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Impact of doubling of minimum wages on India’s manufacturing sector
Traditional labor-intensive industries to be worst hit
24 August 2017
The Economy Observer
The ‘Code on Wages, 2017’ bill was tabled for discussion in the Indian Parliament during the recently concluded monsoon
session. According to various media
articles,
the government is considering doubling of national minimum wage to
INR18,000/month per worker.
In this note, we argue that such revision would hurt the traditional labor-intensive industries significantly, along with
their exportability. Also, higher minimum wages may
further exacerbate
the differential between cost of a unit of labor
and a unit of capital, potentially curtailing labour employment growth and dampening the government’s target to create
100m manufacturing jobs. Finally, it may lead to a ‘reverse/adverse shift’ of jobs from the formal to informal sector.
We estimate that average monthly wage is ~INR14,000/worker in India’s organized manufacturing sector. This means
that an increase to INR18,000/month per worker will cost at least INR47b to the organized manufacturing sector.
An industry-wise analysis reveals that traditional labor-intensive industries such as ‘tobacco products,’ ‘wearing
apparels,’ ‘leather products,’ ‘textiles’ and ‘food products & beverages’ would be worst affected. On the other hand,
some capital-intensive industries would be least affected.
Furthermore, the organized manufacturing sector in Bihar (BH), Telangana (TR), Punjab (PB) and Kerala (KL) would be
worst affected, while Maharashtra would be least hurt.
The Indian government introduced ‘the Code on Wages, 2017’
bill
in the Parliament
on 10 August 2017 with an intention to combine and simplify the relevant provisions
of the following four central labor enactments relating to wages: the Payment of
Wages Act, 1936; the Minimum Wages Act, 1948; the Payment of Bonus Act, 1965;
and the Equal Remuneration Act, 1976.
While these intentions are admirable, several
media reports
suggest that the
government is considering to double minimum wage to INR18,000/month per
worker. Using data from Annual Survey of Industries (ASI), the most comprehensive
annual database on India’s organized manufacturing sector, we measure the impact
of doubling of minimum wages and make five key conclusions:
1. Traditional labor-intensive industries such as ‘tobacco products,’ ‘wearing
apparels,’ ‘leather products,’ ‘textiles’ and ‘food products & beverages’ would
be worst affected, as the average wages are very low in these industries.
2. The organized manufacturing sector in Bihar (BH), Telangana (TR), Punjab (PB)
and Kerala (KL) would be worst affected, while Maharashtra would be least hurt.
3. Doubling of minimum wages would
further exacerbate
the differential between
cost of a unit of labor and a unit of capital. It could potentially restrict
employment growth in the manufacturing sector and hurt the government’s
plan to create 100m manufacturing jobs by 2022.
4. Moreover, expensive labor will hurt labor-intensive, export-oriented sectors
such as textiles, which account for more than 15% of total merchandise exports.
5. Finally, the move may lead to a ‘reverse/adverse shift’ as jobs could shift from
the organized to unorganized sector – in complete contrast to the government’s
intention and need of the hour.
Doubling of minimum
wages would further
exacerbate the differential
between cost of a unit of
labor and a unit of capital. It
could potentially restrict
employment growth in the
manufacturing sector and
hurt the government’s plan
to create 100m
manufacturing jobs by 2022
Nikhil Gupta
– Research analyst
(Nikhil.Gupta@MotilalOswal.com); +91 22 3982 5405
Rahul Agrawal
– Research analyst
(Rahul.Agrawal@motilaloswal.com); +91 22 3982 5445
Investors are advised to refer through important disclosures made at the last page of the Research Report.
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As per the recent data available for FY15, a total of ~240,000 factories under ASI
employed almost 14m people, which have increased at an average of ~2% over the
past three decades
(Exhibit 1).
Of the total people engaged, more than three fourths
are classified as ‘workers,’ another 10% as ‘supervisors/managers,’ and the
remaining 12% as ‘other employees’
(Exhibit 2).
About 1% of people in the ASI
sample are unpaid family members or proprietors.
Exhibit 1: ASI factories employ almost 14m people…
16
14
12
10
8
6
(% YoY)
-16
(In m)
16
8
0
-8
Workers
77%
Exhibit 2: …of which more than three fourths are ‘workers’
(% of total persons
engaged)
Supervisors/
Managers
10%
Other
Employees
12%
Unpaid
family
members
etc.
1%
Data for FY15
Source: Annual Survey of Industries (ASI), MOSL
Traditional industries such
as ‘food products &
beverages,’ ‘textiles,’ and
‘wearing apparels’ are the
three largest employers,
accounting for about one
third of total employment
Furthermore, industry level data reveals that traditional industries such as ‘food
products & beverages,’ ‘textiles,’ and ‘wearing apparels’ are the three largest
employers, accounting for about one third of total employment
(Exhibit 3).
