India’s minimum wage policy, designed to ensure a basic standard of living for workers, has increasingly come under scrutiny, with economists and policy analysts divided over whether it protects the poorest or inadvertently limits their access to formal jobs. While statutory wage floors vary widely across states and sectors, questions are intensifying over the gap between mandated wages and what many firms, especially in labour-intensive industries, can afford, raising concerns about employment, informality and job creation.
A report by the Foundation for Economic Development (FED) has said that the policy may be having the opposite effect by reducing job opportunities and pushing millions into informal employment. It argued that statutory wage floors in India are set significantly above what many workers can productively earn, creating a gap between legal mandates and economic reality. This mismatch, it said, is locking a large share of the workforce out of formal jobs while weakening labour-intensive sectors that could otherwise absorb millions entering the workforce each year.
India’s informal economy remains vast, employing more than 90 per cent of the workforce, roughly 400–500 million people, and contributing nearly 50 per cent to the country’s gross domestic product (GDP). It is characterised by small, unregistered enterprises that rely on low-cost labour, with workers typically lacking social security benefits such as paid leave and insurance, spanning sectors from agriculture and street vending to small-scale manufacturing.
At the heart of the report is the claim that India’s minimum wages are unusually high relative to both worker productivity and international benchmarks. India’s wage floor is estimated at 1.7 times the earnings of the median casual worker, while it stands at 77 per cent of per-capita GDP, far above the roughly 50 per cent benchmark seen in competing export economies such as Vietnam and Bangladesh.
This gap has practical consequences. According to the report, about 64 per cent of Indian workers earn below the minimum wage, with the proportion ranging between 40 per cent and 79 per cent across the 14 largest states. Even more strikingly, for 47 per cent of workers, a 30 per cent wage increase over their current earnings would still fall short of the legal minimum, effectively making such employment arrangements unlawful.
“The statutory minimum is not a binding floor at the bottom of the labour market; it is a line that most workers already sit below,” the report notes. Additionally, recent protests by factory workers in Noida over demands for higher minimum wages amid rising living costs show the strain on India’s labour force. Many of these workers come from lower- and lower-middle-income backgrounds and remain highly vulnerable to inflationary pressures driven by global factors such as the West Asia crisis.
Employers Adjust But Rarely By Paying More
The report outlined a central mechanism: when wages are set above productivity levels, employers do not simply raise pay. Instead, they adjust in ways that often disadvantage workers. It identified nine potential responses available to firms, including layoffs, automation, relocation, and shifting to informal employment. Only one, paying the higher wage, directly benefits workers, and even that is viable only when firms can absorb the cost.
In practice, the report suggested, firms tend to avoid hiring low-productivity workers, reduce workforce size, or operate outside formal regulatory frameworks. Experts noted that this is why India’s informal workforce remains disproportionately large, at about 88 per cent of total employment, higher than comparable economies such as Vietnam, Thailand, and Mexico.
The Annual Survey of Unincorporated Sector Enterprises (ASUSE) for 2025 showed that wages in India’s informal sector rose by just 3.88 per cent in 2025, as compared to the year-on-year growth of 13 per cent seen in 2023-24 (October- September). The government data revealed that the employment in the unincorporated sector grew by 6.18 per cent, with more than 74.52 lakh new jobs added during the period. However, the rate at which the job additions took place was slower than the previous year.
The emolument per hired worker increased to Rs 1,46,550 in the January to December 2025 period from Rs 1,41,071 in the October 2023 to September 2024 period. However, the growth in ASUSE 2023-24 was higher as compared to the emolument of Rs 1,24,842 in ASUSE 2022-23. During the same period, the Gross Value Added (GVA) rose by 10.87 per cent, driven by 16.77 per cent growth in the trade sector, followed by 8.52 per cent growth in manufacturing and 7.36 per cent growth in other services sectors.
Among the broad sectors, however, the other services sector had the highest share in GVA (42 per cent), followed by trade (37 per cent) and manufacturing (21 per cent). Notably, GVA per worker, which is a measure of labour productivity of the sector, rose to Rs 1,56,539 in 2025 from Rs 1,49,742 in 2023-24 in current prices, showing a 4.54 per cent increase. During the same period, the GVA per establishment also increased from Rs 2,45,687 to Rs 2,52,699.
The percentage of female-owned proprietary establishments increased marginally from 26.2 per cent in 2023–24 to 27 per cent in ASUSE 2025, pointing to an encouraging trend in women-led enterprises. The percentage of establishments using the internet has also grown significantly from 26.7 per cent in 2023-24 to 39.4 per cent.
Notably, the impact is even more pronounced for women, who remain concentrated in low-paid and informal roles, including in emerging sectors such as the green economy.
A 2025 report by the Council on Energy, Environment and Water (CEEW) warned that India’s green transition risks falling short of its economic potential unless female workforce participation improves significantly. The study linked India’s ambition of becoming a USD 30 trillion economy by 2047 to building a 400 million-strong female workforce, even as current participation remains low at 41.7 per cent, with urban participation at just 28 per cent.
Despite evidence that higher female participation boosts productivity, women remain clustered in low-value, informal segments across green value chains. In sectors such as renewable energy, they account for a small share of technical and operational roles, while in the circular economy, nearly half of India’s estimated 1.5 million waste pickers are women, earning around 33 per cent less than men and largely operating outside formal labour protections.
Across bioeconomy and nature-based sectors, women are concentrated in labour-intensive, low-paid activities such as raw material collection and plantation work, while higher-value roles remain male-dominated. Structural barriers, including limited access to finance, land, and formal employment opportunities, continue to restrict their mobility within these sectors. The findings suggest that even as new industries emerge, much of the workforce, particularly women, remains confined to the least productive and most informal segments of the economy.
