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Issue 07                                                                   

February 2006

NREGA and Rural India[*]
Varun Khandelwal & Kanika Chawla
(varun.khandelwal@gmail.com; Summer Intern & LSS Delhi 05)

The National Rural Employment Guarantee Bill received the President’s assent in September 2005 and has now become a legal reality. Ever since the Employment Guarantee Bill was tabled in the parliament on the 21st of December 2004, it has been a vital topic of discussion among all strata of the Indian society. Many leading economists consider it as the significant step towards tackling the problems of forced migration, inadequate infrastructure and extremely high incidence of absolute poverty in rural India. In doing so, the National Rural Employment Guarantee Act (henceforth referred to as NREGA) has the potential to alter the development path of the entire nation.

As defined by law, NREGA is 
“An Act to provide for the enhancement of livelihood security of the households in rural areas of the country by providing at least one hundred days of guaranteed wage employment in every financial year to every household whose adult members volunteer to do unskilled manual work and for matters connected therewith or incidental thereto.”[1]
 

How the NREGA Works          

The NREGA promises wage employment to every adult person who resides in any rural area and is willing to do casual manual work at the statutory minimum wage[2]. The employment seeker has to register with the Gram Panchayat[3] for a job card that will be valid for a minimum of 5 years. Different persons belonging to the same household shall share the same job card which is renewable. All applications must be for at least 14 days of continuous work. There is no limit on the number of days of employment for which a person applies, or on the number of days of employment actually provided to him or her. It is the responsibility of the State government to provide to every applicant within 15 days of receipt of his application. Else, it is liable to pay an unemployment allowance to the applicant at the minimum wage rate.

 Problems of rural India, previous schemes and the NREGA 

A large section of rural India lives on the brink of hunger and starvation. The most serious problems of rural India are that of

  • Forced Migration (both Seasonal and Permanent)
  • Inadequate infrastructure especially in terms of water security and connectivity to markets
  • Slow growth in rural employment opportunities as compared to population growth    

The government has consistently been introducing a large number of rural welfare programmes. Schemes such as Jawahar Rozgar Yojana, the Swarojagar Yojana, the Sampoorna Grameen Rozgar Yojana and the National Food for Work Programme have all seen somewhat similar fates. With huge amounts of leakages and the actual intended beneficiaries getting a minute proportion of the funds allocated for them, these schemes have far from achieved their intended goals. The failure of schemes for rural development can be attributed to various factors such as lack of awareness among the locals of their rights and entitlements, lack of a proper legal enforcement mechanism to handle cases of fraud, lack of a physical auditing system and most importantly – inadequate implementation due to bureaucratic bottlenecks.

The NREGA differs from all the other schemes in that the legal provision under this scheme to prevent corruption is much stronger[4] and several steps have been taken to ensure greater transparency of operation. The most significant difference between the NREGA and the other schemes is that the NREGA provides the rural worker with THE RIGHT TO WORK. The importance of this right for improvement in the conditions of the poor is understood better when poverty is looked at through Dreze and Sen’s Capabilities Approach which would immediately recognise the various unfreedoms such a right can remove. 

Various aspects of the NREGA

Fiscal Concerns: One of the greatest fears as regards the NREGA is its burden on the exchequer. It is expected to cost from 0.5%of GDP in 2005-6 to 1% of GDP in 2008-9 or 2.5% of the budget in the year 2004-2005.  

It is believed that government will find ways of containing the expenditure by complicating the application procedures, in spite of the formal legal guarantee. This is what has happened in Maharashtra, where the cost of Employment Guarantee Scheme[5] has been driven down to barely 0.2% of state domestic product.  

Even if the government in full spirit implements the NREGA, the expenditure incurred is not expected to be futile. Expenditure may be incurred on infrastructure development activities, which would generate substantial secondary benefits even years after the completion of the work. Well-designed workfare programs under the NREGA will construct much-needed infrastructure and thus minimize the trade-off between public spending on income transfers versus public spending on development. 

Also, initially all existing rural-development/poverty-alleviation schemes will be brought under the umbrella of the NREGA. Thus, while expenditure will be incurred on the scheme in an accounting sense, in reality there may be a trivial increase in the share of the budget actually being spent on rural-development/poverty-alleviation. 

Employment Multiplier effect: This section draws on various works by Prabhat Patnaik[6]. Let us assume that India is a demand constrained economy with large amounts of unutilized resources and a fairly large stock of food grains. The assumption of a demand constraint economy is particularly applicable to the intended beneficiaries[7] of the NREGA who will depend on the public works for subsistence. 

