RURAL WAGES IGNITES INFLATION

A spike in rural wages, which jumped from 10-13 per cent in FY08 to 18.7 per cent FY'11, after NREGA scheme, is a major reason for the sharp fall in growth and sharper rise inflation, as the UPA's pet scheme has not contributed to productivity gains, says a report. "We believe the National Rural Employment Guarantee Act (NREGA) Scheme has been one of the key factors pushing rural wages without matching gains in productivity... "....which in turn led to a massive spike in inflation. Rural wages moved up from 10-13 per cent in H1 of FY'08 to an average of 18.7 per cent during the past three years, but without a matching increase in productivity," Morgan Stanley India said in a note today. According to the report, factory output grew only 0.7 per cent in the past two years and CPI inflation averaged at 10 per cent during the same period, creating a stagflationary environment-low growth, high fiscal deficit and declining investment. "While growth is weak, high inflation is constraining the central bank from easing. In this context, the current cycle has been unusual in that inflation has been showing almost no response to a deceleration in growth and the resulting negative output gap," the report said. It further said "the NREGA has been one of the key factors resulting in higher food, services and overall CPI inflation as well as inflation expectations." Since the 2008 credit crisis, while fiscal deficit-induced consumption rose, investment remained weak with public and private investment declining from the peak of 26.2 per cent of GDP in FY'08 to 17.9 per cent in FY'13. The report, however, noted that the economy is now entering the adjustment phase, but most of the outcomes will depend on policymakers as well as the private sector investment, which it feels will pick up post-elections. "Post-elections, we believe the new government will have to respond quickly to the deteriorating macro environment," the report said. The report listed out four reasons for this poor growth mix -- growth supported by high fiscal deficit, declining investment to GDP ratio; lower corporate sector investment; and government intervention in labour market pushing rural wages higher without a matching increase in productivity.--