The rural push

Labour market conditions can affect long-term growth

The Indian economy is projected to grow at 7.3 per cent in the current financial year, compared with 7.2 per cent in 2022-23, according to the first advance estimates of the National Statistical Office. The economy has been growing at a stronger pace than anticipated by most analysts, even until a few quarters ago. However, it is likely that this momentum is not benefitting a vast section of society. There has been considerable debate on the nature of the economic recovery after the pandemic. One of the views is that the recovery has benefitted mostly the better-off sections of the population, partly because of formalisation. Nevertheless, even if the debate on the nature of the post-pandemic recovery is set aside, the structure of the Indian labour market deserves increased policy attention.

The majority of the population lives in rural areas, and employment conditions there can have a significant bearing on overall demand. In this context, it is worth noting that data analysed by economist Ashok Gulati and his colleague, and presented in a column in The Indian Express this week, does not paint an encouraging picture. After a dismal performance from 2004-05 to 2008-09, real agriculture and non-agriculture wages in rural areas grew at an annual rate of 8.6 per cent and 6.9 per cent, respectively, between 2009-10 and 2013-14. The growth rate decelerated over the next five years to about 3 per cent. However, over the last five years (2019-20 to 2023-24), the annual rate of growth in real rural wages has been negative for both agriculture and non-agriculture segments. A decline in real wages is bound to affect demand from this section of the population. While this may contribute to the K-shaped recovery, the trend indicates that rural wage growth has significantly underperformed, except for a brief period (2009-10 to 2013-14), which points to broader structural issues.

Far too many people in India depend on agriculture for livelihood. The sustained decline in the agricultural workforce was reversed during the Covid-19 pandemic period. After a minor improvement, 45.8 per cent of the workforce was still engaged in agriculture in 2022-23. Notably, the agriculture sector is expected to contribute a little over 14 per cent to the overall gross value added in the current year. Even with input and output price support, if about 46 per cent of the workforce produces just 14 per cent of the output, there is bound to be pressure on wages and profitability in the sector. The policy priority, therefore, should be to pull out as many people from the agriculture sector as possible. Policy interventions over the years have not yielded the desired results. Further, productivity in the agriculture sector remains low, partly because of small landholdings. Government interventions restricting exports to manage the domestic inflation situation also affect investment and growth in rural areas.

However, from a policy point of view, the rural wage situation only reflects the overall employment condition. Over 18 per cent of the workforce, for example, reported working as helpers at household enterprises in 2022-23. The composition of employment and a decline in real rural wages underscore the long-term challenges for the Indian economy. Sustaining high growth could become difficult if demand from a large section of the population remains weak.