At the root of the green shoots hypothesis is the role of domestic consumption which accounts for over 60 per cent of GDP. This may sound counter-intuitive at first — if all the reports about job losses and pay cuts (particularly in boom sectors like IT) are true, what is the realistic likelihood of a consumption surge? The answer is that while these reports are true they tend to focus primarily on the scenario in big cities, whereas the resilience in consumption demand is located in semi-urban and rural areas. There are two reasons for the shine in rural Bharat.

First, a steady and good agricultural performance, coupled with high minimum support prices for key agricultural crops, has brought a certain prosperity to rural India, which continues to be relatively untouched by the global meltdown. A good monsoon this year — the early forecasts suggest that this will indeed be the case — will consolidate the gains made in agricultural incomes.

Second, and perhaps more interesting, is the impact of NREGA on rural incomes and rural wages. There are two effects here. One is the rise in income of those people who were unemployed but now find employment for 100 days a year under NREGA at up to Rs 100 per day. But that surely can’t be enough to boost rural demand significantly, which is why the secondary effect of the NREGA on average rural wages is critical.

Counter to many assumptions, despite a woefully inadequate system of institutionalised social security, we do have minimum wage thresholds in India. There is, however, no single national rate — different states have always set their own. What NREGA has done, however, is to relay the floor in most states. States have been forced to revise their minimum wages upwards post-NREGA — note the change between 2005-06 and 2008-09: in UP the minimum daily wage went up from Rs 58 to Rs 100 day, in Rajasthan from Rs 75 to Rs 100, in MP from Rs 60 to Rs 84, in Maharashtra from Rs 55 to Rs 75. These are significant increases, and in practice workers often get more than even the revised minimum wage rates, since the minimum wage rates mostly coincide with the NREGA rate in the state. Private employers have to usually pay more than the government does under the employment guarantee scheme to attract workers.

... contd.