The Minimum Wage Solution | 10 Oct 2019

Recently, the government made two announcements at two ends of the spectrum to mitigate the economic crisis. One concerns a new indexation of NREGA wages meant to increase rural incomes and the second is a reduction in corporate tax rate.

Minimum wages in the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), 2005

• Wage rates under MGNREGA, 2005 are notified and revised annually based on the Consumer Price Index-Agricultural Labourers (CPI-AL) by the Central Government in accordance with the provisions of Section 6(1) of the scheme.
• The revised wage rates are made applicable from 1^st April of every year.
• The CPI-(AL) is published by Labour Bureau, Shimla.
• Minimum wages are legal mandate that are arrived at by calculating the minimal nutritional requirement and basic needs of an individual.
• The current daily NREGA wages are just a quarter of the minimum daily living wage of ₹692 as outlined in the 7^th Pay Commission.

New Indexation of NREGA Wages

• Prices of commodities increase each year due to inflation so it is important to increase the daily wages of workers in the villages.
• For that, it is important to keep in mind the previous year’s national daily average NREGA wages (₹179 in 2019) and a good index to benchmark and revise the wages.
• Indices are (weighted) averages of the prices of a basket of goods consumed and the index must be based on the main items of consumption for rural households.
• NREGA daily wages are to be indexed with an updated inflation index called the Consumer Price Index-Rural (CPI-R) instead of the older Consumer Price Index-Agricultural Labourers (CPI-AL).
• Calculation of CPI-AL involves more food items in the consumption basket while the calculation of CPI-R involves more non-food items such as healthcare and education so it reflects the rural consumption basket better than the CPI-AL.
• The new indexation will have a notable impact on increase in income of rural households only if the base NREGA wages are high.
• It is also recommended to use annual average instead of the existing practice of using December month index only.
• A substantial increase in NREGA wages and subsequent indexation with CPI-R would be meaningful for the workers and the economy.

Reduction in Corporate Tax Rates

Government has brought in the Taxation Laws (Amendment) Ordinance, 2019 to make certain amendments in the Income-tax Act, 1961 and the Finance (No. 2) Act, 2019.

• Basic corporate tax rate has been slashed to 22% from 30% while for new manufacturing companies it has been cut down to 15% from 25%.
• In order to promote growth and investment, a new provision has been inserted in the Income-tax Act which allows any domestic company an option to pay income-tax at the rate of 22% subject to the condition that they will not avail any exemption/incentive. The effective tax rate for these companies shall be 25.17% inclusive of surcharge & cess.
• According to a 2015 IMF report, “If the income share of the top 20% (the rich) increases, then GDP growth actually declines over the medium term”, while “an increase in the income share of the bottom 20% (the poor) is associated with higher GDP growth”. Current corporate tax cut can widen economic inequality.
• According to estimates by Credit Rating Information Services of India Limited (CRISIL), due to the recent tax cut, 1,000 companies would have annual savings of around ₹37,000 crore and last annual NREGA budget of ₹60,000 crore can be mentioned here for the comparison.
• The estimated gains of more than 1,000 companies would be equivalent to the annual earnings of around 7.2 crore NREGA labourers.
• The worst part is that the budget allocation for NREGA gets exhausted by October of each financial year, leading to delays in payment of wages.

Way Forward

• While corporate tax cuts and lower interest rates would give corporations some liquidity, it is unlikely that rural demand will increase. On the contrary, without a substantial increase in NREGA wages, the wages would barely match inflation levels leading to wage stagnation in real terms.
• In circumstances of unsustainable wages, the poor would be forced to become part of the migrant labour force and industries would benefit by absorbing them at throwaway daily wages leaving no alternatives.
• It is economically prudent to substantially increase the budget for public programmes such as NREGA. This would lead to higher disposable income for the poor which in turn would have positive multiplier effects in the economy.
• The government needs to pay more attention to the poor in economic, ethical, and legal ways.