What the revision of a 30-year-old inflation index means for rural wages

Shifting the base year for two critical inflation indices is important as they determine minimum wages for agriculture and rural workers, and could also affect payments under the MGNREGA jobs programm

As the day comes to an end, Nanhe Ram (50), waiting outside his contractor's cabin, laments that he has been receiving the same ‘dihadi’ (daily wage) for the past four years.

 

“I hope the contractor doesn't cut my wages this month," he worries. "Last month, due to some problems with the contractor, I received a lesser amount. There are hardly any wage revisions here and whatever we get is barely enough to make our ends meet."

 

In India, both the central and state governments fix minimum wages 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 (CPI) for agricultural and rural labour (CPI-AL/RL) to cover people working in these areas.  

 

Primary among the many reasons for Singh's plight was the use of an outdated base year to calculate inflation for workers; shifting the base year for these two indices is important as they determine minimum wages for agriculture and rural workers.

 

Arun Kumar, former professor at New Delhi's Jawaharlal Nehru University, 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 added.

 

The new base year

 

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

 

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

 

“The earlier base year of 1986-87 became too outdated now…. The country has moved forward, and consumption patterns have changed. Unless the indices were revised, they won’t reflect actual consumption patterns. Most importantly, they won’t capture rural and agricultural wages properly,” a senior government official explained.

 

The revised series now covers 34 states/union territories (UTs) 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 covered as against 65–106 items in the old series. The new series uses consumption pattern data from the 68th round of Household Consumption Expenditure Survey (HCES) which was 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 stood at 57.8 per cent from 69.2 per cent earlier. Similarly, the share of food items for rural labourers has declined to 56.6 per cent from 66.7 per cent in the existing series.

 

Among major changes in the food items, the weightage of cereals and related 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 like '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, given higher consumption patterns for such foods.

 

On the other hand, in non-food items, the share of health has risen to 6.19 per cent for agri labourers and 6.24 per cent for rural labourers from 4.38 per cent and 4.23 per cent respectively.  

 

Why the revision is important

 

Labour economist Santosh Mehrotra says that although the minimum wages are applicable only for scheduled employment and the compliance regime is pretty weak to enforce, 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.  

 

Echoing his views, K R Shyam Sundar, professor of practice at MDI, says that the non-revision of base year for such a long time led to the 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, among others, resulting in lower inflation being recorded against these categories," he adds.

 

Knock-on effects for MGNREGA

 

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-Rural (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 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 wages in a number of states are currently lower than the statutory minimum wages set by both the central government and the states.

 

“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. Also, the minimum wages, set by both the central and state governments, are expected to see an increase,” adds Sundar.