Despite the government trying to control its expenses and put a brake on rising allocation for social sector schemes, the Reserve Bank of India (RBI) has warned that the fiscal space is too limited to continue welfare programmes “at this level”.

“We must recognise that the government does not have the fiscal capacity to continue entitlements and welfare programmes at this level,” RBI Governor D Subbarao’s text of speech to bankers said. 

Besides, it said the government’s welfare programmes and subsidies have raised demand for wage goods on the one hand and helped cut supply of labour at low wages on the other hand. Both these factors have contributed to wage price spiral, it said, and flayed the government for failing to respond to any corresponding increase in productivity supply-side measures.

“The large public employment programme has not only pushed up wages but also exerted upward pressure on agricultural input prices and thereby on food prices.

Second, even as wages have increased, there has been no corresponding increase in productivity — a recipe for inflation,” the speech delivered late last week said.
It said that the nominal rural wages have increased at double digit rates over the last five years since 2008 and surged closed to double digits in the last three years despite high retail inflation.

According to figures put out by RBI, even the real rural wage growth — wage growth after accounting for inflation — rose close to four-fold since 2008-09. The real wage increase, which was 1.5 per cent in 2007-08, went up to 5.1 per cent next year.

“By far the most dominant driver of rural wages has been the government’s affirmative action programmes, both by way of transfer payments (subsidies) and welfare programmes,” it said.

It also said that the recent high growth in rural wages reflected “a catch up with minimum wages, a necessary adjustment intended by the government,” and warned that after the initial catch-up, however, wage growth cannot be sustained without corresponding productivity increases.

The speech also highlighted that much of India’s inflation that is driven by supply constraints can be corrected by appropriate policies and their effective implementation.

The RBI’s observation has come days ahead of the mid-quarter monetary policy review.