Tag Archives: Marginal Value Product

Is MNREGS a significant cause of rapidly rising prices?

The Financial Express reports thus – ‘Rural wage hike pushing inflation, posing challenge for RBI’. It goes on to quote an Assocham spokesperson thus.

“Near 20 per cent annual increase in the wage inflation in rural areas is building up price pressures on food articles like cereals, rice and wheat, and is posing a big challenge for the Reserve Bank which is being called upon to cut the policy interest rates on Tuesday,” industry body Assocham said.

So what sense are we to make of this? Why would rural wages shoot through the roof in this manner? As far as I understand, there are two possible reasons. The first is that agriculture has seen such a tremendous productivity increase that marginal value product of a unit of labour has really gone up 20%. Alternately, as I explained out here, a steady rise in prices is possible only if inflationary policies greatly and steadily increase money supply.

And over the last couple of years, the Government of India, through various State governments, has really been flooding the rural markets with money through the MNREGS. So should we be surprised that rural wages have increased as much and as rapidly as they have? If we are, then it is time to revise our economics fundamentals. That such an outcome is inevitable could have been known right at the time of conceiving of a scheme like MNREGS. Why then are such policies being pushed? These and many other such tough questions are what we should be asking policy makers, but only an economically literate population can do so.