Export Competitiveness And Missing Jobs
The implications extend beyond domestic labour markets to global trade performance. India’s high labour costs relative to productivity are cited as a key factor behind its weak position in labour-intensive exports. Despite accounting for roughly one-fifth of the world’s low-skill labour, India captures only about 7 per cent of low-skill exports, compared with China’s 42 per cent.
This gap reflects a broader competitiveness challenge, where higher effective labour costs, driven not just by wages but also by compliance burdens and lower productivity, make it difficult for Indian firms to compete in price-sensitive global markets. As a result, companies often scale back hiring, automate, or shift production to countries with more flexible cost structures and integrated supply chains, limiting India’s ability to translate its large low-skill workforce into export-led growth.
The FED report estimated that this gap translates into an annual export shortfall of around USD 60 billion, representing lost opportunities in sectors such as apparel, footwear, and leather. “Low competitiveness keeps firms out of global supply chains,” it says, adding that these sectors are critical for generating large-scale employment.
India aims to achieve a total export target of US 1 trillion each in merchandise and services. This ambitious goal, supported by the Foreign Trade Policy 2023, focuses on high-tech manufacturing, ecommerce, and diversified markets to drive growth and enhance global competitiveness. However, an OECD report noted that high informality, skill shortages and infrastructure gaps continue to limit firms’ ability to scale and adopt technology, weighing on productivity and export performance, even as the country’s economy expands.
In January 2026, Union Commerce and Industry Minister Piyush Goyal said that India must transform into a high-quality producer of goods and services to achieve its USD 2 trillion export target. He stressed that quality would be the defining factor in strengthening manufacturing competitiveness. He highlighted PM Modi’s ‘Zero Defect, Zero Effect’ vision, stating that it would play a critical role in the growth and support the country’s long-term economic objectives under the Viksit Bharat 2047 roadmap.
Slow Structural Shift Out Of Agriculture
India’s labour market challenges are also shown in its slower transition out of agriculture. Over the first 30 years of economic reform, the share of India’s workforce employed in agriculture declined by 19 percentage points, compared with a 32 percentage-point shift in China over a comparable period.
The report links this slower transition to the lack of growth in labour-intensive manufacturing, which it argues is constrained by high wage floors and regulatory costs. As a result, millions of workers remain in low-productivity agricultural or informal jobs rather than moving into higher-paying industrial roles.
Beyond industrial constraints, challenges within the rural economy are also slowing this transition. A report by Access Development Services found that nearly 45 per cent of India’s farmers still rely on informal sources of credit, showing persistent gaps in access to formal financial systems. Barriers such as documentation issues and authentication failures continue to limit the reach of formal banking and welfare delivery mechanisms, even as digital initiatives expand.
This dependence on informal finance shows deeper structural issues in rural livelihoods, where limited access to capital and risk mitigation tools constrains productivity and income growth. As a result, many agricultural households remain locked in low-return activities, reducing their ability to transition into more productive non-farm employment.
The 2025 State of India’s Livelihoods (SOIL) report highlighted that these constraints are compounded by broader structural challenges, including slowing job creation, persistent gender gaps and rising climate risks. Agriculture, which still employs a large share of the workforce, is increasingly vulnerable to climate-induced stress, further weakening its capacity to sustain incomes or act as a stable base for economic mobility.
At the same time, the sector is undergoing a structural shift, with women now accounting for over 64 per cent of the agricultural workforce. While this reflects rising female participation, it also points to a concentration of women in low-productivity, informal roles, even as higher-value opportunities remain limited. Combined with the rise in self-employment—now close to 58 per cent—these trends suggest that much of India’s workforce continues to be absorbed into informal or low-quality jobs, reinforcing the slow pace of structural transformation.
Formal Jobs Thin Where Wage Floors Are High
State-level data further reinforces the report’s argument. Regions where minimum wages are highest relative to local economic output tend to have the smallest formal sectors. In some states, only around one in eight workers is formally employed. The report also found that states with higher relative wage floors tend to have lower median wages, suggesting that high statutory wages do not necessarily translate into higher actual earnings.
Instead, they may discourage formal job creation altogether. The sectors most capable of absorbing India’s growing workforce are also among the slowest-growing. Labour-intensive industries such as footwear, leather, and apparel have recorded growth rates of 7–9 per cent, significantly below the 13–14 per cent seen in capital-intensive sectors like automobiles and metal manufacturing.
The report attributes this divergence partly to wage regulations that make it difficult for firms to hire large numbers of low-skilled workers. With 8–10 million people entering the labour force each year, the lack of expansion in these sectors poses a structural challenge for job creation.
The report frames the issue as a fundamental policy trade-off between wage protection and job creation. While minimum wages aim to prevent exploitation, setting them too high may exclude the very workers they are meant to protect by making them unemployable in the formal sector. “The cruel irony of a minimum wage set too high is that it prices the most vulnerable workers out of the labour market entirely,” the report said.
To address these challenges, the FED report proposed three broad policy shifts. First, it recommends allowing greater flexibility in wage-setting through negotiations between employers and workers, within a formal regulatory framework. Second, it suggests replacing further minimum-wage increases with wage subsidies, which would raise worker incomes without reducing demand for labour. Third, it calls for greater regional variation in wage floors to show differences in economic conditions across states.
The findings add to an ongoing debate over labour reforms in India, particularly as policymakers seek to boost manufacturing and generate employment for a rapidly growing workforce. The report concluded that easing constraints on job creation may ultimately deliver better outcomes for workers than maintaining high statutory wage floors. “India will do far more for its workers by making it easier to create jobs than by mandating wages that hinder job creation,” it noted. |