Some
other capital-intensive industries such as ‘basic metals’ and ‘machinery &
equipment’ also employ a large number of people (accounting for 7.4% and 4.4%,
respectively, of total employment).
Finally, we show the break-up of employment by states
(Exhibit 4).
Tamil Nadu (TN)
is by far the largest employment generator (16.2%) in the organized manufacturing
sector, followed by Maharashtra (MH, 12.1%), Gujarat (GJ, 10.3%) and Karnataka
(KA, 7%) and Uttar Pradesh (UP, 6.3%). Together, these five states account for more
than 50% of total employment generated in the organized manufacturing sector.
Exhibit 3: Break-up of total employment of ASI coverage by
major industries
(% of total
workers)
Food pdts &
beverages
11.9%
Textiles
11.2%
Others
49.7%
Wearing
apparels
7.3%
Basic metals
6.8%
Motor
vehicles etc
6.0%
Exhibit 4: Five states account for ~52% of total employment
in organized manufacturing sector
(% of total
workers)
5.4
5.4
4.7
3.9
24.4
4.4
7.0
10.3
12.1
16.2
6.3
Other NMMP
7.1%
TN
MH
GJ
KA
UP
TR
HR
WB
PB
AP
OT
Data for FY15
Source: ASI, MOSL
24 August 2017
2

Average monthly wage per
worker in India’s organized
manufacturing sector was
about INR11,000 in FY15
and is estimated to rise to
INR14,000 in FY18
Estimation of average monthly wages in organized manufacturing sector
As mentioned above, ASI data is the most comprehensive database on India’s
organized manufacturing. However, it comes with a lag of two years, and thus, the
recent available data is for FY15. We estimate that average monthly wage per
worker in India’s organized manufacturing sector was about INR11,000 in FY15.
Extrapolating it with average growth in FY14 and FY15, we estimate that average
wage would increase to about INR14,000 in FY18, about 22% lower than the new
proposed national minimum wage of INR18,000
(Exhibit 5).
However, a look at the
major industries reveals that average wage per worker ranges from as low as
INR4,500/month in ‘tobacco industries’ to as high as INR21,295 per month in ‘basic
metals.’ In a nutshell, doubling of minimum wages will hurt almost all traditional
industries such as ‘food products & beverages,’ ‘tobacco products,’ ‘textiles,’
‘wearing apparels,’ leather & leather products’ and ‘rubber & plastic products’. On
the other hand, capital-intensive industries such as ‘basic metals,’ ‘machinery &
equipment’ and ‘motor vehicles, trailers and semi-trailers’ will be least affected as
their average monthly wages are above INR18,000.
Exhibit 5: Average monthly wages/worker in India’s organized manufacturing sector by industries (INR)
21,295
16,606
14,022
11,016
4,520
11,941
10,417
16,919
18,429
18,115
10,473
14,211
17,156
Data for FY18 extrapolated using average growth during FY14 and FY15
Source: ASI, MOSL
For small labor-intensive
industries such as ‘tobacco
products,’ ‘textiles’ and
‘leather products,’ the
adverse impact will be
disproportionately high
Additional cost of
at least
INR47b to organized manufacturing sector
If minimum wages are hiked to INR18,000/month, it will cost
at least
INR47b to the
manufacturing sector (equivalent to 0.4% of FY15 GVA). For small labor-intensive
industries such as ‘tobacco products,’ ‘wearing apparels,’ ‘textiles’ and ‘leather
products,’ the impact will be disproportionately high
(Exhibit 6).
Exhibit 6: Minimum additional cost to be borne by industries if monthly minimum wage is hiked to INR18,000/worker (INR m)
50,000
40,000
30,000
20,000
10,000
0
0.41
1.16
1.46
0.08
0.05
0.43
0.09
4.03
2.90
2.55
Scatter points denote additional cost as % of FY15 GVA
Source: ASI, MOSL
24 August 2017
3

We find that Bihar (BH),
which already has a very
low organized
manufacturing base, has
lowest average wage of
about INR7,000
Manufacturing sector in Bihar to be worst affected, Maharashtra may see least
impact:
We estimate average monthly wage per worker by major states. We find
that Bihar (BH), which already has a very low organized manufacturing base, has
lowest average wage of ~INR7,000. More interestingly, we find that Maharashtra
(MH) is the only state having average wage of above INR18,000. Accordingly, if
national minimum monthly wage is hiked to INR18,000/worker, BH will be worst
affected, while MH will be least affected
(Exhibit 7).
