In one of our recent weekly, we discussed the emerging stagflation in India – a phenomenon of rising prices with slowing economic growth.
We believe one of the causes of persistent rise in consumer prices has been the steep rise in rural wages in India, mainly on account of introduction of employment guarantee schemes.
The table below shows the wage inflation experienced by a typical farmer in India – for services ranging from weeding to tractor driving to well digging.
Table 1: Wage Inflation in Rural India
Source: Decimal Point Analytics
In the last three years, the average wage inflation in rural India has been in high teens. This wage inflation is getting transmitted into food prices, creating a scenario of rising consumer prices and creating a feedback loop of higher wages in the future.
While in short-term, the wage inflation is benefiting rural workers, however it has the potential to become a source of persistent inflation unless it is accompanied by comparable rise in labor productivity. Sadly, we have not yet found evidence of productivity rising at high double-digit rates in India.
1The latest CPI data is available for May 2012, that is 59 months since July 2007. Hence 59 months comparision.