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Monday, 01 October 2012 00:00
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Huge hike in rural wages could be problematic

Thanks to its high revenues, automobile market leader Maruti Suzuki may not feel the pinch of the 50% increase in wage levels it has promised workers over the next three years—so, even though wages at Maruti are higher than several other automobile firms, its high turnover ensured staff costs were a mere 2.3% of turnover in the June quarter. The larger problem for India Inc, and for India as a whole, however, is that the sharp hike in wages over the past few years—whether it is inflation that is driving the wages, as monetarists claim, is not clear—could be making us uncompetitive.

The first place where you see the trouble brewing is rural India and, since this is where labourers come from, you can expect industrial wages to continue rising. Between FY06 and FY09, rural wages were growing at between 4-8% in nominal terms, but this began to shoot up to 15-20% per annum in the FY10-FY12 period. When looked at in real terms, the hike is even more stark. If you take the category of unskilled labourers, their wages grew around 2.5% per year on a compound basis between FY06 and FY09; this jumped to a little over 8% during FY09 and FY12. Given how the gap between average rural wage growth and CPI (agricultural labour) has been getting wider, it’s difficult to argue this is the classic wage-inflation spiral since such labourer groups are not even unionised. What makes this even more clear is that wage growth is higher in the case of unskilled workers relative to skilled ones, and Axis Bank research shows, the wage growth is higher in states which have a higher MGNREGA deployment vis-à-vis those with lower deployment—Gujarat, with lower MGNREGA deployment, saw a wage growth roughly half that in Tamil Nadu where the MGNREGA deployment is high. The role of the sharp hike in MSPs during the last few years is also likely to be a cause for the wage hikes.

Normally, the wage hikes could be attributed to higher agricultural productivity, in which case it may not be too much of a problem. But nominal rural wage growth started outpacing nominal agricultural growth in the last 2-3 years, suggesting the wage hikes are not related to productivity. Though India is nowhere near the crisis-like situation in countries like Greece and Spain, it’s worth pointing out that the much sharper hike in wages in these countries relative to Germany is a critical reason for the European crisis.


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