Wages,Prices and Agriculture: How Can Indian Agriculture Cope with Rising Wages?

Rapid economic growth in India has resulted in rapidly rising rural wages. Using the framework of variable profit functions and household level data, we study econometrically the wage impacts on crop agriculture. Rising wages are associated with decreasing crop output, other things being equal. Crop prices would need to increase by 80% in the short run to offset the effect of an agricultural wage increase, or by 140% in the short run to offset rural non‐farm wage increases as well. However, because non‐land farm assets respond positively to the non‐farm wage, in the medium term this increase is reduced to 74%. During the period of 1999/00‐2007/08, growth in non‐land farm assets, the labour force, education and technology has easily compensated for the wage increase, and probably also for the accelerating wage growth. Focusing on growing these shifter variables is a much better policy option than raising prices that would come at the expense of consumers or taxpayers.