Wage Illusion

India’s labour debate has long been trapped between two extremes. One side argues that higher wages inevitably kill jobs. The other assumes better pay alone can solve worker distress. Both positions ignore a deeper reality: India’s problem is not merely low wages, but an economy that has depended for decades on cheap and insecure labour to sustain growth. That model is now reaching its limits.

Even after years of headline GDP expansion, a vast section of India’s workforce remains outside stable salaried employment. Millions survive through informal work, casual labour, small-scale selfemployment, or seasonal agricultural activity. The contradiction is stark. India aspires to become a manufacturing and services powerhouse, yet nearly half its workforce remains tied to low-productivity agriculture. The result is stagnant earnings, weak domestic demand and rising economic insecurity despite visible national growth. This is the larger context in which the Code on Wages must be understood. The reform is not simply an administrative consolidation of labour laws.

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It represents an attempt by the Indian state to redefine what formal employment should look like in a modern economy. For years, companies across sectors have used fragmented salary structures, allowances, and contractual arrangements to keep basic wages artificially low. This reduced provident fund liabilities, diluted social security contributions, and weakened workers’ bargaining power. Such practices helped lower costs in the short term, but they also institutionalised a low-wage equilibrium that discouraged productivity upgrades and skill investment.

The new wage framework seeks to reverse some of those incentives by standardising wage definitions and limiting excessive exclusions from base pay calculations. Critics from industry predictably warn that higher wage obligations could discourage hiring. But that argument assumes Indian competitiveness can continue resting indefinitely on suppressed labour costs. China’s economic transformation offers a different lesson. Its manufacturing rise was not built only on cheap labour, but eventually on rising productivity, infrastructure, scale, and worker purchasing power. South Korea and Taiwan followed similar paths decades earlier. Economies that remain permanently dependent on low wages rarely achieve broad middle-class expansion.

India now faces a strategic choice. It can continue competing as a vast reservoir of inexpensive labour, or it can gradually transition toward a higher-productivity economy where workers earn enough to sustain consumption and social stability. The second path is slower and politically harder, but likely more durable. None of this can guarantee success. Labour codes alone cannot fix weak manufacturing capacity, judicial delays, poor skilling systems, or uneven state-level implementation.

Small businesses already operating under cost pressures may struggle with compliance. Without broader economic reforms, wage regulation can become another layer of bureaucracy. Yet the broader signal still matters. India is beginning to acknowledge that labour cannot remain permanently informal while the country seeks great-power economic status. A nation aspiring to become the world’s third-largest economy cannot build that future on insecure workers earning stagnant wages indefinitely