September 1, 2009

Terminate NREGA

The overarching theme of the July 2009 budget has been the UPA government’s emphasis on the social sector schemes—rural employment guarantee, Bharat Nirman, rural housing, Indira Awas Yojana, urban renewal—for ensuring “equitable growth” and “inclusive growth”, by way of injecting huge funds in such schemes multiple times than last year’s outlay, notwithstanding the high targeted fiscal deficit to GDP ratio of 6.85 percent.
The piece de resistance is the staggering Rs 39,100 crore (US$8 billion) allocations to UPA’s flagshipNational Rural Employment Guarantee Act (NREGA) scheme, which has a 144 percent outlay compared to the previous year—almost one percent of India’s GDP.

NREGA and its earlier avatar, NDA government’s Sampoorna Grameen Rozgar Yojana (SGRY), are akin to a public works programme, designed to function as a social safety net by providing employment at a prescribed wage while creating mainly public goods or assets. Such public works programmes undertaken for alleviating poverty and economic development in any country are a part of widespread economic fallacy, exposited by French political economist, Frédéric Bastiat, in his 1850 essay, “Ce qu’on voit et ce qu’on ne voit pas” (That Which Is Seen and That Which Is Unseen).

The mainstream media and the political pundits were quick to attribute the UPA’s 2009 electoral success primarily to NREGA. The corporate sector indirectly joined the chorus, attributing the stable demand in the rural areas—even in these recessionary times—to the purchasing power of the rural consumer, which was again linked to the NREGA. Electoral outcomes are complex processes—and even when supported by any statistical jugglery—cannot be attributed to an overriding factor like the NREGA, which can at best be correlation and not causation.

Public works programmes have uninspiring track records

India has seen a host of poverty alleviation schemes in previous decades: the National Rural Employment Programme (NREP) in 1980; the Rural Landless Employment Guarantee (RLEG) in 1983; the Jawahar Rozgar Yojana(JRY), combining NREP and RLEG in 1989; the Employment Assurance Scheme (EAS) in 1993; the  Jawahar Gram Samridhi Yojana (JGSY) in 1999; the Sampoorna Grameen Rozgar Yogana (SGRY), merging JGSY and EAS in 2002; and the National Food for Work Programme (NFWP) in 2004. Despite massive expenditure, none of these schemes have been able to spur growth or make a dent in poverty in rural India, much like the otiose development aid programmes in the African continent.

The NREGA, launched in 2006 with a similar design as the NFWP, purports to be different from the earlier poverty alleviation schemes by legally guaranteeing 100 days of unskilled jobs per rural indigent household; with provisions for unemployment allowance if a household is not provided employment within 15 days. The Act aims to eradicate extreme poverty and make villages self-sustaining by creating productive assets such as water tanks and soil conservation works, as opposed to capital intensive activities in earlier schemes. The aim is to regenerate the rural natural resource base, which in turn will result in sustainable livelihoods for residents. The Act places Panchayati Raj institutions at the village level at the helm of affairs.

Unfortunately, the facts regarding the imple-mentation of the scheme speak otherwise. A study by think-tank National Council of Applied Economic Research (NCAER) and Public Interest Foundation (PIF), a non-governmental organisation highlighted many flaws which bedevil the NREGA, including funds not reaching its intended beneficiaries, significant inflation in official numbers regarding creation of actual jobs and man-days, fraudulent payments, extraction of money in wage through bank, post-office and other accounts, questionable quality of assets cre-ated under the scheme and their long term usefulness, selection of works, poor execution, inflated estimates, cost overruns, and delays in release of funds by states.

Recently, a day after the budget presentation, the rural development minister admitted to huge slips in the implementation of the scheme, but added in the same breath that the onus for its implementation lay on the states as the central government gives only directions on implementation.

Even after muted admission of the failures of the NREGA and disowning responsibility for its implementation, there is no sign of any reconsideration by the government regarding future and size of the scheme due to the prevailing groupthink.

Clarity of socio-economic objectives

Under the NREGA, only 82 percent of the funds during 2007-08 and 75 percent during 2008-09 were utilised. After the unduly high and hasty outlay to NREGA—in euphoria of an election victory—it would be prudent to allocate funds to states in a phased manner once the many troubles plaguing the NREGA have been resolved. Instead of a country-wide implementation of the scheme, the government would do well to carry out a comprehensive analysis of the states like Rajasthan, Andhra Pradesh and Tamil Nadu— which claim to have successfully implemented the scheme—to understand the best practices and implement a modified delivery mechanism, with a final aim of phasing out the present scheme in within the next three years.

In the long term, prior to undertaking such large scale interventions for achieving equitable growth, the government must elucidate its socio-economic objectives without any inherent contradictions. If the aim is to provide for a social insurance and safety net then cash transfers or conditional cash transfers to the needy, like the Brazilian government’s bolsa familia, is a better option. Also, this can have a wider ambit by including specific disadvantaged groups/households comprising old women, orphans and disabled; who do not have an able-bodied member to undertake manual labour under the NREGA.

If providing large scale employment to people, without regard to productivity and efficient use of capital is the only criteria for NREGA, then there is no reason to wind down government ownership of public sector units as they are the largest provider of employment. In fact, development activities for asset creation on a fast track—and subsequent management and maintenance of these assets—can be undertaken more effectively through existing institutional mechanisms, distinct from NREGA, by employing machinery on work sites—expressly forbidden under the NREGA.

Quick fixes won’t work

Understandably, a democratically elected government can not appear to be callous to the plight of millions mired in extreme poverty while waiting for the ‘trickle-down effect’. Given the perceived political dividends from populist schemes, the temptation to intervene—albeit with noble intentions—for getting quick but scrimpy results is strong.
Nevertheless, the government must remember that such interventions for improving or shaping social and economic outcomes, however well chosen, are a means of last resort. State interventions in this form, having limited palliative effects, are no substitute for structural reforms to address unemployment and sustained poverty alleviation in rural areas, for achieving equitable growth.

Reforms should aim to raise per capita income in the rural areas—by enhancing relative income—and, therefore, would necessitate reduction in the hands dependent on agricultural activities, on one hand, and a step-up in the manufacturing sector, on the other. The manufacturing industries that will absorb the rural labour force need not be only the traditional large scale industries based in and around urban areas, but SMEs in rural areas engaged in industries such as food processing, dairy products and herbal products to avert migration of multitudes from rural to urban areas.

It might be politically expedient to increase the size of the scheme in the mistaken notion that it directly translates into votes, considering the forthcoming assembly elections in many Indian states, but it will be economically suicidal for the country. The opportunity cost of gargantuan spending in social safety schemes for the entire economy–which will not be visible in the immediate and short term–will be very high in the long term, especially due to the large borrowing by the government.

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