India faces the threat of social instability if its wage-based workforce is squeezed further.
 
There are anxious times ahead for the Indian economy and with that for the political fortunes of the Government because of lifting inflation. On the table is not just the pace of economic growth but the threat of social instability if the already low living standards and fragile employment opportunities of India's wage based workforce are squeezed further.
 
High inflation in India's case has three major adverse consequences. The first is the impact of rising prices on the costs of living for everyday Indians. The second is interest rate rises, designed to slow down inflation, will push up debt servicing costs for both businesses and households. The third is the pressure the first two will create on the demand for, and price of, labour. Once these three elements of higher prices, higher interest rates and pressure for higher wages move into place they create a Bermuda Triangle, and some of those entering the triangle, like the lost ships of legend, may not re-emerge.
Financial circumstances of the lowest income wage labour
        
A key comparative advantage the Indian economy has is low labour costs. Labour input costs in agriculture and manufacturing, and many service industries as well, are low and this produces attractively priced goods and services both at home and for export markets. In broad terms therefore any increase in the price of labour is bad news for the economy as this reflects itself in higher, less competitive pricing.

The Indian workforce is dichotomous with some 15 per cent of workers located in salary-based, organised employment and the remaining 85 per cent in the unorganised sector. At the organised end of the labour market, labour is already highly priced and excess demand for workers with the skills employers are seeking means that inflation can be expected to reflect itself quickly in the form of higher salaries for those in this sector.

At the unorganised end of the labour market, workers can be divided into two main categories. The first is the legions of own-account self-employed and small businesses. Most small businesses are operating on small profit margins, as a consequence of which they are in danger of folding unless they can pass increasing costs to customers. The second main group is those in wage-based employment where labour supply far exceeds demand and the pressure workers can exert for higher wages is weak.

It is with the last of these three groups that the greatest political danger exists and where the seeds of social instability are most likely to manifest themselves in a sustained high inflation environment. Sustained high inflation will create pressure for higher wages, which if accommodated, will serve to further feed inflation as well as impacting adversely on the price competitiveness of at least some Indian exports. If not accommodated, it will visit unsustainable burdens on the already low living standards of the workers concerned leading to greater disaffection with the market economy and the political process that underpins it. Wage rigidities for this group mean that the latter outcome is the more likely one.

Why this matters becomes more evident when it is recognised that some 35 per cent or more than 110 million India's workforce are in the wage-based economy. More than enough to unseat any government if there is only a small shift in voter sentiment.

At the lowest rung of this large group are 11 million wage labourers with annual incomes below Rs 20,000 who are the only earners in the households in which they reside. Together, with other non-earning adult members of these households, this group represents 24 million voters. Understanding in a more scientific fashion the pressures this group are likely to face on account of sustained high inflation therefore is vitally important both in electoral terms and in terms of identifying the policy responses that need to be put in place.

From IIMS Dataworks data it is possible to construct a window of understanding of the actual financial circumstances of this lowest-earning group. What this shows is that the average income of the group is very low at around Rs 1,000 per month and that one half of this income is highly exposed to price movements.

Conversely, because of the weak wage bargaining position of the group, their ability to compensate for price rises in the form of higher wages is low which means that most of the price rises they will face must be financed from existing income or by taking on more debt.

On the debt front, the group in average terms is already highly leveraged with 12 per cent of income directed to debt repayments. As the RBI moves to raise interest rates to dampen inflation, this will flow through further reducing the already meagre income available to deal with rising prices.

The Government has already moved to circumnavigate the single largest expense of these households which is food costs with subsided wheat and rice prices to ensure that price pressures on basic food staples at least are contained. While this will certainly help, in and of itself it is likely to be insufficient in many cases to cushion these households from needing to cut back on essential expenditure elsewhere and/or take on more debt.

While this outcome may be sustainable for a period of weeks or even months, these workers and their families will surely collapse quickly under the strains of escalating prices beyond that. A more broadly based safety net therefore is required if this is to be averted. Delivering the required assistance need not necessarily involve new programs but could be partly achieved through existing programs such as the rural employment guarantee by making suitable periodic adjustments in the wage rate payable.

The writer is chairman of IIMS Dataworks. This analysis is based on the Invest India Incomes and Savings Survey 2007 produced by IIMS Dataworks

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