Rising costs of labour must be absorbed by increased agricultural productivity
During the 11th Plan (2007-12),farm wages rose at an unprecedented pace,registering an average annual growth of 17.5 per cent in nominal terms,and 6.8 per cent in real terms. Labour accounts for about 30 per cent of the cost of production in much of crop agriculture. Thus,rising farm wages have increased the cost of production in agriculture across the board. No wonder farmers organisations have been demanding higher minimum support prices (MSPs) to cover their increased costs of production. Farmers often hold the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) scheme,started in 2006,responsible for this strong push in farm wages and the overall scarcity of farm labour. This scheme,they claim,is hitting them adversely as rising costs are not fully compensated by either MSPs or market prices. But rapidly rising farm wages should also bring cheer to those who are concerned with reducing poverty in rural areas,especially because farm labour is generally at the bottom of the economic pyramid. It should also mean much faster decline in rural poverty than has been the case earlier.
It is against this backdrop that we tried to find out how much of the rise in farm wages is being pushed up by MGNREGA and how much is being pulled up by the growth process. Our results,laid out in detail in a discussion paper of the Commission for Agricultural Costs and Prices for the period 1991-2012,reveal that Indias experience is akin to that of most emerging economies at this level of development. The pull of development,especially construction,is much more powerful than the push of MGNREGA in raising farm wages. A 10 per cent increase in construction GDP,for example,increases farm wages by 2.8 per cent,while a 10 per cent increase in MGNREGA man-days leads to only a 0.3 per cent increase in farm wages at the all-India level (pooled results for 16 major states that account for 93 per cent of farm labour).
This is not to suggest that MGNREGA did not matter at all. In states like Andhra Pradesh,Madhya Pradesh,Rajasthan,Tamil Nadu and others,where employment generated through MGNREGA has been significant,it may have empowered the farm labour to bargain for better wages. But even in these states,the effect of the growth pull is generally more pronounced than the MGNREGA push.
That raises a pertinent issue: is MGNREGA an investment policy or a form of dole for farm labour to survive? This issue is important as it has strong policy implications with respect to more than Rs 2 lakh crore spent on this so far. A review of MGNREGAs performance suggests a mixed picture. In some places it has helped in soil and water conservation. In others it is riddled with corruption and inefficiency,as indicated by a recent CAG report on MGNREGA.
However,from a policy perspective,the key challenge for agriculture is how to raise productivity,which can absorb these rising farm wages without being adversely affected in terms of its competitiveness and profitability. Our analysis at the CACP shows that productivity growth had decelerated in several major crops during the 2000s,with the notable exceptions of cotton,maize and pearl millet. This has led to rising real costs of production of crop agriculture,especially rice and wheat,necessitating large increases in MSPs to protect their margins. One of the suggestions made in our paper was to dovetail MGNREGA operations with agricultural operations. It has evoked a mixed response. Some feel this may open another can of worms,that corruption will be rampant. If that is the case,one has to look for alternative ways of raising agricultural productivity.
With rising farm wages,the relative prices of capital to labour will make farm mechanisation more attractive. That is already happening and it may happen more rapidly in years to come,if easy access to cheaper institutional credit for farm mechanisation is made available. But to ensure that capital is used rationally on small farms,it is high time that we free up the land lease market so that a market-guided optimal holding size evolves. Also,the custom hiring of machinery needs to be promoted through innovative methods. Otherwise,farms might end up being over-capitalised,which would further raise their costs of production.
But the long-term solution to raising farm productivity lies in investing in agricultural research and development,irrigation,road networks giving connectivity to farmers. Marketing infrastructure must be developed to ensure good returns to farmers on their produce. India is way behind on these measures,and that raises the issue of marginal returns on these investments vis-a-vis MGNREGA expenses,which needs further debate and analysis.
The writer is chairman,Commission for Agricultural Costs and Prices.
Views are personal
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