Wages and prices

Dealing with the causes of rural distress

A study of rural wages over the past five years in The Indian Express, using the Labour Bureau data, came to some worrying conclusions. Rural wages, both for non-farm and farm employment, have grown only 0.5 per cent annually in real terms over the five-year term of the National Democratic Alliance government. Altogether, rural wage growth, measured year-to-year in December each year, has been greater than rural consumer price inflation in only three of the five years. The trends are similar if only non-farm employment is considered. This is a serious sign of increasing farm distress, and needs careful attention from the next government. It also comes at a time when wholesale inflation in food and non-food items is diverging — a sign that the terms of trade have turned decisively against agriculture. In December 2018, wholesale inflation for food items was -0.07 per cent but it was 4.45 per cent for non-food items.

These trends should be seen in the context of what is known about their impact on poverty alleviation in rural areas in India. Research published in the Economic and Political Weekly of September 30, 2017, by Seema Bathla and others isolated those factors most likely to reduce poverty. Using a structural equation model for the three decades prior to 2014, the impact of various factors on poverty reduction in rural India was estimated. The results were stark: To quote the authors: “Agricultural productivity facilitated by better rainfall conditions, remunerative farm prices, and non-farm employment at better wages have been the main sources of poverty reduction in rural areas during the period from 1981 to 2014.” It is worth noting, therefore, that two of the crucial elements for poverty reduction have thus been absent in the past five years — remunerative farm prices and increasing non-farm wages. There have also been two strongly sub-standard monsoons, and an increasingly unreliable pattern of rainfall. The authors also found that the world price of commodities had a strong and significant impact on terms of trade for Indian farmers, indicating that the agricultural sector is in fact relatively globalised through the price system.

The government will need to examine how this state of affairs can be remedied. Non-farm employment in rural areas clearly needs a boost — historically wages for non-farm employment have been boosted by spending on health and education. The focus now needs to be on quality assurance in these sectors, particularly when it comes to public provision of these services. But the question of agricultural prices and terms of trade also needs to be considered. In particular, trade policy needs to become pro-farmer. Farmers need to be allowed to take full advantage of increases in world prices rather than having their access to world markets cut off suddenly whenever there are questions about food price increases in urban areas. Properly working commodity markets that are globally integrated and allow for various forms of insurance and hedging must be priority.