The rural wage crisis: Low food prices, MGNREGS ineffectiveness to blame

There has been considerable concern that rural India is going through a prolonged period of distress. One important marker of this income stress in village areas is the rural wage rate. By January this year, growth in average rural wages had fallen to just over 3 per cent, the lowest since 2014. In fact, rural wages have largely been stagnant, with very little growth since mid-2014, when the Narendra Modi-led National Democratic Alliance took office in New Delhi. The difference between the period since 2014 and that between 2007 and 2013 in rural wage growth data is stark. In the years prior to 2014, real rural wage growth touched double digits, according to the Labour Bureau. What could have caused this stagnation in rural wages? One answer, of course, is that the country has suffered two droughts in the last four years. It is also true that growth in general has slowed — but that is not a complete explanation, since growth had begun to slow prior to 2013, and picked up thereafter. 

A recent paper from the research division of the Reserve Bank of India has examined dynamic panel data for rural wages since 2001 and come to certain conclusions that are worth examining. In particular, it seems that the decline in inflation since 2014 is significantly related to rural wage stagnation. Higher food prices prior to 2014 enabled growth in agriculture and in the incomes of those directly and indirectly dependent upon the agricultural sector. It is likely that, since 2014, the terms of trade have turned against agriculture, with non-agricultural goods becoming consistently more expensive relative to farm products, thereby reducing the purchasing power of those in the rural sector. There are also other important determinants of growth in the rural wage rate. One of these is the strength of growth in non-agricultural rural production. In India, the construction sector in particular absorbs some of this labour demand. Thus, the RBI paper finds that wages in the construction sector have a positive impact on rural wages — and the slowdown in construction, alongside the consequent decrease in labour demand and in the wages for unskilled labour in the sector, will have reduced rural prosperity.

Finally, it has long been understood that rural wages in India depend crucially also on the bargaining power of workers. Thus, the presence of a reservation wage in the model drives up the realised rural wage. The Mahatma Gandhi National Rural Employment Guarantee Scheme, or MGNREGS, has served since the mid-2000s to provide such a reservation wage, and both data and anecdotal evidence suggest that it has helped drive up rural wages. Yet, in recent years, the number of workdays per household availed of under the MGNREGS has declined in spite of the demand for work associated with two droughts. This points the government in the direction of needed policy changes. It must stop delaying payments for the MGNREGS to states, and restore the programme to full effectiveness. This is a first step towards restoring rural wage growth and alleviating rural distress.