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Ourview | A device for steady growth?

Ourview | A device for steady growth?
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First Published: Wed, Sep 28 2011. 11 03 PM IST

Jayachandran/Mint
Jayachandran/Mint
Updated: Wed, Sep 28 2011. 11 03 PM IST
Around the Atlantic Ocean, a storm of another kind is blowing. A combination of deleveraging and mountains of debt has nearly killed effective demand in Western economies. These troubled countries now look at emerging countries such as India, where consumption has been fuelling growth, as models of stability.
Jayachandran/Mint
Last week, the United Nations Conference on Trade and Development (Unctad) released its Trade and Development Report for 2011. This report made much of the increase in real wages as a source of growth in many emerging economies as a pillar of strength. In India, for example, real wages grew 8% in 2008 after a 0.6% contraction in 2007. From 2001-2005, real wages grew by a mediocre 2.6%. This has been linked by others as being due, in part at least, to the implementation of the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS).
Recent data also points to evidence that across states, rural wages have grown in double digits—at a rate significantly more than the Consumer Price Index (CPI) for agricultural labourers. Something similar is playing out in urban areas.
There are two ways to look at these developments. Wearing a “western lens” one can say there is wisdom in spurring real wage growth—something that slowed a long time ago, it is claimed, in western economies. After all, if real wages don’t grow, a major engine of growth—consumption—risks collapse. This is, of course, an argument that has a long tradition among economists—from Keynes to Axel Leijonhufvud. Wear an “Indian lens”, and a different perspective emerges. Real wage growth may have a different source. In a supply constrained economy, wages outpacing price increases indicate a wage-price spiral rather than a signifier of healthy growth.
In addition, the effects of distortions in the labour market may also be responsible for mismatches between supply and demand of labour leading to higher wages. Again, these are not signs of growth but more of distortions created by policy interventions.
Were it not for the presence of a very visible inflationary gap in the Indian economy—it is widely held that the potential growth rate is around 8%—one could have even held up programmes such as the MGNREGS as a source of strength. Sans inflation, they could very well be an insurance policy in a world that is on the brink of another recession. That, as was pointed out years ago, is not the case.
Consumption or investment demand: what does the Indian economy need today? Tell us at views@livemint.com
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First Published: Wed, Sep 28 2011. 11 03 PM IST
More Topics: Ourviews | India | Economy | MGNREGS | Wages |