Rajiv Kumar

Feeling the heat of high wages

RAJIV KUMAR | Updated on October 28, 2011 Published on October 28, 2011

The jobs guarantee scheme has accentuated labour shortages in industry.

Wage increases brought about by MGNREGS are all very well, provided the supply of goods keeps pace with demand. The scheme should be tweaked for creating productive assets.

It is perhaps not well known that according to data produced by the Labour Bureau, Shimla ( Business Line May 15, 2011) wage rates for agriculture operations increased rather sharply in 2009 and 2010. Farm wages increased by 15-20 per cent in Haryana, Bihar, West Bengal and Assam and 32 per cent and 43 per cent in Punjab and Orissa, respectively.

Data collected from 600 sample villages in over 20 states covering wage payments both in cash and kind further reveals that in Andhra Pradesh farm wages increased by 40 per cent in 2009 and 27 per cent in 2010. The questions that arise are: i) have these wage increases been accompanied by a commensurate rise in productivity ii) what may have caused the wage rise and iii) what is the implication for broader macroeconomic concerns of inflation and sustainable growth.

FARM MECHANISATION

While the data on labour productivity in agriculture is not readily available, there are clear signs that Indian agriculture is becoming more capital-intensive and mechanisation is increasing. This is confirmed by the rise in demand for agricultural equipment like tractors, harvest combines and threshers, reported by manufacturing companies, as also in the rise in agriculture non-crop credit off-take.

This would surely result in higher labour productivity in agriculture — a good outcome. At present, the sector is a laggard in productivity, as it contributes only about 13 per cent of the GDP while employing more than half the workforce of the country. There are some direct implications of this increasing trend in agriculture mechanisation. First, this will soon bring pressure for enlarging the size of land holdings to make them more amenable for mechanisation. State governments should now begin to take steps, like cleaning up and computerising land records, to facilitate the emergence of a well regulated agriculture land market and remove unnecessary impediments and opacity in procedures.

Second, new skills for running and repairing the larger number of farm machines will be in higher demand and shortages have emerged already. Finally, the rising wages (corresponding to productivity increases) and farmers' affluence is resulting in higher demand of non-cereal food articles like proteins, milk, fruits and vegetables, where again supply shortages have emerged, spurring food inflation. This kind of price rise can hardly be reined in by raising interest rates!

It is perhaps beyond argument by now that a strong driver of this upward movement in farm wages has been the working of the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) for the last six years.

NREGS has generated 2.5 billion mandays of work in 2010, which is a mere 2 per cent of all work but affects wages at the margin both in agriculture and industry. Having become an entitlement scheme, it has raised the reserve price of labour and is forcing industry like construction and garments to become more capital-intensive.

In a recent Ficci survey on the impact of NREGS on over 100 companies, it was found that 90 per cent of companies were faced with labour shortages; 94 per cent have seen wage increases and 82 per cent reported wage increases of more than 10 per cent.

As many as 89 per cent of the respondents found it difficult to meet their orders due to labour shortages and 66 per cent are faced with a potential loss of 10 per cent of their demand as a result of labour shortages. Therefore, firms have suggested that work done in industrial units should also qualify for coverage under NREGS and state governments should be far more flexible in permitting labour movement across state borders.

SUPPLY DEFICIT

Wage increases in the system are sign of a healthy economy and should normally not raise any concerns. Rising wages would result in higher demand which can be met by increasing supply capacities through new investment. This can set up a virtuous cycle which can lead to more rapid and inclusive growth.

There is one catch, however. If the higher demand for labour that results in higher wages arises from unproductive employment, it could affect the economy's capacity to generate the required supply response. Employment created under NREGS is largely of an unproductive kind with the mandated 75 per cent of all expenditure on labour which precludes creation of tangible and long-lasting productive assets.

Interestingly, this ratio is as much as 100 per cent in Tamil Nadu, 98 per cent in Kerala and 87 per cent in Maharashtra (juxtapose this with the Ficci survey results that show companies based in the Western and Southern states getting more impacted due to the NREGS).

Moreover, the rather difficult investment climate in the country, with firms still needing up to 70 clearances to start a business, combined with changing regulatory goalposts, prevents the necessary supply response from being generated.

productive assets

Proponents of entitlements schemes like the NREGS and now the Food Security Bill should pause to think of the consequences of raising purchasing power, entitlements and expectations without a commensurate increase in supply-side capacities.

This could result in unsustainable macroeconomic imbalances in the form of higher inflationary pressures, rising current account deficits with higher demand being met by larger imports and burgeoning fiscal deficit. Can a poor country like ours afford the luxury of creating entitlements without any thought to removing existing supply-side constraints and ensuring a judicious use of labour for creating productive assets?

We may be on the cusp of a major crisis in which rising consumption demand, fuelled by growing fiscal deficits, cannot be met by an expansion of domestic supply capacities.

It may be better to tweak the NREGS at this stage itself so that it helps in relaxing some of these bottlenecks and creates productive assets and capacities, rather than only be used for digging holes and then filling them, as classical Keynesianism would advocate.

(The author is Secretary-General, Ficci. >blfeedback@thehindu.co.in)

Published on October 28, 2011
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