Poverty, inflation and wages in Rural India

Introduction

The number of poor people in India, according to the estimates of Tendulkar Methodology, amounts to more than 354.7 million in 2009-10. The country has been successful in reducing the proportion of poor people from about 45.3 per cent in 1993 to about 37.2 per cent in 2004 and to 29.8 at present by 2009-10. But almost one third of the country's population continues to live below the poverty line, and a large proportion of poor people live in rural areas. Poverty remains a chronic condition for almost 30 per cent of India's rural population. The incidence of rural poverty has declined somewhat over the past five years with no clear pattern or trend on why poverty falls. The only direct correlation between the reduction in poverty and official action to remove it seems to be the Mahatma Gandhi National Rural Employment Guarantee Act (NREGA) which promises 100 days of guaranteed work or wages to at least one person per household in rural areas. According to a paper by Erlend Berg, Sambit Bhattacharyya, Rajasekhar Durgam and Manjula Ramachandra (2012), on average NREG boosts the real daily agricultural wage rates by 5.3 percent. My paper looks at the impact of agricultural wages on poverty over the period 2004-05 to 2009-10. During this time period there is a negative poverty rate trend, what gives us a clue that policy of the government towards the poverty problem is the right one. Fluctuation of inflation rate is also considered. The main objective of this paper is to find out the argumentation of the hypothesis that other things being equal, the rise of daily agricultural wages leads to a fall in rural poverty. Using the state wise rural poverty lines, average real daily agricultural wages and consumer price index data for agricultural labourers (CPIAL), I found that poverty is inversely related to wages. Going against the theory of economics that inflation accentuates poverty, I found out a very small but inverse relation between poverty and inflation in rural India.

Data

Wage data are from the Agricultural Wages in India (AWI) series which has been published by the Indian Ministry of Agriculture. It provides occupation wise monthly data on agricultural wages for all the states. It remains the most widely used source for analysis of Indian rural and agricultural wages. CPIAL has been taken from website of Indian Bureau of Labour.

State wise yearly data is available there. State wise poverty figures are available on the website of planning commission according to Tendulkar methodology. AWI covers three main categories of unskilled labour: 'field labour', 'other agricultural labour' and 'herding'. 'Field labour' is in many cases further disaggregated into ploughing, sowing, weeding and reaping. In contrast, 'other agricultural labour' is not disaggregated. Examples of the kind of work included under this category are: watering fields, carrying heavy objects, digging wells, cleaning silt from waterways and embankments. I believe that a large proportion of agricultural wage labour undertaken in India would fall under the field labour category. So, I have considered only the male field labours for the calculation of agricultural wages. Daily agricultural wages have been calculated by simply calculating the average over the year 2004-05 and 2009-10 separately, state wise. A variable of real wages have been generated by deflating the average daily agricultural wages by consumer price index for agricultural labours for the same year, published by the Indian Labour Bureau. The coefficient on the real wages and CPIAL are negative and statistically significant. Whereas, the coefficient of CPIAL is very small (0.0578). The obtained results under the OLS method of estimation showed that, ceteris paribus, 1% increase in wages could lead to 0.7072% fall in poverty level and a 1% increase in inflation rate could lead to 0.0578% fall in poverty level. These results clearly confirm our hypothesis that an increase in wages leads to a decrease in poverty. But at the same time an increasing inflation is does not reduce poverty. Narega was implemented in 2005, and when I used the data for the year just before narega was introduced and five years after it, I can see clearly the results are in favour of NREGA.

As I already wrote in the introduction, a study confirms an increase in daily wages of agricultural field labours and my paper clearly shows the effect of that increase in wages in reducing the rural povery. Moreover, the inverse relation between poverty and inflation somewhere favours the scheme again. According to economic theory, if an increase in prices is higher than the relative increase in nominal wage, then the real incomes (real wage) of the population are falling. But since, there is a positive correlation between the real wages and inflation, as shown in the Table 3 below, I can conclude, that the real wages increased sufficiently to offset the effect of rise in prices. The real wages have rather increased only marginally and in some states like Gujrat, Kerala, Madhya Pradesh, Maharastra, Punjab and Ragasthan there is a declining trend, which is again very small.

Concluding Remarks

Table 5 clearly points out a very little increase in real wages over these five years and some states it has rather declined. A rise in real wages though reduces poverty but it turns out to be a very small factor to it. There are definitely other reasons for an 8.2% fall in poverty over the five years. It could be better health conditions and contribution of other rural development programmes or one reason could simply be wrong estimation of poverty percentages by Tendulkal methodology which has been highly criticized.

At one point, most celebrated flagship program of UPA government seems like taking the credit for the reduction in poverty just by its presence in right circumstances of data, favoring it. But I cannot entirely criticize the Policy as it has definitely provided employment to the needy rural poor of India to some extent. Lest, we ignore the ground reality of the actual number of rural poor getting the employment under NREGA. I am saying this because in Andhra Pradesh there have been issuing of NREGA cards to people above poverty line as well.

(Reason completely based on personal experience) Also, my work has not incorporated the women wages, as the data was not available for 2004-05 for occupation and sex wise daily agricultural wages. Had I included then the real wages might have shown some increase as NREGA provides employment to both male and female workers.