra Modi government’s policy statements, five distinct features of his government’s economic philosophy stand out: 1) pro-business policies give equal opportunity; 2) removing anachronistic government intervention enables ease of doing business; 3) the formalisation of Indian economy will accelerate growth; 4) markets enable wealth creation; and 5) wealth creation benefits all (the economic surveys of the last two years have consistently used this phraseology).

It is the last two tenets that require empirical investigation. As the statistics above show, the creation of wealth creation in India has not benefitted all. Between 1947 and 1985 (when the Indian economy was centralised and highly regulated), the wealth of the bottom 50% of the population grew at a faster rate than the national average. On the other hand, since 1985, the top 0.1% of Indians have captured more growth than all of the bottom 50%. The middle 40% has also seen very little growth in this period.

The evidence shows that “growth benefits all” is false propaganda. Despite this, both the Congress and the BJP have pivoted their economic policies based on this fundamental fallacy.

The myth of endless growth

The second belief that Indian economy will keep on growing endlessly ($5 trillion and more) as long as government remains pro-market is also mythical. Since Narendra Modi took over as prime minister, there has been a significant reduction in average per capita expenditure, a sharp rise in unemployment (it was 7.8% before Covid-19) and deceleration in wage rate growth.

India recorded an average real wage growth (nominal wages discounted by inflation) of 5.5% in the period 2008-2017 (which is often picked up by the government and the mainstream Indian media as a major government achievement). But what is not highlighted is that in the same period Germany has seen an 11% increase, South Korea a 15% increase and China almost 100% increase in the average real wages.

Australia, the United States, France and Canada are the other advanced G20 countries have experienced positive wage growth in the range of 5% to 7%. But as the base wages in advanced G20 countries were several times greater than that in India, the 5% to 7% increase in their wages means their workers earn substantially earn more and also have greater purchasing power than Indian workers.

And since becoming like China has been the aspiration of successive Indian governments, it is also instructive to highlight that China has an elaborate structure of labour laws both at the national and regional level, governing aspects like working hours, rest and leave, work safety, overtime hours and rates, timely payment of wages, leave entitlements, severance pay and minimum wages.

Since 2010, the minimum wage rates in big cities like Beijing, Shanghai and Shenzhen have doubled. Thirteen million jobs were created in urban areas in China in the last five years. The workforce has increased to 807 million in 2016 from 789 million in 2012. Throughout the 2010s, China’s number of unemployed people has steadily remained at 9 million, as per the data of the National Bureau of Statistics of China based on International Labour Organisation standards.

A necessary debate

Unlike India, Chinese governments both at the national and regional level have invested heavily in higher education, research, skill training, retraining programs for laid off workers, early retirement schemes, guaranteed pension and regulating minimum wages based on local living costs and local wages. Even as we were dreaming of becoming a manufacturing base, China has become an artificial intelligence superpower, by investing heavily in training its youth in the AI and thus generating tens of thousands of new jobs.

In China, France, Germany, UK and US, there has been a raging debate about making income distribution fairer and more orderly, expanding the size of the middle-income group, increasing income for people at the bottom 50% and adjusting national income redistribution.

India’s sole reliance on private capital to spearhead country’s growth demands a great national debate in light of data and evidence.

The catching-up phase of the Indian economy, which generated growth in excess of 7%, was over by 2010. If India has to grow from hereon, it will have to invest in its people, workers and youth. And as long as capital makes away with the lion’s share of the national income, India will remain poor, though its tally of billionaires may look impressive

The corruption and red tape ingrained in the labour law regime and at all levels of governments must go. But we must also elevate our labour law thinking from the 20th century terminology of minimum wages and working hours to the biggest challenge of our times. That is finding the right economic, fiscal and industry policies that can maximise the labour share in the national income.

Ashish Khetan is a corporate lawyer and specialises in international economic law.