Let us define the employment multiplier as the ratio of total employment generated due to government spending on the NREGA to the employment generated directly due to the scheme.  Now let us estimate what the value of this employment multiplier when the Government finances the schemes in the following three ways: 

Firstly, the scheme can be financed by increasing the tax on consumption. However, an increase in tax will potentially reduce demand else where as it appropriates purchasing power. This implies that the multiplier effect of demand generated through the employment providing public work may be negated by the reduction of demand elsewhere due to taxing away of purchasing power. Thus for every person employed there should be one person unemployed somewhere else. So, in this case employment multiplier is one,  

Secondly, the Government can finance this scheme through borrowing. There are several ways the government can borrow the required fund. It can borrow from the banking system at a low rate of interest via the SLR funds[8]. Here there is no taking away of purchasing power from any part of the economy. The expenditure on the scheme will generate multiplier effects. In this case employment multiplier is greater that one, as employment created by the NREGA shall in fact lead to increase in demand in rural areas which will further lead to creation of more employment opportunities. 

Thirdly, the Government can print money in order to raise funds which will create an effect similar to borrowing and value of the employment multiplier in this case is greater than one. 

If the assumption of a demand constrained economy is true, and we do have reason to believe that it is true since the income from the NREGA will accrue to those workers who cannot even afford subsistence level food consumption[9], then neither borrowing nor printing money will give rise to significant inflationary tendencies in the economy. 

Growing stockpiles of food-grains: NREGA can address the problem of a growing stockpile of food grains in the granaries controlled by the Government. It is a well documented fact that the Government in India holds food grains far in excess of the quantity required to achieve food security[10]. Over time this stockpile of food would decay. The NREGA offers the Government the opportunity to use this excess of grains to finance labour for development of rural infrastructure. NREGA would raise off-take of grain in two ways - directly when wages are paid in grain and indirectly by putting incomes in the hands of the poor. Utilisation of excess grains to finance the scheme will serve two purposes:       

  • Paying a part of the wages in grain will avoid the inflationary tendency in other wage goods that may arise due a sudden transfer of purchasing power
  • It will reduce the outlay on food subsidy by significantly reducing the carrying cost of grain. Today, nearly 66 % of the food subsidy comprises the ‘carrying cost’ of grain[11]. Thus, the NREGA will provide the Government with a means to reduce expenditure on the current account and improve the fiscal health of the Government.

Water Security and Market Connectivity: Rural India faces an increasing problem of water security both due to lack of irrigation infrastructure and the vagaries of the monsoons. Water tables all over the country have been falling due to over-exploitation of ground water resources.  Economist Mihir Shah believes that the NREGA offers a ‘historic opportunity’ to address this problem[12]. The expenditure on public works under the NREGA can be directed towards construction of irrigation apparatus which would thus alleviate the problem of water security to some extent.

Following an analogous logic, the funds allocated under the NREGA may be used for development of roads thereby connecting villages to national highways and thus facilitating connectivity with markets. While the roads constructed using labour intensive techniques may not be comparable in quality to the city roads, they will certainly serve the purposes of the village economy and stimulate it at the same time by creating demanding for labour and raw materials. 

Rural-Urban Migration: The NREGA, by guaranteeing employment, will alleviate the problem of rural-urban migration. The NREGA will have significant positive impact on seasonal rural-urban migrations by providing rural workers with employment during the lean season. This will reduce the problems of excessive population pressures in Indian cities as surplus rural labour will find employment in their own districts. The NREGA will also have an impact on permanent migrations trends. While it is difficult to ascertain what the exact impact will be, one can assume that the created infrastructure and the increased activity in the rural economy due to increased purchasing power will lead to higher rates of permanent job creation and thus mitigating the urgency to migrate.  

Development of Human Capital: The public works that will be undertaken under the ambit of the NREGA have the potential to develop human capital by promoting skills in rural India. This may be through ‘learning-by-doing’ kind of processes or through formal training of the workers by experienced/trained personnel. Whatever be the case, skill formation is a desirable social goal per se and will, in the long run, reduce the dependence of the rural population on agriculture by enabling them to move on to other activities[13].       

Micro-theoretic Perspective: One of the most remarkable features of the NREGA is that, in contrast to most other schemes, it will not distort consumer preferences by direct price administration/subsidisation. The NREGA is designed to operate using lump-sum transfer. This will enable the markets in rural India to remain efficient in line with the First and Second Welfare Theorems.  

Conclusion

It is sometimes said that the opposition to NREGA lay neither in the scarcity of resources, nor in the contention that a reasonable and practicable piece of legislation could not be conceived; it lies in the fact that such an Act is contrary to the entire direction of neo-liberal reforms. This aversion may be due to the fact that international capital has a strong distaste for the excepted inflation and exchange rates fluctuation resulting from Keynesian demand management.

The issue of the cost of the scheme maybe a little exaggerated. A large portion of the outlay under NREGA may (and probably will) be sourced from amalgamation of other schemes into the NREGA. This would bring the expenditure on employment and infrastructure within the purview of the NREGA. Other schemes of the Government would also become more efficient and productive once are brought under the legal framework provided by the NREGA. Also, the NREGA has tremendous potential in eliminating the trade-off between rural income transfers. The possibility of resolving the problem of accumulating grains with the Food Corporation of India and resolving the issue of water security and inadequacy of rural infrastructure is also very attractive.

