like a dog chasing its tail – it can never catch it. another could be that since rice and wheat are the primary food commodities procured at the msp, production is distorted towards rice and wheat, leading to a suboptimal production mix by farmers – too much rice and wheat, and too little of other needed commodities. both these explanations would suggest the need for more moderation as the government sets the msps in coming months. it is useful though, to look at the details of the cost increases. prices of agricultural inputs, including wages, have recorded a sharp increase during 2008 – 09 through 2012 – 13 in comparison with the preceding five years ( 2004 – 05 to 2007 – 08 ) as shown below ( table 1 ). perhaps the most significant increase has been in rural wages. for example, wage increases have accounted for the largest share of increase in paddy input costs ( chart 8 ). nominal rural wages have grown at a sharp pace during the last five years. because so many indian workers are at subsistence wages, higher food prices do drive rural wages higher, and there is some evidence for this before 2007. from 2007 onwards, however, econometric tests suggest causality has flowed from wages to prices, underscoring the role of rural wages as a major determinant in food price increases. so why has rural wage growth been so strong? b. mahatma gandhi national rural employment guarantee act ( mgnrega ) a sharp pickup in rural wages was seen after the rural employment guarantee program ( assuring 100 days of employment to every household whose adult members volunteer to do unskilled manual work ) was enacted. mgnrega may have contributed to the bargaining power of rural workers, but careful econometric studies suggest that it accounts for only a small fraction of the rural wage increase, and indeed, any effect is waning ( chart 9 ). that said, the indexation of mgnrega wages suggests its effects in pushing rural wage inflation will not disappear entirely. c. rural liquidity and credit there has been an increase in liquidity flowing to the agricultural sector, both from land sales, as well as from a rise in agricultural credit ( chart 10 ). more loans to agriculture have fostered substantial private investment in agriculture, but may also have pushed up rural wages. d. labour shifting to construction the labour force has been moving from agriculture to non - agriculture sectors, particularly construction. this would have the effect of pulling up rural labourers ’ wages ( due

to scarcity ), especially in the labour supplying states. total agricultural labour declined from 259 million in 2004 – 05 to 231 million in 2012 – 12. agriculture, which accounted for 60 per cent of total employment in 1999 – 2000, now accounts for less than 50 per cent ( chart 11 and table 2 ). e. female participation one of the more interesting possible explanations for the rise in rural wages is the changing female participation in rural markets. the female participation rate is down in all the age categories. improved living standards could lead rural families to withdraw women from the bis central bankers ’ speeches labour force ( chart 12 ). also, higher prosperity could lead to greater investment in educating girls ( for the age group 10 to 24 ) again leading to lower participation in the workforce. 3. to summarise in sum then, when we examine food inflation, a substantial portion stems from an increase in food production costs, primarily rural wage inflation. some of that is an increase in real wages, needed to attract labour to agriculture, away from construction, education, household work, or mgnrega. if, however, wages elsewhere also go up, the necessary shift in relative wages to keep agricultural work attractive will not take place, and we will continue to have a wage spiral. also, some of the agricultural wage growth may be because of more liquidity flowing into rural areas. somewhat paradoxically, to contain food inflation and get a strong increase in food production, we need to ( i ) contain the rise in wages elsewhere so that relative wages in agriculture can rise without too much overall increase in wages. ( ii ) contain any unwarranted rise in rural wages as well as the rise in other agricultural input costs ( though not through subsidies ) so that the farmer gets a higher return. ( iii ) allow food prices to be determined by the market and use minimum support prices to provide only a lower level of support so that production decisions do not get distorted or the price wage spiral accentuated. this means limiting the pace of msp increases going forward. ( iv ) reduce the wedge between what the farmer gets and what is paid by the household by reducing the role, number, and monopoly power of middlemen ( amend apmc acts ), as well as by improving logistics. ( v ) improve farm productivity through technology extension, irrigation, etc. note that of these steps, monetary policy has a direct role in ( i ) and ( ii ) by slowing the demand for labour and by anchoring