The poor labour under wages of prosperity

EVEN as the GDP growth soared above 7 per cent in 1994-95 and 1995-96, the real wages of unskilled agricultural labour declined, albeit marginally. This suggests, reading between the lines of the Economic Survey, that the poor were left out of this record rise in prosperity.

Real wages (adjusted for rural inflation) of unskilled rural labour are a reasonably good measure of poverty, and wage data are avail-

able much more quickly than NSS poverty estimates. The accompanying table, culled from the purvey, shows that rural real wages fell 6.19 per cent in 1991-92, when the government went bust, and this worsened poverty greatly.

Real wages recovered sharply in the next two years, by 5.21 per cent and 5.61 per cent respectively, so poverty diminished. GDP growth then accelerated in 1994-95 and 1995-96, and many people assumed that the benefit would trickle down to the poor, too. Unfortunately, thanks to high rural inflation in these years, real wages actually declined by 0.60 per cent and 0.69 per cent respectively.

This was initially not anticipated as the wholesale price index did not rise so dramatically in 1994-95 and decelerated sharply in 1995-96. However, the data show that inflation was much higher for rural labourers, thanks to the unexpectedly steep rise in food prices in these years.

Many studies show that when prices accelerate, wages ultimately catch up but only after a lag (some studies suggest that it takes three years for wages to catch up fully). So the immediate effect of higher inflation is impoverishment, while a catching-up effect is observed in subsequent years.

The silver lining is some advance indication that rural inflation may be lower in the current year (1996-97). In that case, real wages could rise significantly. So paradoxically, although GDP growth is slowing down this year, poverty could diminish.

Data for the first four months of the agricultural year (July-October) shows that inflation as measured by the consumer price index for agricultural labour is down to 7.63 per cent, from 9.95 per cent and 11.8 per cent in the preceding two years. At the very time when inflation is moderating, nominal wages will be trying to make up for the two high-inflation years.

So pessimists are wrong in claiming that the poor will be completely left out of the high growth process. Between 1991 and 1996 real wages have risen by around 3 per cent despite exceptionally high inflation. By this yardstick, poverty should have diminished slightly. However, the non-poor have done much better than the poor in this period, and so income disparities have widened.

It remains to be seen whether the favourable price trend in the first four months of the current agricultural year will be sustained. The harvest is expected to be much better this year than last year, and that is a hopeful sign.

The government has raised procurement prices but also introduced half-priced grain for the poor through the public distribution system, and the impact of this must be watched. Most studies suggest, unfortunately, that very little cheap grain will get through to the poor in some of the neediest areas (like Bihar and eastern Uttar Pradesh).

The figures show that in the short run, inflation can more than offset the impact of rapid GDP growth on poverty. But this does not mean that GDP growth is irrelevant.

On the contrary, in the long run rapid growth will matter more than inflation.

Wages catch up with prices after some years, so the misery caused by inflation is temporary.

What do you think?