Low Growth In Rural Wages: The New Normal That Has Everyone Worried

Top management at the country’s largest consumer goods firms struck a somber note this month. While reporting quarterly earnings and commenting on demand conditions in the economy, most of them cited signs of weakness particularly in the rural economy. Some called for fiscal stimulus to boost demand.

This conundrum of weak rural demand, driven by low food prices and weak growth in wages, will haunt any new government that takes charge, for signs of a reversal in these conditions remain absent at least for now.

Rural wage growth in nominal terms in FY19 stood at 3.7 percent until February, compared to 5.6 percent in FY18, according to data on average wage rates for men, collated by BloombergQuint from the Labour Bureau.

Adjusted for inflation, the real rural wage growth in FY19 was just 0.4 percent until February, as against 1.7 percent in FY18.

The labour bureau lists average daily wage rates every month for 12 agricultural and 13 non-agricultural occupations.

In FY19, average agricultural wages grew by 3.5 percent until February, compared to 5.8 percent in FY18. Non agricultural wage growth moderated to 3.5 percent from 5.3 percent for the same duration last year.

In real terms, after adjusting for inflation, agricultural wages rose by 0.7 percent until February, compared to 2.2 percent in FY18. Non agricultural wage growth fell to 0.4 percent from an already low growth of 1.7 percent.

Rural wage growth is a story of general labour demand, said Abhijit Sen, former member of the Planning Commission. Weak rural wages suggests weakness in demand for labour in the rural economy, which would be part of the macroeonomic slowdown, added Ajay Shah, professor at NIPFP.

While the Reserve Bank of India expects GDP growth of 7.2 percent in FY20, economists see this forecast as optimistic. High frequency indicators including vehicle sales, manufacturing output and consumption demand have remained weak.

What Drives Rural Wage Growth?

An RBI working paper, on rural wage dynamics in India, dated April 2018, summarised the sharp movements in rural wage growth into three phases.

In the first phase from January 2002 to September 2007, the average growth in rural nominal wages remained around 4 percent.
During the second phase from October 2007 to October 2013, the average growth in nominal agricultural and non-agricultural wages jumped to around 17 percent and 15 percent respectively.
In the current phase from November 2014, rural wage growth has recorded significant deceleration. Low inflation has occasionally marginally surpassed nominal growth, leading to rural distress.

High growth in rural wages in the second phase was led by the implementation and the quick progress of the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and a healthy growth of the construction sector, stated the paper. The high wage growth period also coincided with elevated inflation in the economy, which is not the case post 2012-13.

The study, after observing patterns across all three phases, would that nominal wage growth and inflation are closely related. “Importantly a rise (or decline) in nominal wage growth is preceded by a rise (or decline) in inflation,” the study said.

Other factors that drove high rural wages included bargaining strength, technological progress and the significance of growing rural non-agricultural employment.

Are Any Of These Factors Turning?

The question then is whether there is a turn in any of the supporting factors, which could help push up wage growth and, in turn, rural demand.

The answer, so far, appears to be no.

Inflation, which the RBI study suggested leads a turn in direction for wage growth, is expected to stay modest in FY20. The RBI expects sub-4 percent inflation to stretch out through most of the financial year. While food price inflation may rise due to the low base effect, surplus supplies across many agricultural commodities may prevent a sharp rise in prices.

Though prices of food items are expected to see an uptick, the impact is expected to be minor on nominal wage growth, said Devendra Kumar Pant, chief economist at India Ratings. RBI’s working paper also cites empirical research that Indian agriculture real wage rates do not adjust instantaneously to changes in their determinants, indicating wage stickiness.

Since demand and price of labor in non-agricultural segments is also a determinant, economists are also watching these indicators.

JM Financial, in a recent report on the rural economy, noted that labor demand in the non-farm sector remains modest. This lacklustre growth is on account of formalisation of the economy impacting small businesses, challenges in cash flow due to lower disbursement by select non-bank lenders, along with regulatory and environment-driven restrictions on activities such as sand mining and brick kilns. A pick-up in construction activity in the rural roads and housing segment has also flattened out.

Meanwhile, the average wage rate per day per person under the Mahatma Gandhi National Rural Employment Guarantee Scheme fell to Rs. 175.51 for the current financial year, from Rs. 179.12 in the last financial year. Wage rates for the program are indexed to inflation.

While wages have remained flat, the demand for work under the program surged 14 percent in FY19, according to JM Financial’s report.

These factors, when taken together, may mean that rural wages are likely to remain modest, said Rahul Bajoria, senior regional economist at Barclays.

High labour influx and increasing mechanisation, no material inflation in wages paid under the rural employment guarantee scheme and lack of profits in the agriculture sector are likely to hold down rural wage growth.

Rahul Bajoria, Director- Senior Regional Economist, Asia Pacific, Barclays

What Can The Government Do?

If weakness in the rural economy persists, the slowdown in growth may prove to be more than just cyclical and would require a policy response, said Kotak Institutional Securities in a note dated May 4. “We believe a combination of monetary stimulus and structural reforms may help revive growth over time,” the brokerage house added.

The choice, according to a UBS note dated May 9, is between a short-term growth boost through further fiscal expansion and a further growth slowdown from pursuing fiscal consolidation.