The resurgence in rural incomes over the past decade seems to have been the greatest success of the ruling United Progressive Alliance (UPA) government. Buoyant rural consumption has partly absorbed the negative impact of slowing urban consumption on the economy.

Yet, there are early signs of warning that the rural economy may be running out of steam after years of steady growth. The UPA’s neglect of rural investments in favour of short-term palliatives to prop up consumption could impose a heavy toll on rural India now.

One of the highlights of the UPA era has been the sharp and sustained increases in wages at the bottom of the pyramid. Wages of rural unskilled labourers saw a sharp spike since the mid-2000s after years of stagnation. But after scaling a peak of 22% year-on-year growth in August 2011, wage growth has been falling consistently, with wage growth in September this year down to 16%, according to data provided by the labour ministry. The slowdown in real wage growth (after adjusting for inflation) has been even sharper over the past year, a recent Nomurareport has pointed out.

The turning tide in rural India deserves close scrutiny as it has important implications for policymakers and companies alike. The rural wage boom was a product of several factors operating simultaneously to push up the wage floor across India. The evidence so far suggests that the rural boom was driven by four key factors: faster economic growth that led to a boom in sectors such as construction and raised demand for rural labour, a sustained rise in global commodity prices in the previous decade, higher minimum support prices paid by the government, which trickled down to labourers, and the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) that helped push up the wage floor in the initial years after its launch. Rising rural incomes allowed many women to quit demanding farm jobs, leading to a shortage of workers, and sustained the wage boom.

The absence of buoyant global commodity markets, slowdown in domestic economic growth, and the limited financial ability of the government to raise procurement prices (which have been slowest in several years this time) have all contributed to the unravelling of the rural boom.

Even if many of the policy interventions to boost wage growth may have given a short-term boost to rural consumption, they have actually served to undermine rural prosperity over the long term. Wage increases fed by the MGNREGS, for instance, pushed up wages without a corresponding increase in productivity—a sure recipe for inflation.

Similarly, the excessive reliance on price signals to incentivize farm production meant that subsidies, which again have little impact on long-term productivity, came to dominate public spending in agriculture. Public investments in agriculture—in water-management projects or in research and extension networks—account for only one-fifth of public spending today, with subsidies accounting for the rest.

India has always pursued the conflicting goals of keeping retail foodgrain prices low to protect consumers and of keeping procurement prices high to incentivize farmers. Apart from a massively wasteful distribution system, such a policy mix is self-defeating as it burdens the fisc with a perennial subsidy burden and stokes inflation. While such a policy approach is not new, it has become unsustainable in the UPA era. The difference between the economic costs of procuring rice and wheat and the prices at which they are distributed has ballooned over the past decade, according to the Commission for Agricultural Costs and Prices (CACP).

The neglect of long-term investments has meant that rural growth has been inherently unsustainable all these years. The limitations of the UPA’s strategy are increasingly becoming apparent now. Like any other supply shock, exogenously imposed higher wages can be inflationary in the initial phase but the bargaining power of labour erodes over time, and the wages move back in line with productivity growth. Slower economic growth has already crimped the government’s ability to support rural growth using higher support prices.

With increasing difficulty in passing on cost pressures to consumers, farmers have now begun to opt for mechanization in larger numbers to reduce their dependence on farmhands. The rural transition might involve considerable pain, particularly for those at the bottom of the pyramid. What has started as a slowdown in wage growth may eventually turn into a correction in real wage levels. It will be difficult for many to readjust to a life of diminished expectations once again.

It is unlikely that the reversal in rural fortunes will be so fast as to impact the outcome of general elections next year. But the turning rural tide could pose one of the biggest challenges to the next government, as it will have limited ammunition to trigger a rural revival once again.

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