Exhibit 7: Average monthly wages/worker in India’s organized manufacturing sector by states (INR)
18,136
14,022 14,595
6,965
14,748 13,878 13,188 15,562
12,751 12,863
12,001
14,086
12,672
10,673
12,430
14,015
Data for FY18 extrapolated using average growth during FY14 and FY15
Source: ASI, MOSL
State-wise, we estimate that while Bihar employs only 1.2% of total ASI employment
(Exhibit
4),
higher monthly minimum wage of INR18,000/worker will cost
at least
INR1.5b to the state’s manufacturing sector (equivalent to 2.3% of FY15 GVA).
Telangana (TL), Punjab (PB) and Kerala (KL) would be the other adversely affected
states. Among largest employers, Tamil Nadu (TN) and West Bengal (WB) will be
worst hit
(Exhibit 8).
Exhibit 8: Minimum additional cost to be borne by states if monthly minimum wage is hiked to INR18,000/worker (INR m)
56,000
42,000
28,000
14,000
0
IN
AP
BH
DL
GJ
HR
KA
KL
MP
MH
PB
RJ
TN
TR
UP
WB
Scatter points denote additional cost as % of FY15 GVA
Source: ASI, MOSL
0.41
0.46
0.33
0.53
0.26
0.28
1.20
0.54
1.22
0.93
0.41
2.25
1.40
0.78
0.89
24 August 2017
4

Bringing caution by making labor more expensive:
In one of our
earlier
reports, we
had highlighted increasing capital intensity in the Indian industrial sector as one of
the key reasons for low employment growth since 1980s. Over the past 35 years,
while employment has grown at annual average of 1.9%, capital employed has
recorded a CAGR of 14%. In other words, although the number of employees per
factory has fallen from 80 in the early 1980s to about 60 in FY15, total capital
employed per factory has increased from less than INR5m to more than INR100m.
We further argued that employers have been preferring capital over labor because it
is cheaper for them to employ capital than labor. We reproduce below exhibits from
the same report
(Exhibit 9-10).
This is what we had stated then:
“…In the 1980s, while a unit of labor used to cost INR10,000, a unit of capital was
16x dearer, costing about INR157,000. Over the next three decades, this huge gap
between labor and capital costs disappeared, as labor continued to turn more
expensive, while capital cost was broadly unchanged. In FY10, a unit of labor cost
INR147,000, while a unit of capital cost INR132,000. In FY15, while labor costs
surged even higher to INR254,000, a unit of capital cost INR146,000. While the cost
of a unit of labor was 0.1x the cost of capital in the early 1980s, it crossed 1x for the
first time in FY10 and has increased further to 1.7x in FY15. Not surprisingly then,
industries prefer capital over labor…”
Exhibit 9: Comparison of cost of a unit of capital and a unit
of labor
320
240
160
80
0
Cost per unit of labor
(2004-05=100)
Cost per unit of capital
Exhibit 10: Cost of a unit of capital fell from ~16x the cost of
a unit of labor in early 1980s to less than 0.6x in FY15
2.0
1.5
1.0
0.5
0.0
Per unit cost of labor/per unit cost of capital
Cost of capital = interest paid + depreciation
Source: ASI, MOSL
With the government
aiming to double the
minimum wage level, it will
further exacerbate the
differential between cost of
a unit of labor and a unit of
capital
With the government aiming to double the minimum wage level, it will further
exacerbate the differential between cost of a unit of labor and a unit of capital. In
other words, it will make labor dearer and capital relatively cheaper. This, in our
view, will be exactly opposite of what is desired/required.
24 August 2017
5

Expensive labor to hurt competitiveness:
Finally, it is also important to note that
raising minimum wages may also potentially hurt India’s exports growth by making
some labor-intensive, export-oriented sectors uncompetitive in the global market.
Textiles (excluding
readymade garments)
account for ~7% of total
exports, while readymade
garments account for
another 6% of total
merchandise exports
Exhibit 11
below shows the share of four manufacturing sectors we discussed above.
Textiles (excluding readymade garments) account for ~7% of total exports, while
readymade garments account for another 6% of total merchandise exports.
Moreover, although ‘leather & leather products’ account for only ~2% of total
exports, the global market is highly critical for such industries. With these four
industries accounting for ~15% of total exports, it is obvious that raising the cost of
their products by making labor more expensive will make them relatively
uncompetitive in the global market.
It is also important to note that over the past three years (FY14 to FY17), while total
exports have declined at a CAGR of 4.4%, exports of readymade garments grew at a
CAGR of 5.2% and those of other such products declined at a slower pace than the
decline in total merchandise exports
(Exhibit 12).
