Mass distress: Handouts are no substitute for wage-raising structural reforms

In a note on pre-budget recommendations submitted to the finance ministry, the CII suggested the issuance of ‘consumption vouchers’ to poor households to boost demand in the economy. 

It also suggested raising wages under MGNREGA by 40% and PM-Kisan cash transfers to farmers by 33%. The larger issue is not the relevance of these suggestions—which are worth considering—but the assessment of the economy by the industry body.

That the rural economy has been in distress is more or less an accepted fact. Despite government claims of India’s economy doing well, the industry association’s reading confirms the bad health of the rural economy, which a host of secondary data also shows. 

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The CII note also suggests that demand deficiency is no longer just a rural issue but has spilled over to the broader economy. Data on automobile offtake and other durable sales indicates that private consumption remains the Achilles’ Heel of the economy.

A leading indicator of rural demand is wages for casual workers. Latest labour bureau data points to a modest improvement in rural wages last year, with wages for agricultural work rising 2.1% and for non-agricultural work by 1.8%. 

But these are not sufficient, given the long period of stagnation earlier. Compared to five years ago, rural agricultural wages have only increased at 0.1% per year over the last five years, whereas non-agricultural wages have actually declined by 1% per annum. 

The increase last year has reduced the severity of the income crisis but is not enough to pull the rural economy out of its almost decade-long period of distress. In fact, non-farm wages are lower than they were a decade ago, while agricultural wages are marginally up.

Recent estimates from the Periodic Labour Force Survey (PLFS) further confirm a strengthening of a structural transformation of the economy, with labour moving back to agriculture for the fifth year in a row. 

But even on income indicators, the real wages of all workers (that is anyone working for an employer and isn’t self-employed) have increased at only 0.7% per year between 2017-18 and 2022-23. 

It is higher at 1.7% for rural areas, but has barely increased in urban areas, with an annual growth of 0.1%. In fact, urban wage workers have seen their real earnings decline 0.5% per year since 2011-12. Evidence from the recently released survey on unorganised enterprises and other data on the income of farmers is just as bleak.

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Clearly, what started as rural distress has now become an economy-wide issue. The crisis of declining or stagnant incomes has led to a slowdown in private consumption demand across the overall economy, as is clear from the national accounts. It is also a disincentive for corporates to invest.

While there is a broad agreement on the critical role of demand in the economy and that it has been a drag for the economy, solutions are not easy. Issuing consumption vouchers or making cash transfers is unlikely to solve the problem, as it is structural in nature. 

These are at best short-term palliative measures and are unlikely to resolve the causes of distress. In the last decade, most states and the Centre have increased their cash transfers, primarily to women but also to farmers and unemployed youth. 

The quantum has seen a sharp increase in the wake of competitive populism driven by elections. But this hasn’t helped revive consumption demand in the economy.

What is required is a shift in strategy to drive incomes higher for those in lower-income groups, the unorganized sector and the rural economy. 

This will require changing the economic paradigm, with a shift away from big-ticket infrastructure development to a broader push for reviving the rural and informal sectors. 

At the same time, increasing incomes also requires larger government spending on the rural economy to kick-start the process of a positive structural transformation. Raising MGNREGA wages could also push up wages across the economy.

The forthcoming Union budget will be the first full budget of India’s new government. Given the fiscal constraints it faces, any strategy that attempts to increase cash transfers may prove to be rewarding in the short run but it is unlikely to be sustainable. 

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While a restructuring of expenditure priorities is necessary, what is also needed is a re-orientation of policies to prioritize income growth, particularly at the lower end of the spectrum.