Mains Paper 3: Economy
Prelims level: NREGA
Mains level: Arguments behind indexation of the NREGA wages
The government made two recent announcements at two ends of the spectrum
to mitigate the economic crisis.
One concerns a new indexation of NREGA wages meant to increase rural
The second is a reduction in corporate tax rate.
Why indexation of the NREGA wages is crucial?
Prices of commodities increase each year, so it’s important to
accurately estimate how much a NREGA labourer should earn in 2020 if she
earned ₹179 (national daily average NREGA wage) in 2019.
We need a good index to benchmark and revise the wages.
Indices are (weighted) averages of the prices of a basket of goods
consumed and the index must be based on the main items of consumption for
NREGA daily wages are to be indexed with an updated inflation index
called the Consumer Price Index-Rural (CPI-R) instead of the older Consumer
Price Index-Agricultural Labourers (CPI-AL).
The calculation of CPI-AL involved more food items in the consumption
basket while the calculation of CPI-R involves more non-food items such as
healthcare and education.
CPI-R better reflects the rural consumption basket compared to CPI-AL.
Increase base wages
Although this new indexation is critical, it will have a sizeable impact
on increase in rural incomes only if the base NREGA wages are high. For
example, let’s assume a 10% increase in wages due to the new indexation.
Then NREGA wages in Kerala at ₹271 per day, one of the highest, would
However, if NREGA wages were equal to the State minimum wages, the wages
in Kerala would increase from ₹490 to about ₹540.
A substantial increase in NREGA wages and subsequent indexation with
CPI-R would be meaningful for the workers and the economy.
But barring three States/UTs, NREGA wages are still lower than the State
minimum wages elsewhere, in violation of the law.
Minimum wages are neither a dole nor an act of charity.
They are a legal mandate that are arrived at by calculating the minimal
nutritional requirement and basic needs of an individual.
The Fair Wages Committee of the Ministry of Labour (1949) noted in a
progressive report that a “living wage” should also include education,
healthcare and insurance besides the bare essentials. In Sanjit Roy v. State
of Rajasthan (1983), the Supreme Court held that paying less than minimum
wages is akin to “forced labour”.
In Workmen v. Management of Raptakos Brett (1991), it said that the
aforementioned provisions must be added to arrive at a moral “living wage”
to ensure basic dignity of life.
Yet, the current daily NREGA wages are just a quarter of the minimum
daily living wage of ₹692 as outlined in the 7th Pay Commission.
The current corporate tax cut will only widen economic inequality.
According to the Oxfam Inequality Report 2018, in one year, the wealth
of the richest 1% in India grew by ₹20.91 lakh crore, which is equivalent to
the 2017-18 Budget.
According to estimates by CRISIL, due to the recent tax cut, 1,000
companies would have annual savings of around ₹37,000 crore. In comparison,
the last annual NREGA budget is ₹60,000 crore.
The estimated gains of more than a 1,000 companies would be equivalent
to the annual earnings of around 7.2 crore NREGA labourers.
What is worse is that the budget allocation for NREGA gets exhausted by
October of each financial year, leading to delays in payment of wages. These
are all legal violations.
According to a 2015 IMF report, “if the income share of the top 20% (the
rich) increases, then GDP growth actually declines over the medium term”,
while “an increase in the income share of the bottom 20% (the poor) is
associated with higher GDP growth”.
While corporate tax cuts and lower interest rates would give
corporations some liquidity, it is unlikely that rural demand will increase.
On the contrary, without a substantial increase in NREGA wages, the
wages would barely match inflation levels leading to wage stagnation in real
It is therefore economically prudent to substantially increase the
budget for public programmes such as NREGA.
This would lead to higher disposable income for the poor which in turn
would have positive multiplier effects in the economy.
On economic, ethical, and legal counts, it behoves the government to pay
attention to the poor.
In circumstances of unsustainable wages, the poor would be forced to
become part of the migrant labour force eager to eke out a modicum of
It would be benefit by absorbing them at throwaway daily wages leaving
no alternatives for labourers.
This, at the twilight of the second decade of the 21st century, is
Q.1) Which of the following banks has been listed as a Domestic
Systemically Important Banks (DSIBs) by the Reserve bank of India? (a) Punjab National Bank
(b) Bank of Baroda
(c) HDFC Bank
(d) IndusInd Bank
Q.1) Explain the indexation of the NREGA wages is crucial.