CPI base year revision for agri and rural workers may push up minimum wages

Unaware of recent Delhi govt decision to hike minimum wages in the national capital, Lal and his fellow workers continue to receive same wage as three years ago when they started working in unit

As the day comes to an end, Santosh Lal (44) waits  outside his contractor's cabin for his wage. Some others join him. They’ve been manning furnaces, cutting machines and drills throughout the day at this glass-making unit in a dusty industrial pocket of West Delhi.

 

Unaware of the recent Delhi government decision to hike the minimum wages in the national capital, Lal and his fellow workers continue to receive the same wage as three years ago when they started working in the unit. 

“It’s a great respite that the contractor didn't cut my wage. Last month, due to some problems with the contractor, I received a lesser amount. We have been working on the same ‘dihadi’ (daily wage) for the past three years. There are no wage revisions here and whatever we get is barely enough to make our ends meet,” Lal says. 

In the Indian labour market, working wages are often depressed for a host of reasons that include the use of an outdated base year to calculate inflation for workers. Poor  enforcement mechanisms add to the problem. 

“A relative who works as a ‘dihadi’ technician with a big government project in Rohini had his wage revised late last year. If the government has hiked our wages, we should get them. But who will ensure this” asks Lal. 

In India, minimum wages are fixed by both the central and state governments for a number of occupations known as scheduled employment. In addition, these wages undergo periodic revisions due to changes in inflation. For this, the government comes up with two consumer price indices for agriculture and rural labour (CPI - AL/RL).   

Labour economist Sanotsh Mehrotra says that although the minimum wages are applicable only in scheduled employment and the compliance regime is pretty weak to enforce them on ground, they do set a floor wage rate for employers to follow. 

“At best, they are only implemented in the government's own establishments. Indian labour market with its highly stratified nature means that they serve as an indicator for the wage market and for the workers to demand a certain wage from their contractors," he adds.  

 

Revising The Base Year

 

Nearly four decades since its last iteration, the Centre is planning to revise the base year of the consumer price index for CPI -AL/RL to better capture price increases. The exercise is part of a broader effort by the government to introduce new series for several key macroeconomic indicators, including the Index of industrial production (IIP), gross domestic product (GDP), and the consumer price index (CPI). 

Currently, the base years for CPI and CPI-IW (industrial workers) are 2012 and 2016, respectively, while the base year for CPI-AL/RL is 1986-87. The base year for CPI-AL/RL was last revised nearly three decades ago, in November 1995.   

For this purpose, the Labour Bureau has constituted an expert committee, chaired by National Statistical Commission (NSC) member Asit Kumar Sadhu, to shift the base year from 1986-87 to the 2024-25 agricultural year. 

“The 1986-87 base year is too outdated now…. The country has moved forward, and consumption patterns have changed. Unless the indices are revised, they won’t reflect actual consumption patterns. Most importantly, they won’t capture rural and agriculture wages,” a senior government official explains. 

According to Arun Kumar, former professor at Jawaharlal Nehru University, the two indices are crucial because the general headline retail inflation figure does not accurately represent a large segment of the rural population, given their distinct consumption patterns. 

“Low-income people, especially in rural areas, spend most of their earnings on food, which is very different from the way people in urban areas or with higher incomes spend. While the current index, based on 1986-87 is obsolete, we still need a different index to compute inflation as experienced by these sections of the population. It's a welcome move that the government is changing the base year,” he added.

 

Effect Of Outdated Base Year

 

Shifting the base year for these two indices is important as they determine minimum wages for agriculture and rural workers. 

K R Shyam Sundar, professor of practice at MDI, says  the non-revision of base years has resulted in continuation of the lopsided weightage being assigned to food items in the current series. “This has resulted in neglecting the actual price changes that have occurred in other important consumption items like education and health, among others, resulting in lower inflation being recorded against these categories,’’ he adds. 

Under the current base year which uses the National Statistics Office' (NSO) 1983 household consumption expenditure survey, food items have a weighting of 72.9 per cent in the present CPI-AL and 70.4 per cent in CPI-RL. Other important consumption components, such as medical care, have a weightage of only 4.38 per cent in CPI-AL and 4.23 per cent in CPI-RL. Meanwhile, ‘Education, Recreation, and Amusement’ has a minuscule weightage of 0.94 per cent in CPI-AL and 0.99 per cent in CPI-RL.

Once the latest household consumption expenditure survey is used to calculate new series, the weighting composition of different items will change. 

Also, CPI-AL is used to determine wages under the government’s flagship rural jobs programme — the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). In 2009, the MGNREGA wage was first indexed against the CPI-AL.

The Mahendra Dev committee, set up in 2013 to look at the MGNREGA wages afresh, recommended in its 2015 report, that the wages should be indexed against CPI-R instead, since CPI-AL and CPI-RL (Consumer Price Index-Rural Labour) were outdated. In CPI-Rural, food items account for only 59 per cent and it also provides for higher expenditure on education, medical care, and transport and communication. 

The recommendations were not implemented by the government as the finance ministry expressed concerns over the potential fiscal implications of adopting CPI-R for wage indexation. 

As a result, the MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act 2005) wages in a number of states currently are lower than the statutory minimum wages set by both the states and central government.

 

Impact of Revision

 

Mahendra Dev, professor at Indira Gandhi Institute for Development Research (IGIDR) who headed the  committee mentioned earlier, says that the two indices with 1986-87 as a base year have hidden the actual inflation rate experienced by these workers. 

“First, they have a disproportionate weightage of food. Second, the government provides subsidised food to almost all the rural population. This results in reporting of an inflation rate which is quite lower than the actual rate. With the new series, the weightage given to different items will get rejigged for sure,” he points out. 

Since the government didn't accept the proposal to delink MGNREGA wages from CPI-AL a decade ago, it will now be possible to offer higher wages under the scheme as the new series will better capture the inflation, says Dev. Also, the minimum wages, set by both the central and state governments, are expected to see an increase.