Exhibit 11: Share of traditional labour-intensive industries in
India’s merchandise exports (%)
Tobacco & pdts
8
6
4
2
0
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
* Include carpet, cotton yarn, manmade yarn and jute manufactures
Textiles*
Leather & leather pdts
Readymade garments
Exhibit 12: Average change in exports growth of selected
industries (% CAGR)
% CAGR over the past three years (FY14-FY17
5.2
(1.7)
(4.4)
Total
exports
(2.5)
(2.0)
Tobacco & Leather & Textiles* Readymade
pdts
leather pdts
garments
Source: ASI, MOSL
24 August 2017
6

If minimum wages are
almost doubled from
INR9,100 now to INR18,000,
the manufacturing sector
would certainly find it even
more difficult to increase
employment meaningfully
Doubling of minimum
wages is unlikely to benefit
the economy, including
workers, because if
employers are discouraged
to raise employment
growth, workers may
eventually lose out
Conclusion: Five key risks if monthly minimum wages double to INR18,000
The manufacturing sector is only one of the sections of the economy that will be
affected by a change in the minimum wage law. However, dearth of credible,
regular and comprehensive database makes us rely on ASI data for our analysis. In
this note, we have made an attempt to gauge the impact of doubling of national
minimum wages, which, as per media reports, is being contemplated by the
government. Although it may benefit the worker class initially, we discuss the five
key risks emerging from this change.
1. While some of the capital-intensive industries such as ‘basic metals’ and
‘chemical & chemical products’ will be relatively immune to such revision,
traditional labor-intensive industries will witness substantial additional costs.
2. It could potentially threaten the existence of the organized manufacturing
sector in states like Bihar, where average monthly wage is as low as INR7,000
per worker. Among the large states, TN will be worst hit, followed by WB.
3. We had also highlighted in one of our earlier
reports
that the cost of a unit of
capital fell from ~16x the cost of a unit of labor in the early 1980s to less than
0.6x in FY15. If minimum wages are almost doubled from INR9,100 now to
INR18,000, the manufacturing sector would certainly find it even more difficult
to increase employment meaningfully.
4. It is also important to note that most of these labor-intensive industries have a
decent share in India’s exports. Textiles, along with readymade garments,
accounted for 13% of total exports in FY17, with almost 2% share of ‘leather &
leather products’ and 0.4% share of ‘tobacco & tobacco products’. As labor turns
more expensive, it will become extremely difficult for these industries to
maintain their competitive edge in the global market.
5. We also fear that higher minimum wages may push employers to shift jobs from
the formal to informal sector, which either may be entirely out of this minimum
wage law or will attract lower wages. This would be in contrast to the need of
the hour and also what the government has been targeting.
Overall, the doubling of minimum wages is unlikely to benefit the economy,
including workers, because if employers are discouraged to raise employment
growth, workers may eventually lose out. Further, it could hurt the government’s
plan to create 100m manufacturing jobs by 2022.
24 August 2017
7

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completeness or fairness of the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be
treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may
be required from time to time without any prior approval. MOSL, its associates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent
in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this
report. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of
information that is already available in publicly accessible media or developed through analysis of MOSL. The views expressed are those of the analyst, and the Company may or may not subscribe to all the views expressed
therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any
purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution,
publication, availability or use would be contrary to law, regulation or which would subject MOSL to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be
eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Neither the Firm, not its
directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with
the use of the information.
The person accessing this information specifically agrees to exempt MOSL or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to
hold MOSL or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSL or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be
suffered by the person accessing this information due to any errors and delays.
Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022-3980 4263; www.motilaloswal.com. Correspondence Address: Palm Spring
Centre, 2nd Floor, Palm Court Complex, New Link Road, Malad (West), Mumbai- 400 064. Tel No: 022 3080 1000. Compliance Officer: Neeraj Agarwal, Email Id:
na@motilaloswal.com,
Contact No.:022-30801085.
Registration details of group entities.: MOSL: NSE (Cash): INB231041238; NSE (F&O): INF231041238; NSE (CD): INE231041238; BSE (Cash): INB011041257; BSE(F&O): INF011041257; BSE(CD); MSE(Cash): INB261041231;
MSE(F&O): INF261041231; MSE(CD): INE261041231; CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412. AMFI: ARN 17397. Investment Adviser: INA000007100. Motilal Oswal Asset
Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.: INP000004409) offers
wealth management solutions. *Motilal Oswal Securities Ltd. is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. * Motilal Oswal Commodities Broker Pvt. Ltd. offers Commodities
Products. * Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products
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