With rural wages continuing to rise, at 17.4% in September, the political class has every reason to celebrate since a higher wage growth means a sharper reduction in poverty. Indeed, the fall in poverty levels over the past few decades can be directly related to the dramatic hike in rural wages. While nominal farm wages rose 11.6% per annum in the 1990s, growth fell dramatically to just 1.8% per annum between 2001-02 and 2006-07, before rising once again to 17.5% per annum between 2007-08 and 2011-12. Since the time period of the slowing wages coincides with the time the NDA was in power, and the dramatic rise with the UPA coming to power, the usual explanation is that it is policies like MGNREGA that are driving up the wages. Convenient as that is, the number of jobs created by MGNREGA is so small—2-3% of the total work force is employed in MGNREGA—it can’t possibly affect wages so much. A recent study by Ashok Gulati, Surbhi Jain and Nidhi Satija studies the wage hikes and the reasons for it. Not surprisingly, while it concludes MGNREGA has an important impact on wages in states like Andhra Pradesh and Odisha where MGNREGA penetration has been relatively high, the trio find the impact of higher construction activity and higher agriculture GDP is much higher—typically, while a 10% hike in MGNREGA employment causes a 0.3-0.5% hike in general agriculture wages, a 10% hike in agri-GDP causes a 2.1% hike in wages, and a 10% hike in construction GDP results in a 2.8% hike in farm wages.
While this raises the question of whether the over-R2 lakh crore under MGNREGA was better spent in other areas to give a boost to farm wages, the larger question is one of how sustainable this is. Labour is already getting scarce in rural areas with the labour force participation rate falling from 54.8% in FY12 to 52.8% in FY13. So, with wages rising the way they are, increasing mechanisation of the farm sector can be seen. Also, since agriculture productivity is very slow to grow in cereals, for instance, the trend will only rise as farm wages keep rising. In other words, if productivity levels in rural India do not start rising, unemployment rates are certain to start shooting up.