There is now an emerging consensus that the economy is in a downward spiral with little hope of it reviving in the near future. While this is certainly evident from the quarterly national account estimates released last month, data released subsequently by other sources confirm the trend is continuing.
It is also clear that much of the distress which has now become obvious has been going on for quite some time even though the situation has worsened after the twin shocks of demonetization and hurried implementation of the goods and services tax (GST).
Much of the impact of these two shocks is still unfolding but it is now evident that domestic demand in the economy has slumped with the agricultural and unorganized sector being the largest casualties. Some of this was already made clear in the second volume of the Economic Survey presented last month.
The second issue, which continues to plague the economy is the absence of job creation, which has also been recognized by most economists as the biggest pressure point on the economy. This again is now more or less confirmed by data from various sources, public as well as private.
While the government has continued to remain in denial mode on most indicators, citing an absence of concrete data or has taken recourse to blaming “technical issues”, the reality is that there is now much more convergence by various data sources on the state of the economy than what the government would like to believe.
An important source of data in this regard is the trend in real wages of casual workers in agriculture and non-agricultural areas in the villages. These remain incontrovertible and an important measure of the state of the economy. In fact, wages are not just an indicator of the earnings of salaried and casual workers—they are also an independent source of information on the labour market.
The information on wage data is available from the labour bureau on a monthly basis, the last being June 2017. These are available for various agricultural and non-agricultural occupations, including general agricultural labourers and non-agricultural unskilled workers.
The trend from these shows a sharp deceleration in real wages for both agricultural and non-agricultural sectors since 2013-14. Real wages of casual workers in agriculture and non-agricultural areas were increasing at 7% per annum between 2007-08 and 2012-13. As against this, real wages in agriculture between 2013-14 and 2016-17 have slowed to 1% per annum. Unlike agriculture, real wages in non-agricultural occupations have actually declined in real terms with wages of unskilled workers declining in real terms by 0.1% per annum.
The increase in real wages of casual workers during 2008-2013 was not just responsible for insulating the economy from a severe shock following the financial crisis and the drought of 2009, but it also contributed to poverty reduction between 2004-05 and 2011-12.
The increase in wages was a result of many factors, including the increase in agricultural productivity but was supported by buoyancy in the construction sector which absorbed a large number of workers released by the agricultural sector. It was also helped by the expansion of the National Rural Employment Guarantee Scheme (NREGS) which not only contributed to tightening the labour market in rural areas but also provided a floor for private wages with NREGA wages being pegged at minimum wages.
The deceleration in real wages was evident even before the present National Democratic Alliance government took over, with real wages turning negative in 2013-14. The subsequent collapse of the rural economy in the wake of the commodity price crash and back-to-back droughts further aided the deceleration.
The cutback in expenditure on NREGA since 2011-12 has worsened the situation. Not only did the government cut back the expenditure, but it also froze minimum wages, depriving rural workers of alternative opportunities. Some of these could have been reversed but for the twin shocks of demonetization and GST roll-out which hurt the rural economy and the rural informal sector.
The deceleration in real agricultural wages and a real decline in non-agricultural wages not only confirm the worsening demand situation in rural areas but also confirm the lack of job creation in rural areas.
The last time real wages decelerated on this scale was the period between 1998 and 2003, a period of crisis in rural areas, particularly in agriculture. The deceleration this time not only coincides with a similar phase of rural distress and agrarian unrest but also a decline in construction activity which had contributed to insulating the economy from the vagaries of monsoon failure and price fluctuations. The deceleration this time is confirmation of a collapse of demand in rural areas. Given the government’s denial of jobless growth, the collapse of rural wages is clear evidence of the lack of employment creation in the last three years in the economy.
The decline in wages is not just a serious and indisputed indicator of the state of the economy but it is also a pointer to the stress in the rural economy. Given that almost one-third of all rural workers and households are dependent on wage work, it will certainly affect the significant gains in poverty reduction that were achieved in the previous decade. But the sheer size of the rural casual workforce also implies that any attempt at reviving the economy will have to include efforts to create employment and raise wages in rural areas.
Himanshu is an associate professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi.