Why is Rural Wage Growth at a Decade Low?

Moneylife Digital Team 30 May 2018

Economy & Nation

According to CMIE’s research on rural wages, the year-on-year growth in wages has faltered to a 3-year low of 3.09% in January 2018. The growth in the same month a year ago was 6% and it was 4.7% the year before that. If inflation were to be factored in these numbers, the real growth has been negative so far and turned worse lately. This is surprising considering many of the headwinds the sector had faced such as i.e. falling international prices, rising indebtedness of farmers etc. between 2014 and 2017 have now receded. Early signs of growth and recovery in rural consumption seen in the sales of two wheelers and FMCGs have been visible, yet, rural wages have faltered.

The reason behind this isn’t clear, but an Edelweiss Research report suggested that ‘Post GST, sustained weakness in labour-intensive segment could have slowed pace of labour migration from rural areas, thus weighing on rural wage growth’. Labour-intensive industries such as textiles, gems & jewellery, etc. are yet to show any recovery even 10 months into the GST implementation, and the IIP in these segments is still in the contraction zone.

In addition to the effect of GST and Demonetisation on the labour-intensive industries, the overall trend in India’s capex cycle specifically in real estate/construction sectors could be responsible for the slower migration, and faltering rural wages.

The real estate sector and manufacturing sector are two of the most labour-intensive sectors of the economy, and have a high potential for ‘job creation’. These sectors have been facing a big credit crunch, as nearly 36% of the total banking system’s credit is under or likely to be a part of the RBI’s prompt corrective action. Thus, banks have become more risk averse in lending to businesses and projects.

The rural sector faced several headwinds in the past couple years which have now receded, also government spending and transfers through farm loan waiver both have revived the rural economy. India’s agricultural trade balance which slid sharply to US$7 BN in April 2017 from US$27 BN in 2014 has also picked up, increasing to US$14 BN in April 2018. The government has raised import duties on agricultural products to make locally produced goods more competitive, and also set a ‘Minimum Support Price’ on several crops and commodities to address the agrarian distress. The combined effect of these directs to a positive growth of the rural economy.

So the weak link affecting growth in rural wages is the capex flow in labour-intensive sectors, which, if doesn’t mend then it would adversely impact future rural consumption.

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