At the same time one needs to watch the political behind the implementation of the scheme with caution. The entire exercise of planning and the resources put into the scheme can go to waste, as has been the case with many Government schemes. The reliance on local governance structures and the accountability, both in the NREGA and via the Right to Information Act (2005), lend some strength to the hope that this scheme will not be a merely fulfilling of the Common Minimum Program and will vindicate its use as a tool in furthering the economic development of India.

Bibliography

Abhijit Sen Committee Report. 2002. Report of the High Level Committee for Formulating a Long-term Grain Policy. New Delhi: Union Ministry of Consumer Affairs, Food and Public Distribution, Govt. of India.

Dhawan, B D and S S Yadav. 1995. Private Capital Formation in Agriculture. Economic and Political Weekly. Vol XXX. No 39. Mumbai: Sameeksa Trust.

Dhawan, B D and S S Yadav. 1997. Public Investment in Indian Agriculture. Economic and Political Weekly. Vol XXXII. No 14. Mumbai: Sameeksa Trust.

Gaiha, R. (2001) “Rural Public Works and the Poor- A Review of the Employment Guarantee Scheme in Maharashtra”, Accepted for presentation at the 13th World Congress of the International Economic Association, Lisbon, September, 2002. A revised version was presented at a seminar at Columbia University, November, 2002.

Gaiha, R. P.D. Kaushik and Vani Kulkarani. 1998. Jawahar Rozgar Yojana, Panchayats and the Rural Poor in India.

Haddad L. and Michelle Adaot. How Efficiently Do Public Works Programs Transfer Benefits to the Poor? Evidence from South Africa. Food Consumption and Nutrition Division Discussion Paper No. 108. Washington D.C: Food Consumption and Nutrition Division, International Food Policy Research Institute.

Kalanidhi Subbaro. 2003. Systemic Shocks and Social Protection: Role and Effectiveness of Public Works Programs. Social Protection Discussion Paper Series, World Bank. Paper no. 0302. Washington D.C: World Bank.

Ministry of Law and Justice, 2005. National Rural Emplyment Guarantee Act 2005. The Gazette of India (September 7, 2005). New Delhi: Government of India Press.

Pasquale Scandizzo, Raghav Gaiha and Katsushi Imai. 2004. Option Values, Switches and Wages - An Analysis of the Employment Guarantee Scheme in India. United Kingdom: School of Economic Studies, University of Manchester. 


[*] This paper is based on certain sections of the paper presented at Hindu College’s All India Student’s Economics’ Meet 2005. The original paper won First Prize. The competition was on a National Level and prestigious institutions such as Presidency College, Calcutta; St. Stephens’s College, New Delhi; St. Xavier’s College, Calcutta; Loyola College, Chennai; had participated.


 

[1] Ministry of Law and Justice, 2005. National Rural Emplyment Guarantee Act 2005. The Gazette of India (September 7, 2005). New Delhi: Government of India Press.

[2] The minimum wage for the purpose of the Act is Rs. 60 per day. The minimum wage, however, may be higher depending on the district-level poverty line.

[3] The ‘Gram Panchayat’ is a local governance body at the village level.

[4] Also, when the legal provisions of the NREGA are coupled with the recently enacted Right to Information Act (2005), there exists hope for much lower degrees of corruption in the implementation.

[5] The Maharashtra Employment Guarantee scheme is a similar (and the only) scheme in India to the NREGA.

[6] An eminent economist based at the Jawaharlal Nehru University, New Delhi, India.

[7] The intended beneficiaries of the NREGA will be “below the poverty line”. Any purchasing power transferred to them will primarily be spent on subsistence level wage-goods in which the assumption of demand constrain holds.

[8] SLR is Statutory Liquidity Ratio and is an important part of the banking regulations. To put it very simple, banks have to invest a certain fraction of the deposits received in designated securities.

[9] As they are below Poverty Line. The Poverty Line is calculated by considering the minimum calorific requirements of an individual which is translated in to an equivalent amount of money required to purchase food that supplies the minimum calorific requirement.

[10] This is not an intentional accumulation on the part of the Government. The excess stock has accumulated due to the commitment of the Government to buy grains from farmers at a minimum support price which is sometimes even above the market price. Thus, all excess low-quality stock of grains is purchased by the Government.

[11] Abhijit Sen Committee Report. 2002. Report of the High Level Committee for Formulating a Long-term Grain Policy. New Delhi: Union Ministry of Consumer Affairs, Food and Public Distribution, Govt. of India.

[12] Shah, M. 2004. National Rural Employment Guarantee Act: A historic opportunity. Economic and Political Weekly (Dec 11, 2004). Mumbai, India: Sameeksha Trust.

[13] Which may originate from the NREGA or autonomously.

 

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