the concern of poor income levels of the rural workers directly. Indirectly, it adds to the rural demand for rural produce. Studies show that in some regions improved purchasing power with an increase in income had a multiplier effect on the rural economy (Sampath and Rohini, 2015). They point out that criticism of MGNREGA largely stems from the alteration of power balance in rural India between landless labourers and their employers. In regions where the scheme has been successful, the latter have been disadvantaged as they had to raise agricultural wages94. There have been criticisms, however, that higher wages are leading to declining profits of farmers (FICCI Report, undated), which possibly could adversely affect labour absorption.
Our policy suggestion is to push-up real wage rates of rural activities. Rise in the wage of any rural occupation impacts wage rates of other rural occupations as evidenced by research on MGNREGA. The rationale underlying this policy suggestion is given by our model. Our model shows that a rise in the industrial wage rate boosts demand. This in turn expands output, as the demand-side effect prevails over the supply-side effect (increase in price and consequent suppression of demand). An expanding output eventually improves employment levels. Thus, though the initial emphasis is on improving the real wage rate, this will eventually lead to increases in the size of the workforce. The expansion of domestic consumer demand will boost the rural output.
Moreover, with an increase in the wage rate a fairer distribution of income across classes in the rural economy also cannot be ruled out. A policy of a rise in wage rate can also be pursued through raising the minimum wage rates, which are government mandated. In our model, rural industrial wage rate also rises with increase in rural agricultural wage as the wage rate of rural industrial workers is a function of the wage rate of agricultural labourers.
On the flip side, rising wage rate reduces the profit share as explained in our model. The declining profit share will have a negative bearing on medium-run growth in output.
However, in our model rising capital productivity improves medium-run growth in output. In other words, in order to keep the growth momentum going a policy of rise in wage rate has to be supplemented with a rise in productivity of capital. This would not only ensure that the ouput level rises (due to the rise in wage rate) but that the growth of output over a longer time horizon keep humming (through a rise in capital productivity).
This would ensure that the profit rate stays healthy in the rural industrial sector.
Application of improved technology and new productive investments (which embody the new techonology) would ensure that the capital productivity rises over time. The role of research institutions, many run by the government, comes to the fore in this context. Rise in capital productivity has the advantage that it helps in pushing profit rate without further distorting the already skewed distribution of income.
In other words, a scenario where a public scheme like MGNREGS increases the workforce participation of unskilled workers and hikes the rural wage rate; and private investment creates high wage, skilled work opportunities, there is bound to be an increase in local demand that will benefit the local economy. However, there are regions where impact of MGNREGS is negligible or absent as it has been able to create a low volume of activities. In such regions, our suggestion is that there needs to be adequate emphasis on the creation of high wage, skilled work opportunities.
In a nutshell, we propose that policies should focus on the following:
i) Wage rates of rural activities including those in agriculture need to be raised;
ii) Rural employment generation schemes need to be encouraged as they raise wage rates, thus helping (i), and also in creating a dent on the pool of the unemployed and underemployed
iii. Capital productivity of rural industrial sector needs to be improved. Given that the rural industrial sector produces a varied range of goods that qualify as raw materials, consumer goods, intermediaries and investment goods a uniform technique of production cannot be applied. On one hand, there is a need for capital-intensive industries that are characterized by rising labour productivity, output, and profits as they generate the much needed investible surplus to maintain growth. But such well-performing industries will have higher wage rates that will eat into the investible surplus and stymie growth. So there is also a need for industries that are marked by rising capital productivity, to maintain the growth momentum. We propose that the choice of techniques across different industries should be such that at the aggregate level capital productivity increases so that the rate of growth in output of the rural industrial sector is maintained, with rise in the wage rate. We are not trying to give an industry-wise or industry category wise choice of a technique of production. Borrowing from Rudra (1956) we propose that there should be a set of technologies apt for the various industries in the rural industrial sector. The basis of choice is the available investible surplus and the desired level of output. It needs to be noted that improvement in capital productivity not only aids growth in output but also leads to a need for lower levels of investment in the next production cycle. A strategy to increase capital productivity can be extended to industries where substitutability between labour and capital is feasible. This way employment opportunity can be created for the labour force in such industries.
Capital productivity can also be maintained/improved through better maintenance practices that keep a check pm the depreciation rate.