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Posted: Fri, Jan 7 2011. 1:00 AM IST

Rural job scheme

minimum wage revised,
risking inflation spiral
Ruhi Tewari & Asit Ranjan Mishra
In a move that brings relief to the rural workforce, but risks creating an
inflation spiral, the government on Thursday revised the minimum wages paid
for its flagship job guarantee scheme by linking them to the Consumer Price
Index for agricultural labour (CPI-AL) for each individual state.

Such a price spiral, in case it actually emerges, could roil the electoral
prospects of the Congress in the key contests to the state assemblies of West
Bengal, Kerala and Tamil Nadu, due later this year.

Indexation to CPI-AL, whic h has a heavy weightage for food produc ts and has
been in double digits for most of the last one year, should significantly raise
rural wages—by between 17-30% according to estimates by the rural
development ministry—providing a fresh fillip to farm c osts and unleash another
round of food inflation if higher costs are passed on to consumers.

With the prospect of annual inc reases in wages indexed to inflation, there is a
risk of a pric e spiral at a time when food inflation has surged onc e again,
touching 18.32% for the week ended 25 Dec ember.

Within the government there was a frantic sc ramble as the Congress-led United
Progressive Alliance (UPA) sought to fight what appears to be a fresh burst of
inflation. With international food prices rising faster than local prices, there is a
risk that some of this would be transmitted to Indian shores.

While finance minister Pranab Mukherjee sought to calm sentiments by c laiming

the fresh spurt in food pric es was a result of supply mis-management and put
the onus on the states, cabinet sec retary K.M. Chandrasekhar presided over a
meeting of top bureaucrats on Thursday. A senior finance ministry official, who
spoke on condition of anonymity, said the ban on onion exports by Pakistan
may encourage hoarders to hold their stocks.

“While there are some weather induced supply c onstraints on some of these
items...a large part of the pric e rise is due to the widening gap between the
wholesale and retail pric es, and the growing demand for these products due to
rising inc ome levels,” Mukherjee said in a statement.

Ashok Gulati, director of the International Food Policy Researc h Institute, said
that the excess liquidity in the system on top of lower production is driving up
food pric es. “The government should bring down import duty on food items to
zero or 5% and should unload its excess stock of foodgrains in the market so
that it boosts consumer sentiment. It should also do away with the horrendous
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mandi system and encourage investment by big retails firms, which will
c ompress the chain and help bring down food prices,” he said.

Abhijit Sen, Planning Commission member in c harge of agric ulture, said much is
being made on the impac t of the job guarantee scheme on rising cost of food
and wages.

“MGNREGS might have some effec t on food pric es, but that will be very small
as the amount spent on the scheme is negligible when c ompared to the
aggregate demand (of the ec onomy),” Sen said. The sc heme has a budgetary
allocation of `40,100 c rore this fisc al to March.

Pronab Sen, principal adviser of Planning Commission who is also chairing a

c ommittee to suggest a mechanism to revise wage rates for the job guarantee
scheme, said if the government does not c ompensate wageless labourers, then
they will be the ones who will be suffering the most due to higher food
inflation. “What is the job of the government? Is it to protect the wage
labourers or the urban middle class?” he asked. Sen said he will submit the
report in a c ouple of weeks.

The ministry of rural development said in a notification that the revised wage
rates c ome into effect from 1 January 2011. The current minimum wage rate is
`100 per day.

The Mahatma Gandhi National Rural Employment Guarantee Ac t (MGNREGA)

assures 100 days of manual labour to each rural household every year. It has
been one of the UPA’s most successful welfare programmes, benefiting 39
million households in 619 distric ts.

Rural development minister C.P. Joshi denied media reports that there are
differenc es between UPA chairperson Sonia Gandhi and the government on the
issue. “The government of India after consultations with ministries and after
taking into ac count recommendations of the National Advisory Council (NAC)
has decided to index MGNREGA wages to Consumer Price Index of agricultural
labour with effec t from 1 January this year,” he said.

While the indexing based on CPI-AL will take place every year, the base will be
revised onc e every five years.

“Though it is a demand driven scheme, our estimate is that this revision will
c ost the exchequer `3,500 crore extra between January and Marc h,” Joshi
added.

With the revised rates, most states, barring Kerala and Rajasthan, will have
MGNREGA wage rates higher than their respec tive minimum wages.

The notification comes at a time when NAC—the political interfac e between the
Congress party and the government—has been rec ommending linking MGNREGS
wages to minimum wages of states.

NAC chairperson Sonia Gandhi had written to Prime Minister Manmohan Singh on
11 November last year to c onsider bringing MGNREGA wages in line with
minimum wages under a 1948 Ac t. For this, NAC had suggested notifying
MGNREGA as sc heduled employment by the government of India.

The rural development ministry had opposed the move.

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Mint reported on 21 November the ministry’s reservations on linking MGNREGA
wages with minimum wages mandated by states for farm labour. In an internal
note, the ministry said such a step could lead to states increasing minimum
wages for farm labour at their own disc retion, putting additional burden on
Central finances.

ruhi.t@livemint.com

Sanjiv Shankaran contributed to this story.

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