The Indian economy has continued to throw up one puzzle after another in recent years. Here's another one. RBI's recent reports have indicated that a strong reason why the inflation is high in India is because of the upsurge in both rural and urban wages. Now, this is interesting. The central bank seems to suggest that there is a labour shortage in India. But this certainly looks unlikely with the economy showing signs of slowdown and the general perception about employment also not being good. What then explains the rise in wages? We believe that the Government, with its employment guarantee schemes has set some kind of a floor on rural wages. And thus the urban industries such as construction need to pay significantly higher wages in order to lure rural people into urban areas. All this has led to wages rising without a commensurate increase in productivity. And this is a dangerous trend as per us. Unless compensated by higher productivity, the policy of offer ing a certain minimum wage will be yet another long term drag on the economy we reckon.