Rural Wages

Trends in rural wages:

 1990s: Fairly uniform growth rate, at an average annual rate of 3.7%

 2000s: V-shaped pattern-
 Overall: 2.1% p.a.
 2001-06: Real wages fell by 1.8% p.a.
 2007-2012 (eleventh plan): increased by 6.8% p.a. (real); by 16% p.a.
(nominal)

Thus, clearly, the 1990s were pretty good for agricultural labour. If wages had
risen at this average rate all through the 2000s as well, the current levels would
have been significantly higher than what they are today. However, wages started
falling around 2001 (probably because the effects of reforms had petered out),
and then there was a significant trend break in 2007. It is noteworthy that
MGNREGA Act was passed in 2005 and implemented from 2006, so there seems
to be a strong reason to consider MGNREGA as one of the reasons for this trend
break.

The reasons for the trend break in 2007, and continually rising farm wages till
2011, can be decomposed into two broad categories:

 ‘Push’ factor: MGNREGA- this push factor would be very significant if

wages from MGNREGA were higher than alternative wages in the farm
sector. This has been true in some areas initially, but not in all. Also, the
existence of MGNREGA raises the bargaining power of laborers, so even if
other wages are somewhat higher, laborers atleast have an alternative to
fall back on if their perceived wage from other employment is not on
offer. Similarly, MGNREGA can have a migration-curbing effect

 ‘Pull’ factors from higher economic growth in general:

 Effect of high growth in construction sector provided alternate
employment
 Rising crop prices (this was partly because of rising wages- production
costs increased, so cultivators lobbied for ever-increasing MSPs. This was
granted)

Empirical results show that the growth ‘pull’ factors seem to have influenced the
farm wages more than the ‘push’ factor of MNREGA. Impact of MGNREGA is also
significant, but is 4 to 6 times less effective than the growth variables since 1990-
91.

These results raise a pertinent policy issue: given fiscal constraints and high food
inflation, if there was a tradeoff between allocating resources for welfare
schemes and increasing investments with a view to raise farm wages, could the
money spent on MGNREGA (more than Rs 2 lakh crore) not be better used if it
was for investment in say rural-urban construction, or for overall growth, or for
agricultural growth? These investments would have raised the growth rates in
these sectors, and thereby ‘pulled’ the real farm wages through a natural process
of development,whereby wages increase broadly in line with rising labour
productivity.

Current scenario: Rural wage growth has now declined to around 3.8% p.a., as
per numbers released in November 2014 (lowest since 2005). Part of this could
be because of faltering implementation of MGNREGA under the new regime, but
part of it could also be because MSPs were raised at an average rate of 12% p.a.
for many years, whereas this year they’ve only been raised by a nominal 4%.
This is also probably a cause of the falling inflation levels. Given this, the
clamor for a fresh round of rate ruts become higher for the RBI.
This slowdown in real wages is probably due to the reversal of the factors that
stoked them in the first place.Rural wages started going up in 2007, thanks to
increased non-farm employment opportunities in a booming economy aided by
improved road and telecom connectivity. This was further enabled by MGNREGA
and rising crop prices that made it possible for farmers to absorb the wage
increases.

All three drivers are showing weakening now. A slowing economy has led to a
drying up of job opportunities for rural migrant workers, especially in sectors
like construction and manufacturing. The crash in prices of most crops has,
likewise, reduced the scope for pass-through of wages by farmers.
And finally, MGNREGA appears to have lost its bite. “We have had a change of
government, due to which the emphasis on MGNREGA has been somewhat lost. It
has to come back”, PronabSen said.