The sharp fall in GDP growth rates from 2011 to now has impacted rural wages despite the steady increase in NREGA minimum wages.

If any proof were required that it is growth that creates jobs and higher incomes, and not doles or artificially-created work, the latest data generated by the Labour Bureau should dispel it.

A report in The Indian Express today (7 January) says rural wage growth rose barely 3.8 percent in November year-on-year, apparently the lowest since July 2005. That was the year in which the UPA launched the Mahatma Gandhi National Rural Employment Guarantee Act (a.k.a., NREGA), a make-work programme for providing 100 days of work for anyone demanding it. One person from a household if guaranteed work even if there is actually no productive work available.

The key to proving that NREGA may be doing less for the worker than growth lies in comparing relative GDP growth rates during the four-year period from 2010-11 to 2013-14, NREGA spends, and wage growth trends.

This is what the numbers show. The overall NREGA wage spends remained in the range of Rs 26,000-29,000 crore all through these four years. In other words, they plateaued. Since minimum wages were raised every year by indexing to inflation, this means fewer people got jobs under NREGA even though their wages were higher. (The wage figures here are not the total annual spends on NREGA, as administrative and material costs are excluded. These figures indicate only the wage element in NREGA costs. Actual NREGA expenditures were higher.)

But between 2010-11 and 2013-14, GDP growth fell from 8.9 percent to 4.7 percent steadily. And rural wages followed the same trajectory.

Wage inflation peaked in 2010-11, and then started falling to reach last November’s dismal number of 3.8 percent (see this telling chart from the government’s Mid-Year Economic Analysis below).

The Analysis, released last month by Chief Economic Advisor Arvind Subramanian, makes this observation: “The rate of growth of rural wages, after having averaged 18 percent (26 percent at its peak) for the previous five years, has now decelerated sharply into single digit territory. This reflects strong disinflationary pressures in agriculture and signals a slack in the labour market.”

Normally, a slack in the labour market should mean a boom in NREGA employment, as people not getting jobs anywhere should be flocking to it. But the opposite seems to have happened despite higher NREGA wages.

Did UPA let down its biggest rural constituency just when they needed it the most?

The Mid-Year Analysis observes: “A dramatic change seems to have happened to rural labour markets since 2012 because wage growth has plunged. A combination of softness in the economy and reductions in MGNREGA expenditures (declines of 3 and 36 percent in the last two years) have played a key role. If these trends continue, rural wage growth can continue to decelerate, further moderating inflationary pressures.”

The point about NREGA (or MGNREGA) is this. Since states are bound to offer employment to anyone who demands it, and wages have been raised every year due to high inflation, the fall in demand for MREGA employment is surprising – unless one were to conclude that the scheme was allowed to atrophy and poor implementation was deterring more people coming forward for jobs even though they needed it.

This is the paradox, since actual rural wage growth rates were falling between 2011 and 2014 at a time when NREGA wages actually went up consistently due to inflation indexation. Between early 2011 and April 2014, NREGA wages went up by 30 percent from a range of Rs 117-181 to a range of Rs 153-236 per day for various states.

So, taking these factors together, it is more than likely that falling growth was impacting wage growth more negatively than a falling NREGA workforce (which was being paid more).

Clearly, the NREGA scheme needs major rework and appears to be of only marginal utility in helping improve rural incomes. The scheme possibly needs to remain in places of extreme poverty, but if we accept that growth determines wages (and hence incomes for many rural people) more than NREGA, there is a case for shifting investments to projects that really deliver growth.