Govt’s rural focus could hit urban economy

Aunindyo Chakravarty
Senior economic analyst

IN 2014, journalist Ravish Kumar encountered three ‘Ms’ which were making the voters in India’s villages angry. These were Manmohan, Mahangai and MGNREGA. While the first two were expected, the third was surprising. It turned out that the rural poor were unhappy that they weren’t getting the work they had been promised, and the affluent were miffed that agricultural workers were no longer willing to work for rock-bottom wages. This anger helped Narendra Modi come to power, but the same issues could return to haunt him now.

That’s because MGNREGA has become the go-to scheme for the Modi government to deal with rural distress in the time of Covid-19. Every year, demand for MGNREGA work goes up, right after the summer harvest. Last year, 4.6 crore households sought work under MGNREGA in April and May and 3.8 crore households were provided work. That means 17 per cent of job seekers were sent back empty-handed. This year, the lockdown caused a 39 per cent drop in households asking for work in April, but demand went up by 45 per cent in May. Work provided dropped by 35 per cent in April, but shot up by 55 per cent in May. Overall, job-seeking households increased by 6 per cent in April-May this year, while governments provided 15 per cent more work in the same two months, compared to 2019. In absolute numbers, 56 lakh additional households got work under MGNREGA in the first two months of this fiscal, compared to last year.

The Modi government had already announced an additional Rs 40,000 crore for MGNREGA over and above what was announced in the budget. This is most likely to be the bulk of the Rs 50,000 crore announced under the new PM Garib Kalyan Rozgar Yojana, which is meant to help migrant workers get employment in their villages. The government says, about two-thirds of the one crore migrant workers who have gone home, will be provided work under this scheme.

Consider the numbers. There are about 12 crore people who have jobs in our cities and towns. Another one crore in urban India are unemployed. Now that about one crore migrant workers have gone home, the urban centres can potentially operate on full employment. Of course, that assumes that the economy returns to its pre-lockdown capacity, which is unlikely in the near future.

Migrant workers are already wary of returning to towns and cities, after their traumatic experience during the lockdown. Now that the Modi government is promising work in situ, even if it only provides subsistence level income, workers have even lesser reason to return to the urban centres to look for work. It is, perhaps, no coincidence that many of them are in Bihar, which is going to elect a new government this October. Reports suggest that migrant workers had already demanded that Nitish Kumar give them work in their villages if he wants them to vote him back to power.

Imagine the impact on key pockets of the urban economy, which depend on cheap migrant labour — construction, real estate, trade, transport and small retail. Low wages have helped the entrepreneurs sustain their margins in these sectors, even during the long slowdown India has faced, since 2011-12. If the migrant workers don’t return, a large chunk of this ‘reserve army’ of low-paid labourers will disappear. That will cause a temporary labour shortage and push up wages.

Most businesses — especially small and medium entrepreneurs — will see their blue-collar wage bill go up. Remember, they are already working with razor-thin margins for the past couple of years. How will they deal with this pressure on costs?

Most likely, it will be by freezing white-collar salaries, and cutting back on sales, marketing and administrative expenses. This is bad news for the salaried middle class in our cities and towns. And, it is not only those employed in the sectors that are directly affected, but also those in finance, media and general management services who will face problems.

Even the affluent classes in rural India will face problems. This is especially true for rich and middle farmers, who employ agricultural labour. The employment opportunities provided by the Modi government to the poorest of the poor, are likely to push up rural wages after a long hiatus. This will push up the cost of production in agriculture. This had turned out to be a political problem for the UPA six years ago. PM Modi will have to deal with it as well. Rich and middle farmers are a small proportion of the rural population, but have disproportionate political heft and social influence.

One could argue that increased rural incomes will help improve demand for cheaper products, especially FMCG items like soaps, shampoo sachets, biscuits and cooking oil. However, the Modi government’s schemes are oriented towards reproducing a subsistence economy in rural India. This might reduce abject poverty, and reduce extreme hunger, but it will have virtually no impact on demand for non-essential goods and services.

This is a crucial moment for Modinomics. Till now, government schemes, subsidies, cash transfers, and handouts have been used to help the poorest of the poor survive, even when they do not have any regular source of income. The middle class has continued to back the PM, hoping that his policies will soon begin to yield dividends. The industrial recession over the past year has shaken that belief. If the government’s rural focus ends up hitting the urban economy, it could well be the beginning of their disenchantment with Mr Modi. And, the middle class might not have the numbers, but it has the influence and money that could make all the difference in the elections.