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Slowdown in rural wages not a temporary phenomenon

While the revised estimates of the gross domestic product (GDP) suggest the Indian economy turned the corner in 2013-14, concerns remain over the durability of this nascent recovery. Particularly worrying is the recent slowdown in rural wage growth, which signals a weakening of rural demand. Growth in rural wages, which had averaged 18 per cent in the previous few years, fell to less than five per cent in September last year.

Worse, the decline in rural wage growth is not likely to be a temporary phenomenon, according to economists. This view is based on their assessment that the three factors that drove rural wages in the past – the Mahatma Gandhi National Rural Employment Guarantee Scheme or MGNREGS, higher minimum support prices (MSPs) and a buoyant construction sector – are all weakening and the trend is unlikely to reverse in the short term.

Since its launch, MGNREGS has been instrumental in raising rural wages by increasing the bargaining power of workers and by providing a floor to rural wages. As wages under the scheme are linked to inflation, it feeds the wage price spiral, the vicious cycle of higher wages leading to a higher cost of production; that leading to higher inflation; and that, in turn, to higher wages. But with allocations to MGNREGS declining three per cent to 36 per cent over the past few years, it has lowered labour participation, and has contributed to weak wage growth.

Former chief statistician of India and now the chairman of the National Statistical Commission, Pronab Sen, argues that “in 2009-10, the previous drought year, MGNREGS uptake was able to increase rural wages. But we are not seeing that trend now”. With the government focusing on compressing expenditure, if allocations to MGNREGS are moderated, wage growth going forward is likely to be curtailed to the extent rural wages rose on account of MGNREGS.

The second factor that drove rural wage growth was the sharp increase in MSPs. Higher MSPs lead to higher food inflation, which, because of their indexation to MGNREGS wages, lead to higher wages. But after being raised roughly 12 per cent between 2007 and 2013, MSPs for rice and wheat have been raised by only 3.8 per cent in the current financial year. This has had a dampening effect on inflation which will, in turn, feed into lower rural wage growth. Further, commodity prices have also softened over the past three years, with the World Bank’s Food Price Index for food, oil & meals, and grains declining 20 per cent, 27 per cent, and 29 per cent, respectively. With declining farm income, there is a tendency to cut back on hired labour, implying a reduction in demand for wage labour which, in turn, affects wages adversely. Also, Sen points out, this year’s weak monsoon could have depressed rural wages.

The third factor that pulled up wage growth in rural areas in the past years was the tightening of labour markets in these parts due to a flow of workers from the agricultural sector to the construction sector. But, in a slowing economy, job opportunities, especially in the construction sector, have dried up. That has depressed wages.

This suggests that, as the impact of MGNREGS and MSP on rural wages is likely to remain muted going forward, unless there is a significant pick-up in economic activity, particularly in the construction sector, considerable slack will exist in the labour market. So, wage growth in rural areas might remain muted going forward, dampening rural demand.

Rural demand was one of the bright spots of the economy over the past years. According to Pronab Sen, it was rural demand that propped up consumption in the past few years in the absence of any real demand from urban areas. But with rural wage growth slowing down considerably and a turnaround seeming unlikely in the short term, rural demand and, as a result, the overall domestic household demand, are likely to be constrained in the near term.

NO RURAL RESPITE
Factors that might depress rural wage growth
  • Reduction in allocation to the Mahatma Gandhi National Rural Employment Guarantee Scheme
     
  • Moderation in minimum support price rise
     
  • A slowdown in the construction sector

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