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The bottom 20%

While higher MSPs will help farmers, opportunities must be created for those whose real wages have contracted

The bottom 20%
The results are not surprising because typically essential items, such as food and fuel, account for a bigger share of the consumption baskets of lower-income classes.

Retail inflation went up to 7.4% year-on-year in September driven by a broad-based rise in prices, primarily that of food. With the rupee depreciating and crude oil prices still elevated, the higher cost of imported goods also stoked inflationary pressures. While the runaway rise in prices would no doubt impact consumption across income groups, those at the bottom of the pyramid are bearing the brunt of it. A study by Crisil has found that the bottom 20% of the population has been hit hard with an average inflation of 7.8% and 8.1% in rural and urban India, respectively. For the middle income groups the blow was a little softer at 7.7% in all parts of the country. For those in the top 20%, the average inflation was lower at 7.3% and 7.2% in rural and urban areas, respectively. The results are not surprising because typically essential items, such as food and fuel, account for a bigger share of the consumption baskets of lower-income classes.

The fact is that 80% of India’s workforce is employed in the informal sector, which was worst hit by the pandemic and is struggling to recover. Approximately half of this is employed in the agriculture sector. Moreover, of the balance, a good number work in rural India. While urban India is recovering, after surviving the first year of the pandemic reasonably well thanks to large government support, the rural economy was sluggish last year. Indeed, while India’s gross domestic product (GDP) growth contracted by 6.6% in FY2021, agriculture growth—the mainstay of the rural economy—grew by 3.3%.

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However, consumption spends in rural India decelerated in FY22, possibly due to slower government spending and the dislocation of livelihoods due to the pandemic. The terms of trade also worsened. In contrast, urban consumption suffered during the pandemic in FY21, but consumption spends picked up post the resumption of normal activity last year. In the current year too, rural India isn’t faring too well, as reflected in the trend in rural wages. Real rural wages have de-grown in every month since January this year, by anywhere between 0.7-1.2%. Nominal wages, however, have increased every month by 4.8-6.1% in the same period. The fall in wages has been sharper for non-agricultural workers, suggesting the farm economy is in much better shape than the non-farm economy.
Unemployment is a serious concern. In August, for example, rural unemployment rate rose to 7.7%, according to CMIE data. Moreover, agriculture shed 11 million jobs. A little over half of these were farmers, the rest were farm labourers. To be sure, most of them were able to find employment in the non-farm services sectors though how well-paid these jobs were, is not clear.

The government needs to create job opportunities for non-farm workers; rural spends by a clutch of ministries contracted 12% y-o-y in Q1FY23 on the back of a decline of 34% y-o-y in Q1FY22, according to an analysis by Motilal Oswal. That brought down the share of rural spends to just 9.4% in Q1FY23, from 12% in 1QFY22 and 18.8% in Q1FY21 that, incidentally, was a 12-year high. While higher support prices would help farmers, opportunities need to be created for non-farm workers, semi-skilled workers, whose real wages have contracted in four of the last five quarters. Else the terms of trade for rural India will continue to deteriorate.

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