One of the so called successes of the Congress led United Progressive Alliance (UPA) government has been the increase in rural incomes. As Ashok Gulati, Surbhi Jain and Nidhi Satija of the Commission for Agricultural Costs and Prices (CACP) of the Ministry of Agriculture point out in a research paper titled Rising Farm Wages in India “During the Eleventh Five year Plan (2007‐12), nominal farm wages in India increased by 17.5 per cent per annum (p.a), and real farm wages by 6.8 per cent p.a., registering the fastest growth since economic reforms began in 1991.”
Hence, rural incomes have been growing at a very fast rate through much of the second term of the UPA government. And the UPA politicians have pointed this out time and again. Yes, urban India is feeling the heat, but that is the price we need to pay to ensure that rural India is in a better situation than it was in the past, is an argument we have been made to hear time and again.
But looks like time has run out for this argument as well. Rural wages after adjusting for inflation fell in August 2013. As Sonal Varma of Nomura points out in a note dated October 24, 2013 “Growth in the average daily wage rate for agricultural labourers moderated to 13.1% y-o-y in August 2013, significantly slower than 18.5% y-o-y in 2012 and 23.4% in 2011. After adjusting for inflation, the decline was even more stark: real rural wage growth moderated to -0.1% y-o-y in August from 9.3% y-o-y in 2012 and 13.4% in 2011.” (y-o-y = year on year)
A real rural wage growth of -0.1% basically means that the income is growing just about at the same speed so as to match inflation. And this can’t be a good sign for sure.
One of the major reasons for an increase in rural wages has been Mahatma Gandhi National Rural Employment Guarantee Act(MGNREGA). As the CACP authors point out “The argument forwarded is that MGNREGA has ‘pushed’ up the average wage of casual workers, distorted the rural labour markets by diverting them to non‐farm rural jobs, thus creating an artificial labour shortage.” And this shortage has in turn pushed up rural wages to a large extent.
As Varma points out “Several factors, including the government’s employment guarantee scheme(which is MGNREGA) and indexing rural wages to CPI inflation, have boosted rural wage growth and shifted the terms of trade in favour of the rural sector.”
MGNREGA was launched in 200 of the most backward districts of the country on February 2, 2006. It was extended to all rural districts from April 1, 2008. The scheme aims at providing at least 100 days of guaranteed employment in a financial year to every household whose adults are willing to do unskilled manual work.
The payments made under MGNREGA vary from Rs 120 to Rs 179 per day, depending on the state. As mentioned earlier these wages are indexed to inflation. “At the national level, with the average nominal wage paid under the scheme increasing from Rs 65 in FY 2006‐07 to Rs 115 in FY 2011‐12… It has set a base price for labour in rural areas, improved the bargaining power of labourers and has led to a widespread increase in the cost of unskilled and temporary labour including agricultural labour,” write the authors of the CACP report.
So far so good. If MGNREGA was creating useful assets then all this money would have been well spent. The trouble is it isn’t. T H Chowdhary provided an excellent example of why MGNREGA does not work in a column he wrote for The Hindu Business Line in December 2011 “Villages cannot sustain so many unskilled labourers and not-so-literate labour. By creating useless “work” we are promoting dependency among the unfortunate rural, illiterate and unskilled population…An example of the village Angaluru in Krishna district will illustrate how good money is being thrown away for bad results. Out of 1,000 families, 800 had registered themselves as BPL, seeking work under NREGA. So far, it was 100 days at Rs. 100 per day. Even at this, 80,000 mandays of useful work in a year is impossible in a village and that too, year after year.”
What this tells us is that the very structure of MGNREGA does not make sense (and we are not even talking about all the corruption that comes with such schemes). What is true about one Angaluru village in Andhra Pradesh is true about most of the other villages all across the country as well.
Hence, the government is effectively giving away money free to people who have registered under MGNREGA. As Chowdhary puts it “Those who are registered for NREGA are mustered just for attendance and since there is no work to be done they go home, thus paid for no or little work.”
When people get paid for doing no work it is but natural that they will demand much more money for working. This has led to a substantial increase in rural wages over the last few years.
And high wages have led to high inflation in turn, specially food inflation, as a higher amount of money chased the same amount of goods and services. Over the last few years, the wages had been rising at a much faster rate than inflation, but now inflation has finally caught up.
This will now have an impact on rural demand which has remained robust over the last few years, even though the overall economic growth has slowed down considerably. As Varma of Nomura puts it “Over the last few years, rising real rural wages have…supported rural demand… A moderation in real rural wages should cause rural demand to moderate.” This, in turn, will slowdown economic growth further in the time to come. On a positive note, a slowdown in rural demand will also lead to medium term inflationary pressures moderating.
The basic point is simple. Sustainable economic growth cannot be created by simply distributing money or as some economists like to put it by “dropping money from a helicopter”. Gurcharan Das summarises the situation best in India Grows At Night. As he writes “We need to be humbler in our ambition and our ability to re-engineer society…If the state could only enable access to good schools and health care, equity would follow.”
The article originally appeared on www.firstpost.com on October 25, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)