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The conversation on India’s industrial potential and economic growth often circles around wage levels, productivity, and the path to industrialization. One critical, and perhaps provocative, question emerges from this discourse: Is India caught in a low-wage trap? And could higher minimum wages actually force the country toward greater productivity and industrialization?

Understanding the Low-Wage Trap

The low-wage trap refers to a cycle where wages remain persistently low, discouraging businesses from investing in productivity-enhancing technologies or skills development. Companies operating in such an environment often rely on labor-intensive methods rather than innovation or mechanization because cheap labor makes it economically viable to stay inefficient.

India, with its abundant labor force and relatively low labor costs, has long been seen as a destination for cost-efficient manufacturing. However, this advantage may be turning into a barrier to progress. When firms aren’t pushed to be more productive, they settle for inefficiency—and workers suffer from stagnating incomes and poor working conditions.

Raise Minimum Wages to Raise Productivity

This idea may seem counterintuitive: why raise minimum wages in a country where unemployment is high, and the informal sector dominates?

The answer lies in a strategic paradox. If wages increase, companies can no longer afford inefficiency. They are forced to optimize, automate, train workers better, and adopt leaner operations—steps that ultimately raise overall productivity.

Take China, for example. Over the last two decades, China’s wages have risen substantially. But so has its labor productivity. Between 2005 and 2020, average manufacturing wages in China tripled, but productivity gains outpaced wage growth. Higher wages made low-skill, low-productivity manufacturing unsustainable. The result? China moved up the value chain—from low-end textiles to electronics, robotics, and electric vehicles.

Could India chart a similar course?

India’s Current Wage Landscape

India’s statutory minimum wages vary widely across states and sectors. According to the Periodic Labour Force Survey (2022-23), the average daily wage for casual laborers in rural areas was around INR 300, while in urban areas it hovered around INR 400. This is significantly lower than the average manufacturing wage in China, which is now over USD 600/month, or about INR 50,000/month.

In addition, over 90% of India’s workforce is in the informal sector, where minimum wage laws are either weakly enforced or outright ignored. As a result, the actual wages earned are often well below subsistence levels, leaving little room for skill development or upward mobility.

The Case for Higher Minimum Wages

1. Forces Efficiency: When labor becomes expensive, firms look for ways to become more efficient. That includes investment in automation, better management practices, and upskilling workers.


2. Boosts Consumption: Higher wages mean greater purchasing power. In an economy driven by domestic demand, this can spur growth across sectors.


3. Encourages Formalization: Companies that must comply with wage regulations are more likely to register formally, contributing to tax revenues and improving worker protections.


4. Attracts Quality Investment: Investors seeking long-term productivity rather than short-term labor arbitrage are more likely to set up operations in countries with skilled, fairly paid workers.

The Risks and Counterarguments

Critics argue that artificially raising wages could:

Increase unemployment, especially among low-skilled workers.

Encourage automation to a level that displaces labor without creating new jobs.

Burden small businesses that lack the resources to absorb wage hikes or invest in productivity improvements.

But these concerns can be addressed with well-designed policy interventions:

Gradual implementation of higher minimum wages.

Support schemes for SMEs to adopt productivity-enhancing technologies.

Public investment in skill development and labor mobility.

Strong enforcement mechanisms to prevent exploitative practices.

A Balanced Strategy

India’s long-term economic competitiveness cannot rest solely on cheap labor. If it aims to become a manufacturing powerhouse, it must focus on productivity, innovation, and worker welfare.

A higher minimum wage—combined with investments in infrastructure, education, and industrial modernization—could serve as the trigger for this transformation.

The question isn’t just whether India can afford higher minimum wages. It’s whether India can afford not to raise them. Change is always uncomfortable, especially for industries accustomed to low labor costs. But India must decide whether it wants to remain a hub of cheap, unproductive labor—or evolve into a high-value, high-productivity economy.

The low-wage trap is real. Escaping it requires bold, well-planned moves—and raising minimum wages might just be the disruption India needs.