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March 9, 2012

A failure of success

Retooling the rural employment guarantee

The Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) is arguably the biggest poverty elimination scheme ever implemented anywhere in the world. It was launched in early 2006 as a social security program to guarantee all rural poor households a minimum of 100 days employment.

In six years, despite all the allegations of pilferage, ineligible beneficiaries, and poor quality of assets, its balance sheet reveals several impressive successes. Since its inception, it has provided a staggering 11.287 billion man-days of employment at a cost of nearly $30 billion. Apart from raising rural wages, for both on-farm and off-farm activities, it has increased the disposable incomes for rural households and contributed significantly to boosting rural aggregate demand. By almost any measure, it is undeniable that the program has had a significant role in mitigating rural poverty.

But its secondary impact on the economy and society at large is a matter of some debate. For example, how have the massive cash transfers to rural consumers affected local wages and aggregate price levels? What is its contribution to the persistent food inflation? Where is the additional household disposable income being spent? In contrast to the rigorously evaluated conditional cash transfer programs of Latin American countries, this global-size flagship anti-poverty program remains very mildly evaluated.

Photo: Jankie

For many months, newspapers have been carrying stories speculating on how rural wages have increased in response to the minimum wages linked MGNREGS wage or how it is contributing to labour shortages and food inflation. While the correlations are unmistakable, it is not be possible to draw definitive conclusions about causal relationships without more empirical research.

However, a careful examination of the scheme’s policy trajectory over the past six years reveals subtle shifts which may have altered the basic nature of the program. Its initial mandate was to provide assured employment to the rural casual labour who could not find employment elsewhere. It also believed that the MGNREGS works would prevent distress migration from rural areas.

Though started with focus on the most poverty and distress hit districts, within a year it was expanded to cover all the districts in the country. The scheme wages have undergone annual upward revisions and have, since January 2011, been indexed to the consumer price index inflation. In short, it appears to have been transformed from a demand-driven unemployment insurance program to a supply-driven employment creation programme.

This transformation has been accompanied by certain distortions. One, data from the Labour Bureau reveal that rural wages have risen by an average of 70 percent across the country between January 2007 and April 2011. However, this spike in wages due to the unskilled labour-intensive MGNREGS works has not been accompanied by commensurate productivity improvement. Basic economics teaches us that wage growth without proportionate productivity improvements undermines the labour market’s allocative efficiency and is a recipe for stagnation. Has MGNREGS become the latest example of public policy interfering with price signals?

Two, while the MGNREGS appears to have succeeded in limiting distress migration, there is evidence, from labour shortages of semi-skilled construction labour in many places, that it may have constrained labour migration itself. This assumes significance since rural to urban migration in search of better livelihood opportunities has been the driving force behind India’s economic growth since the late nineties.

Finally, the political positioning of the scheme and the dominant policy paradigm of rights-based governance makes its slide down the path of populism difficult to resist. In many respects, the programme has become so deeply integrated into the country’s development paradigm that it may be impossible to exit the programme anytime in the foreseeable future. Accordingly, despite increasing evidence that the unskilled labour intensive model of employment guarantee schemes is not relevant for many parts of India, there is obvious reluctance to do any course-correction for fear of populist backlash.

A recent newspaper report depicted the lack of sufficient interest for MGNREGS works in Warangal District of Andhra Pradesh as evidence that its implementation had “come a cropper”. In states like Andhra Pradesh, the lack of adequate response for MGNREGS works cannot be blamed on lack of awareness or social access barriers. Therefore, the low demand this year, especially in the backdrop of the district’s excellent performance last year, is most likely due to reduced demand.

However, instead of exploring the strong plausibility that the drop in MGNREGS enrolment this year may be an indicator of a stronger economy or availability of non-government job opportunities at higher wages, the newspaper article branded it a governance failure. Such an understanding of the scheme, representative of its mainstream perception, will hinder any exit strategy, even if the market is able to provide employment at higher than the MGNREGS wages. Ironically, its success may itself prove to be MGNREGS’s greatest failing!

So what is the way ahead? There are at least two clear shifts possible. One, the MGNREGS has to recover its original mandate of being a demand-driven, unemployment insurance program. The scheme should seek to bridge private employment deficits and not crowd-out private employment opportunities. The most effective strategy would be to provide direct unemployment insurance cash transfers for a limited period to individual accounts, conditional on the recipients undergoing some skill training. This would help partially resolve the vocational skills deficit in our workforce that is already constraining economic growth. It would also address concerns that the program is not contributing to productivity improvements.

Two, it should prioritise on the creation of durable infrastructure assets instead of labour-intensive earth works. Given our massive infrastructure deficit and the huge amounts proposed for infrastructure creation, it is only appropriate that these works be integrated into the MGNREGS. For example, a national rural roads program, similar to the Depression-era Highways construction program in the US, can be implemented on a mission mode as a five year program.

Such measures will de-politicise the program, minimise market distortions, and ensure bang for the buck. It will ensure that the MGNREGS is not only a social security program but also a direct contributor to sustainable national economic growth.


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