Rural job scheme minimum wage revised, risking inflation spiral

Rural job scheme minimum wage revised, risking inflation spiral

New Delhi: In a move that brings relief to the rural workforce, but risks creating an inflation spiral, the government on Thursday revised the minimum wages paid for its flagship job guarantee scheme by linking them to the Consumer Price Index for agricultural labour (CPI-AL) for each individual state.

Such a price spiral, in case it actually emerges, could roil the electoral prospects of the Congress in the key contests to the state assemblies of West Bengal, Kerala and Tamil Nadu, due later this year.

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Indexation to CPI-AL, which has a heavy weightage for food products and has been in double digits for most of the last one year, should significantly raise rural wages—by between 17-30% according to estimates by the rural development ministry—providing a fresh fillip to farm costs and unleash another round of food inflation if higher costs are passed on to consumers.

With the prospect of annual increases in wages indexed to inflation, there is a risk of a price spiral at a time when food inflation has surged once again, touching 18.32% for the week ended 25 December.

Within the government there was a frantic scramble as the Congress-led United Progressive Alliance (UPA) sought to fight what appears to be a fresh burst of inflation. With international food prices rising faster than local prices, there is a risk that some of this would be transmitted to Indian shores.

While finance minister Pranab Mukherjee sought to calm sentiments by claiming the fresh spurt in food prices was a result of supply mis-management and put the onus on the states, cabinet secretary K.M. Chandrasekhar presided over a meeting of top bureaucrats on Thursday. A senior finance ministry official, who spoke on condition of anonymity, said the ban on onion exports by Pakistan may encourage hoarders to hold their stocks.

“While there are some weather induced supply constraints on some of these items...a large part of the price rise is due to the widening gap between the wholesale and retail prices, and the growing demand for these products due to rising income levels," Mukherjee said in a statement.

Ashok Gulati, director of the International Food Policy Research Institute, said that the excess liquidity in the system on top of lower production is driving up food prices. “The government should bring down import duty on food items to zero or 5% and should unload its excess stock of foodgrains in the market so that it boosts consumer sentiment. It should also do away with the horrendous mandi system and encourage investment by big retails firms, which will compress the chain and help bring down food prices," he said.

Abhijit Sen, Planning Commission member in charge of agriculture, said much is being made on the impact of the job guarantee scheme on rising cost of food and wages.

“MGNREGS might have some effect on food prices, but that will be very small as the amount spent on the scheme is negligible when compared to the aggregate demand (of the economy)," Sen said. The scheme has a budgetary allocation of 40,100 crore this fiscal to March.

Pronab Sen, principal adviser of Planning Commission who is also chairing a committee to suggest a mechanism to revise wage rates for the job guarantee scheme, said if the government does not compensate wageless labourers, then they will be the ones who will be suffering the most due to higher food inflation. “What is the job of the government? Is it to protect the wage labourers or the urban middle class?" he asked. Sen said he will submit the report in a couple of weeks.

The ministry of rural development said in a notification that the revised wage rates come into effect from 1 January 2011. The current minimum wage rate is 100 per day.

The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) assures 100 days of manual labour to each rural household every year. It has been one of the UPA’s most successful welfare programmes, benefiting 39 million households in 619 districts.

Rural development minister C.P. Joshi denied media reports that there are differences between UPA chairperson Sonia Gandhi and the government on the issue. “The government of India after consultations with ministries and after taking into account recommendations of the National Advisory Council (NAC) has decided to index MGNREGA wages to Consumer Price Index of agricultural labour with effect from 1 January this year," he said.

While the indexing based on CPI-AL will take place every year, the base will be revised once every five years.

“Though it is a demand driven scheme, our estimate is that this revision will cost the exchequer 3,500 crore extra between January and March," Joshi added.

With the revised rates, most states, barring Kerala and Rajasthan, will have MGNREGA wage rates higher than their respective minimum wages.

The notification comes at a time when NAC—the political interface between the Congress party and the government—has been recommending linking MGNREGS wages to minimum wages of states.

NAC chairperson Sonia Gandhi had written to Prime Minister Manmohan Singh on 11 November last year to consider bringing MGNREGA wages in line with minimum wages under a 1948 Act. For this, NAC had suggested notifying MGNREGA as scheduled employment by the government of India.

The rural development ministry had opposed the move.

Mint reported on 21 November the ministry’s reservations on linking MGNREGA wages with minimum wages mandated by states for farm labour. In an internal note, the ministry said such a step could lead to states increasing minimum wages for farm labour at their own discretion, putting additional burden on Central finances.

Sanjiv Shankaran contributed to this story.