The National Democratic Alliance (NDA) government has done a commendable job of getting the food inflation down, in spite of a sub-par monsoon last year. In the bargain, however, it might have deepened rural distress. If the rainfall is below normal this year, too, as the India Meteorological Department (IMD) expects, things will likely get worse for rural India. As a recent report from HSBC economists Pranjul Bhandari and Prithviraj Srinivas says, while the government may well be able to keep inflation down, “the impact on rural demand and growth could be more substantial. The confluence of factors which the rural sector is facing is not helping. The cycle of low minimum support price (MSP) increases and low rural wage growth, combined with soft global commodity prices and a stronger rupee, are not fetching much for farmers".

Consider what happened in 2002, when the country had a full-fledged drought. The monsoons were 19% below normal that year, and agricultural production plunged. Nikhil Gupta of Nirmal Bang Institutional Equities summarizes the policies the NDA government followed: “...when monsoon was bad for the third consecutive year in 2002 (FY03), retail food inflation averaged 3.2% y-o-y (year-on-year) per month over FY03 and FY04. This is commendable; however, there were costs attached to it. The government didn’t increase the MSPs of several crops significantly, which kept agricultural wages in check. Consequently, inflation was subdued as the spending ability of the rural populace was limited. This was also evident in low growth in consumption and, thereby, low GDP (gross domestic product) growth in FY03." Keeping real rural wages low was a deliberate strategy.

The previous NDA government’s record in addressing rural distress was not so good. A paper by Ashok Gulati, a former chairman of the Commission for Agricultural Costs and Prices, pointed out that while real farm wages grew at an average annual rate of 3.7% in the nineties, they fell at an annual average rate of -1.8% between 2001-02 and 2006-07. Note that this was happening during the boom years between 2003 and 2007. Indeed, this may have been a factor in the NDA losing the 2004 elections.

In contrast, the Gulati paper says real wages grew 6.8% per annum between 2007-08 and 2011-12. This is sometimes seen as the result of social welfare programmes such as the employment guarantee scheme. The increase in farm wages led to rural workers spending more on food, especially on pulses, milk and, perhaps, fruits and vegetables, pushing up prices. The HSBC report has a nice chart showing the correlation between real wage growth and fruit and vegetable consumption.

Why are rising farm wages a bad thing? It has certainly been a big factor in reducing absolute poverty in the last decade. The problem lies with the way in which it has been done. If the manufacturing sector grows, pulling people off the farms and giving them productive jobs, that is commendable. According to the Lewis growth model, wages will not rise immediately as there is a huge amount of underemployed surplus labour in agriculture. The manufacturing sector will have access to low-cost labour, which will enable it to be competitive and expand output. In China, a study has shown that, between 2001 and 2007, the number of low-skilled rural migrants working in cities increased by 14.3 million, which played an important role in containing wage growth. Once the surplus labour in agriculture is absorbed, rural wages start to rise.

While the best example of this process in recent times is China, it has also apparently started happening in neighbouring Bangladesh. A study by the International Food Policy Research Institute (IFPRI) showed real farm wages have been going up in Bangladesh, primarily as a result of the growth in garment manufacturing. Says the report: “The booming manufacturing sector has attracted millions of surplus workers, in particular, women, from rural areas. Initially, as labourers moved out of the agricultural sector, the impact on rural wages was minimal due to the presence of surplus labour. However, over time, as the supply of seemingly unlimited labour was exhausted, the terms of trade in the labour market started to shift in favour of workers." Indeed, it has been claimed that the daily wage of a farm labourer is now higher than the average daily wage in the readymade garment industry. While Bangladesh, too, has welfare programmes aimed at the rural poor, the IFPRI study says it’s hard to ascribe the rise in rural wages to government transfers.

The Narendra Modi government’s attempt, like the Atal Bihari Vajpayee government’s before it, is to follow this strategy for growth. Unfortunately, though, manufacturing has not been a big source of jobs in India. Instead, the government is trying to spend more on road-building and construction, which has been the main source of providing jobs to unskilled workers coming from farms. Its priorities are clearly seen from the squeeze on the employment guarantee scheme, which saw its outlay on wages fall 9.5% in 2014-15 from the previous year. Its budget for road transport and highways for 2015-16, on the other hand, is up 35.1%. So far, the government has been able to push down rural wage growth and keep MSPs low. Will it be able to stick to the strategy it used in the early 2000s? As Nikhil Gupta points out, this time, politics may trump economics. With rising farm distress, suicides by farmers and with the opposition ganging up against its land acquisition policies, the government faces a strong political challenge.

Manas Chakravarty looks at trends and issues in the financial markets. Your comments and feedback are welcome at capitalaccount@livemint.com

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