If you ask an Economics graduate “What will happen to real rural wages in a democratic country where real GDP growth is consistently north of 6% and where the rural economy suffers from endemic labour shortages?”, chances are that no Economics graduate will answer that “real rural wages will stagnate in such an economy”. And yet that’s what has happened in India’s rural economy. Given that India, as a whole, is one of the 60 poorest countries in the world, rural India is likely to include several of the most deprived regions of the planet. In this long read, Rohit Inani, part of the outstanding team at IndiaSpend, drills down into how on earth rural India got a raw deal when a decade ago it seemed all but inevitable that rural wages would continue to rise. Mr Inani begins by giving some basic stats which capture the extent of the problem:
“For the last 10 years, real rural wage growth…has remained stagnant. Real wages are incomes after adjusting for the effect of inflation. And if real incomes do not grow, people do not possess the purchasing power to buy more goods and services, thereby affecting both demand and general wellbeing of people in an economy.
According to an analysis of government data by the Indian Council for Research on International Economic Relations (ICRIER), an economic think-tank, during the Narendra Modi government’s first term, growth in real rural wages for farm and non-farm sectors declined to 3% and 3.3% respectively from about 8.6% and 6% between 2009-10 and 2013-14. However, during the Modi government’s second term, the situation worsened as growth turned negative: -0.6% for farm wages and -1.4% for non-farm wages….
However, government data found that even as average monthly incomes for a household of five people increased from Rs 6,426 in 2012-13 to about Rs 10,200 in 2018-19, agricultural households remain under considerable financial distress, with about 50% in debt and the average outstanding loan rising 59%”
Politics aside this is a major challenge for investors such as ourselves because the majority of India’s consumers (by number) are living in rural India and if they ain’t earning more, they aren’t going to be consuming a heck of a lot. That in turn means the investable universe for investors like us shrinks.
So how exactly did rural India get a raw deal? Mr Inani quotes Jean Dreze, an economist of repute and a professor at Ranchi University: ““There has been little research on the recent stagnation of wages, because few people paid attention to this until last year,” Drèze, visiting professor at the Department of Economics at Ranchi University, told IndiaSpend. “India has had a problem of sluggish growth of rural wages for a long time–most of the last 35 years. But today, this stagnation is happening in spite of fairly rapid economic growth.
“One reason for this long-standing tendency is that India has a huge reserve army of workers who have poor educational qualifications and lack marketable skills, even if they have plenty of other skills. This holds wages down.””
Leaving aside the obvious problem of too many workers chasing too few jobs, the second challenge in rural India is something that many of us studied in middle school 40 year ago – pathetically small landholdings: “About 82 million households–comprising 410 million people–cultivated crops on land of size less than or equal to 2 hectares, according to government data. In this cohort, which forms 88% of all agricultural households in the country, about 38.7 million households are in debt with average outstanding loan amounts of Rs 33,220, Rs 51,933, and Rs 94,498 for farmers with landholdings between 0.01-0.40 hectare, 0.41-1.00 hectare and 1.01-2.00 hectare respectively.”
The third factor is a slowdown in labour demand in urban areas (which in turn means that fewer people migrate from rural areas to urban areas thus increasing the supply of labour in rural areas). Mr Inani quotes another highly regarded economist, Himanshu of JNU: ““The demand from non-farm sectors such as manufacturing and construction has also slowed down and people are moving back to agriculture. Agricultural prices–in terms of MSPs–have not moved as fast as non-agricultural prices. Terms of trade have shifted against agriculture. And this has driven wages down,” Himanshu said, noting that even as the construction sector is rife with investments, there is hardly any positive movement in rural wages.”
And the final factor driving wage stagnation is that there isn’t a heck of lot happening in rural India beyond farming and farming itself has become increasingly mechanised thus requiring less labour: “Pronab Sen, economist and former chief statistician of India, told IndiaSpend that labour-intensive projects such as rural housing and road construction positively affect rural wages owing to higher labour intensity.
“In rural India, agriculture is no longer the driver of economic activities. And alternative occupations are simply not growing fast enough,” Sen said. “So you have a surplus of labour.””
All of this being said, economists are still at a loss to understand why the broader Indian economy’s economic growth didn’t any positive spillover effects for rural wages. Jayati Ghosh, a professor of economics at the University of Massachusetts, Amherst, and Jean Dreze have joined forces to decipher this phenomenon: “According to an analysis by the Financial Times, between 2014 and 2022, India’s GDP grew at an average of 5.6% in compound annual growth rate terms while an average of 14 other large developing economies grew by 3.8% over the same period. Factoring in global economic historical trends, Drèze and Ghosh found it difficult to find a similar trend globally, where on a line graph economic growth and rural wages moved in opposite directions.
Drèze said that it would be a surprise if there were another example of a country growing so fast for 10 years with hardly any increase in real rural wages. “This is very, very rare,” Ghosh said.”
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