Fiscal deficit & inflation

Are Wages to Blame?
RUPE

The RBI advances yet another explanation for inflation: Wages. It finds that rural wages have been rising in real terms (after discounting for inflation) since 2007-08, with figures available till October 2012. It claims that "in the recent period causality ran from wages to prices, indicating that increase in real wages has been feeding into the cost of production and also sustaining demand, thereby leading to higher prices." It claims that "There has been a significant increase in the cost of production in agriculture, driven largely by the increase in wage costs." Secondly, "There is also evidence that increasing wage costs are a source of concern even in the organised sector. Private sector surveys indicate that wage increases in India are much higher than in other emerging market and developing economies." The RBI calls for maintaining a close vigil on the "wage inflation spiral".1 The implication is that the Government should reduce its spending, which is leading to excess demand; in particular it should not spend on NREGS, which is leading to an increase in rural wages, feeding into the cost of production of crops, as well as sustaining demand.

First, to attribute price rise to wages reveals the RBI's class bias. Let us take industrial prices: Once you subtract all costs from total income, the remainder is shared between wages and profits. If indeed wages rise, that need not lead to any increase in price, as long as the capitalist reduces his profit margin. So when the RBI finds that wage costs are a "sign of concern", its real concern is to protect the profit margins of the capitalists at the cost of the labourers. By contrast, during the previous two decades, as the real wages of industrial workers fell (as shown by data of the Annual Survey of Industries), the RBI did not stay awake at night worrying.

Secondly, even if real wages were to rise, the profit margin of the capitalist may be protected if each worker produces more, as has been the case. Indeed, during the last two decades there was a double benefit to the capitalists: declining real wages and rising productivity per worker. As a result, as the Economic Survey 2012-13 points out, ‘‘Total emoluments as a percentage of output have consistently declined from 40.6 per cent in 1980-81 to 22 per cent in 2010-11.... The increase in profitability of organised manufacturing has depended on the reduction of these two ratios [wages/output and interest/output], and [the profit/output ratio] improved from 18.5 per cent in 1991 to 53.8 per cent in 2007-08 before moderating to 47.8 per cent in 2010-11’’.

Thirdly, rural labourers have the lowest consumption of any section of society, so any increase in demand from them should be welcomed, not warned against. There does seem to have been some recovery in rural wages. Real wages (i.e., after discounting for inflation) for agricultural labour stagnated or slightly declined for the seven years 1999-2000 and 2006-07, the period of rapid growth in the economy; however, they rose significantly since 2007-08.2 From 2008-09 to 2011-12 the compound annual growth rate of real wages for rabi season agricultural labour was about 9 percent.3 At the same time, agricultural GDP in 2011-12 was 43 per cent higher in real terms than it was in 1999-2000. As such, it seems that agricultural labour is still only making up lost ground in its share in output. However, already there are signs that, because of the steep rise in prices (running at 12.7 per cent in February 2013) paid by agricultural labour for their basket of commodities for consumption, the improvement in real wages of agricultural labour is slowing down.

In any case, to attribute inflation in agricultural products to the rise in agricultural wages is far-fetched. Labour costs are between one-third and a half of cultivation costs, but only a portion of the labour costs are of hired labour. For example, of operational costs of Rs 15,097 for cultivation of one hectare of wheat in Madhya Pradesh in 2010-11, the hired human labour costs were Rs 1,663, and family labour was valued at Rs 2,915.4 So even a 20 per cent increase in hired labour costs would be Rs 332/hectare, which cannot explain the rise in retail prices of wheat. The point is, between costs of cultivation and the retail price of agricultural products, there is a large gap which consists of costs of procurement, transport, storage, distribution, and of course trading margins. The RBI, like the princess in the fairytale, finds, under multiple mattresses, the pea that is bothering it—namely, the rise in agricultural wages.

Moreover, there are sizeable increases in other costs of cultivation in the last few years, as can be seen from the table of wholesale prices of certain inputs. The prices of these inputs are largely determined by the Government itself (‘administered prices’).

Finally, there are clear explanations for the recent price rise in certain agricultural commodities such as wheat and rice (namely, allowing exports), which have driven overall price rise. Only the RBI's determination not to seek the causes of the current inflation in the Government's policy and in the profit margins of industry and trade can explain its pinning the blame for inflation on agricultural labourers.

To conclude regarding the "inevitable" relation P Chidambaram claims between the fiscal deficit and inflation: (i) consumer inflation has not fallen, but risen, despite slashing the fiscal deficit; and (ii) the main contributors to the rise in prices are goods such as agricultural commodities, or goods whose prices the Government itself fixes. The prices of these goods need to be brought down by Government action to stop exports, curb speculation, promote agricultural production, procure and properly store crops, and distribute them cheaply to the public; and to keep down the prices of petroleum products, coal, and electricity.

However, the entire thrust of Government policy is in the opposite direction. The year 2013-14 promises to continue along the lines of 2012-13—namely, industrial stagnation and cost-push inflation.

1.    RBI, Macroeconomic and Monetary Developments, 3rd Quarter 2012-13, January 2013.
2.   Yoshifumi Usami, "Recent Trends in Wage Rates in Rural India: An Update", Review of Agrarian Studies, 20), 2012.
3.   The average of five operations i.e. ploughing, sowing, weeding, transplanting and harvesting. Commission for Agricultural Costs and Prices, Price Policy for Rabi Crops: Marketing Season 2013-14, August 2012.
4.   Ibid. Of course, the labour-hiring peasant does feel the pinch of rising agricultural wages, since it is the only component in the cost of cultivation that can be negotiated, and the more he/she pays, the less remains for the labour-hiring peasant.
[source : Aspects of India’s Economy, No 53

Frontier
Vol. 45, No. 49, June 16 -22, 2013

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