The recently released India Development Update by the World Bank has shed light on a critical question: despite stagnant real daily wages for rural laborers since 2013, how has private consumption continued to grow at an impressive rate? This issue raises concerns about the significance of rural laborers in the larger economic picture.
The report draws attention to the fact that monthly wage data from the Labor Bureau indicates that the real daily wages of rural workers, both in agricultural and non-agricultural sectors, have remained unchanged since 2013, albeit with some fluctuations. This, coupled with the consistently high demand for jobs under the government’s rural employment guarantee scheme (MGNREGA), suggests an excess of labor and a lack of employment opportunities in rural areas. The MGNREGA data show an increased demand for work under the scheme in comparison to the previous year and 2019, indicating rural distress.
It’s essential to remember that the 2017-18 Consumption Expenditure Survey, which the government discontinued, showed a 3.7 percent decline in inflation-adjusted average monthly per capita expenditure (MPCE) between 2011-12 and 2017-18.
The apparent contradiction arises when we consider that, despite stagnant rural wages, GDP data reflects a Compounded Annual Growth Rate (CAGR) of 5.6 percent in real private final consumption expenditure between 2013-14 and 2022-23.
Several factors may explain this paradox. Firstly, strong urban consumption growth has compensated for rural weaknesses. Secondly, while the rural labor force has faced challenges, farmers, particularly small and marginal ones, have diversified their income by engaging in wage employment. Lastly, the relatively affluent segments of society have prospered, while the poor have experienced stagnant incomes, contributing to the concept of a “K-shaped economy.” Additionally, there is a concern that the data itself may be unreliable.
The World Bank’s outlook for India’s future consumption growth suggests a potential tapering of private consumption due to the waning of post-pandemic pent-up demand and high food price inflation, particularly affecting low-income households. Nevertheless, the report projects real private consumption growth at 5.9 percent in FY24, 6 percent in FY25, and 6.4 percent in FY26, indicating optimism even in the face of continued stagnation in real rural wages.
This situation prompts a significant question: does the consumption of rural laborers hold real importance in the economy, or can it thrive without their active participation? One perspective posits that the underemployed rural population might serve not as a source of demand but as a mechanism to keep wages low.