What the revision of 3-decade-old inflation index may mean for rural wages

What the revision of a three-decade-old inflation index may mean for rural wages

As the day draws to a close, Nanhe Ram (50), who is waiting outside his contractor’s cabin, laments that he has been receiving the same dihaadi (daily wage) for the past four years. 

 

“I hope the contractor doesn’t deduct my wages this month,” he says. “Last month, I got less than what was due. Wages are hardly ever revised, and I can barely make ends meet with what I earn.”

 

In India, both the central and state governments fix the minimum wage for a number of occupations identified as scheduled employment. These wages are revised periodically in line with inflation. For this, the government relies on two consumer price indices for agriculture and rural labour (CPI-AL/RL).  

 

The primary reason for Singh’s plight is that an outdated base year is used to calculate inflation for workers. 

 

Arun Kumar, a retired Jawaharlal Nehru University professor, says 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,” he explains.

 

A new base year 

 

Last month, after nearly three decades since its last iteration in November 1995, the Centre revised the base year 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 CPI.

 

The new base year for CPI-AL/RL is 2019. 

 

“The earlier base year of 1986-87 became too outdated. The country has changed, and so have consumption patterns,” says a senior government official. “Unless the indices were revised, they would not reflect the actual consumption patterns. Most importantly, they would not capture rural and agricultural wages properly.”

 

The revised series now covers 34 states and Union territories (UTs) — two UTs have been clubbed and Chandigarh was not included — as against 20 states in the old series, with prices collected from 787 sample villages, as against 600 villages in the old series. Also, 150–200 items are now covered against 65–106 in the old series. The new series uses consumption pattern data from the 68th round of the Household Consumption Expenditure Survey, released in 2011-12. 

 

Hence, the weightage of food items has now declined by nearly 10 percentage points for both agricultural and rural labourers. 

 

In the new series, the share of food items for agricultural labourers stands at 57.8 per cent from 69.2 per cent earlier. Similarly, for rural labourers, the share of food items has slipped to 56.6 per cent from 66.7 per cent in the earlier series. 

Among major changes in food items, the weightage of cereals and its products has fallen to 12.9 per cent for agricultural labourers and 12.07 per cent for rural labourers from 40.9 per cent and 38.15 per cent, respectively. 

 

Meanwhile, the share of protein-rich items such as meat and fish has risen to 5.87 per cent for agricultural labourers and 5.52 per cent for rural labourers from 3.1 per cent and 3.3 per cent, respectively. 

 

In non-food items, the share of health has risen to 6.19 per cent for agricultural labourers and 6.24 per cent for rural labourers from 4.38 per cent and 4.23 per cent, respectively.   

 

Labour economist Santosh Mehrotra says that although 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,” he says. “The 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.”  

 

The need for revision

 

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

 

Echoing the view, K R Shyam Sundar, professor of practice at Management Development Institute (MDI), Gurugram, says not revising the base year for such a long time led to lopsided weightage being assigned to food items while calculating inflation for these workers. 

 

“This resulted in neglecting the actual price changes that have occurred in other important consumption items like education and health, leading to lower inflation being recorded against these categories,” he explains.

 

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

 

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

 

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

 

As a result, MGNREGS wages in a number of states are currently lower than the statutory minimum wages set by both the states and the central government.

 

“Since the government didn’t accept the proposal to delink MGNREGS 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 Shyam Sundar. “Also, the minimum wages, set by both the central and state governments, are expected to see an increase.”

 

For daily-wagers like Nanhe Ram, things might finally begin to look up.