NREGA wages to rise 10% if linked to rural CPI: Pronab Sen

The United Progressive Alliance (UPA) government is keen to increase the wages that it pays under the National Rural Employment Guarantee Act (NREGA) ahead of the elections.

Pronab Sen, Head of the Statistical Commission, was assigned the task to suggest an index that will be followed to determine the increment in wages. Sen did not submit a report that time (2010) for want of clarity on certain policy issues. The government had announced maintaining NREGS wages at Rs 100 in real terms but it was proving tough to escalate wages taking inflation in account.
While Sen thinks that CPI rural is more accurate measure of cost of living today, there is a feeling that the government will adopt  CPI for agricultural labour as the index to link NERGS wage hikes
Currently the task of fixing an appropriate index to link NREGS wage hike is assigned to Professor Mahendra Dev. Below is a verbatim transcrict of an interview with Pronab Sen: Q: Can you tell us what exactly is in the government’s mind? Is the government’s premise that it does want to increase NGREGA’s wages? What exactly were the terms of reference or the request made to you?
A: The terms of reference come from the statement that was made in 2010 when the government announced that it would pay a minimum of Rs 100 in real purchasing power terms for NREGA and the question of course was that how would you escalate at Rs 100 to take into account inflation. Q: What was your suggestion, did you suggest you use consumer price index (CPI) and if it is CPI, is it the unified CPI that we now have?
A: No, in fact I didn’t submit a report because there are a couple of policy issues, which were not straightened out but what we were working on at that time, we had looked at the relative merits of the CPI for agricultural labour and the CPI rural, which is the overall CPI for the rural areas and our judgement was on the CPI rural was more accurate measure of cost of living today. Q: You had recommended that the government should use the CPI (rural) to scale up wages, how much would wages have been scaled up if the CPI (rural) is applied? Are we going to see a dramatic rise in wages and what was the government’s point of view, why would they not want CPI (rural) as the index to be used?
A: I don’t think the government has taken a decision on whether the CPI (rural) should be or should not be used but if you use the CPI (rural), you would get an increase of roughly about 10.5 percent annually. Q: What is the other index they can use the CPI (agricultural labour)?
A: The consumer price index for agricultural labour. If you use that it will be about 12 percent per year. Q: In effect could you help us with what the impact on the overall inflation will be if there is a substantial hike in the NREGA scheme?
A: That is difficult to tell. The thing is that since the NREGA wage rate is being indexed, what it introduces is a direct link between food prices and rural wages. So that builds in a particular circularity but this is true of any indexation process; so in itself that is not too bad.
The real issue of course is which particular index to use. If you use something like the CPI for agricultural labour which has a very high weight of cereals in it, then any increase in cereal prices transforms immediately into a rise in rural wages whereas if you look at something like the CPI (R), cereal weights are relatively low and other food items have become more important. So there is a balancing to be done in the two. Q: Once such schemes are launched or such wage hikes are given, is it very difficult to roll it back considering we are in election time?
A: The thing is quite often schemes of this kind outlive the utility after a while and tends to die away. If you look at what has happened to NREGS, there was a spike in 2009-2010 when we had that drought in the country. But since then the total outlay on NREGS has been much less than what had been allocated in the Budgets. Over time hopefully the need will go away. Q: What maybe the impact on inflation immediately? One remembers that in 2010 when this Rs 100 was projected in real terms, we saw a fairly steep 16 percent or even 18 percent rise in rural wages for the next several years.  Two-three years later, if another CPI (AL) becomes the basis for increasing, you say it will increase by 12 percent, do you see another spiral of food prices and general inflation?
A: There will be some effect certainly but I don’t think that you can compare the current situation with what happened in 2010 simply because in 2010 when Rs 100 was announced, there were many states where the minimum wages for agricultural labour was substantially below Rs 100. So there was a step change that took place which then translated into 16 percent rise. That situation does not exist today. So there will be certainly an impact but if you look at agricultural prices, it is not driven so much by the cost of production as it is being driven by a mismatch in demand and supply.
Q: Do you see another round of inflation as it looks inevitable now that wages will be hiked by using the CPI (AL) as the basis?
A: The fact of the matter is since 2010, the CPI (AL) has in any case been used. The real question is do you continue to use it or do you shift to what is in fact the more rational index which is the CPI (R). Q: I take your point, I still want to know the impact on inflation?
A: Not very much. Q: Any impact on the fiscal deficit you think?
A: There will be some increase in an exposed sense because you will be looking essentially at another hike in the wage rate but nothing dramatic. As I said that consistently over the last two years or nearly three years, we are underspent as far as NREGS is concerned. So the budgeted amount has never been fully utilized.