From UPSC perspective, the following things are important :
Prelims level : Not much
Mains level : Paper 3- Issue of wage growth
The article discusses the threat posed to the Indian economy by the subdued demand following the return of the labourers to their urban jobs.
Rural employment issue
- About 30 million migrant workers rushed home to their villages during the pandemic.
- About 60 per cent of out-migration from rural India is aspiration-led.
- Income earned in urban jobs is 2.5 higher than earned in rural area.
- Though rural economy has been recovering faster than the urban economy, this optimism could prove short-lived, as eventually the more long-lasting determinants of rural wages could prevail.
What are the determinants of rural wages
1) NREGA wages
- The government has raised the rural employment guarantee programme (NREGA) wages and outlays.
- Demand for the scheme is outpacing supply.
- This demand-supply mismatch means that it may not be an effective driver of higher rural wages.
2) Low construction activities
- Many rural Indians, especially those without land, have become building labourers.
- 70 per cent of construction is related to real estate and property developers are dependent on funding from struggling non-banking financial companies.
- Until this type of lending restarts, construction may not normalise.
- And that means rural wages may not rise quickly either.
3) Rising debt level
- The increase in borrowing and fall in inflation over the last few years has increased the “real” indebtedness of rural Indians.
- This affected particularly the landowners who pay villagers to farm their land.
- This is likely to hurt their ability to pay high wages.
3 Reasons why wage outlook could be dimmer
- As migrant labours start to return to their urban jobs, their wage outlook appears to be bleak for 3 reasons.
- 1) As during demonetisation, workers could find jobs again, but at lower wages.
- 2) There could be a second-round of pandemic-led labour market weakness, driven by job losses and falling wages from the first round.
- 3) We find that both rural and urban wages are driven by economic growth, India’s post-pandemic medium-term growth falling by one percentage point to 5 per cent does not bode well.
- Weak wages could keep demand subdued. To offset this policymakers have an important role to play.
- 1) In particular, policymakers may have to ensure that capital is allocated efficiently.
- After all, investment is the only way to increase the economy’s capacity to create well-paying jobs.
- 2) Bringing back investment growth would also involve capital re-allocation.
- This means taking it away from sectors that are not working and redeploying it in sectors that are.
- Improving the Insolvency and Bankruptcy Code procedure is a key step here.
- 3) Another important step is to improve the health of banks as they are the ones allocating capital by giving loans.
- Implementation of the 5-Rs — recognition, restructuring, resolution, recapitalisation and reforms — for the banking sector may be particularly useful here.
Consider the question “After supply-side disruption is over, India’s growth may suffer from the subdued wage growth. Suggest the steps to avoid this from happening.”
Supply disruption caused by reverse migration won’t last long, but led by lower wages, demand could remain weak, requiring policy intervention.